U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 (Fee Required)
For Fiscal Year Ended August 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the Transition Period ______ to ______
Commission File No. 0-25660
HALSTEAD ENERGY CORP.
(Name of small business issuer in its charter)
Nevada 87-0446395
(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
33 Hubbells Drive, Mt. Kisco, New York 10549
(Address of Principal Executive Offices)
(914) 666-3200
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to
Section 12(b) of the Exchange Act: None
Securities registered pursuant to
Section 12(g) of the Exchange Act Common Stock, $.001 Par Value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
( ) Yes (X) No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in the form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
( ) Yes (X) No
<PAGE>
The issuer's revenues for it most recent fiscal year were $13,272,991.
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of November 1, 1998 was $3,957,499.
As of November 1, 1998, the issuer had 3,013,750 shares of its Common Stock
outstanding.
<PAGE>
PART 1
ITEM 1. BUSINESS
Background
Halstead Energy Corp. (the "Company") was originally incorporated in the
State of Utah on January 15, 1986 under the name of Technical Analysis, Inc.
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 1,085,000 shares of the Company's Common
Stock. Simultaneous with such acquisition, the Company changed its name to
Halstead Energy Corp.
The Company's operating entities are engaged in the wholesale and/or
retail distribution of, and the provision of services relating to fuel oil,
liquid propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company; and Halstead Quinn Terminal ("HQ Terminal"), HQ Gasoline ("HQ
Gasoline")and Dino Oil ("Dino"), which are separate divisions of HQ Propane.
Recent Developments
The Company sold the customer list and certain other assets of its
wholly-owned subsidiary, White Plains Fuel, Inc., in October 1998, to the third
party that had operated such business since June 1995, for a purchase price of
$361,000.
In April 1998, HQ Propane acquired certain assets (including a customer
list) from a small retail propane distributor serving Westchester and Putnam
counties.
In October 1998, the Company effected a one-for-two reverse stock split
respecting the Company's common stock. Except as expressly set forth herein to
the contrary, all share, share price, exercise price and conversion price
information shall be stated/restated to reflect such reverse stock split.
The Company's Common Stock was delisted from The Nasdaq Small Cap Market,
Inc. ("Nasdaq"), effective as of the close of business on November 9, 1998, as a
result of Nasdaq's determination that the Company failed to satisfy the terms of
a Nasdaq qualifications exception which was granted on September 8, 1998.
Although the Company intends to challenge the delisting, there can be no
assurance that the Comany's common stock will be re-listed on The Nasdaq Small
Cap Market after completion of the review process. If the Company's securities
are excluded from The Nasdaq Small Cap Market, it may adversely affect the
prices of such securities and the ability of holders to sell them.
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. A. Tarricone, Inc. ("ATI") acquired
HQ Propane in 1975 and subsequently spun it off to its shareholders in December
1992. In July 1996, HQ Propane acquired the customer list and certain other
assets of E.F. Osborn & Sons, a Pawling, New York-based retail propane
distributor), and in April 1998, HQ Propane acquired certain assets (including a
customer list) from another small retail propane distributor serving Westchester
and Putnam counties.
HQ Propane has over 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 retail propane distributor in Westchester
County.
Although propane can be used for virtually all household and business
utility applications, of HQ Propane's customers, approximately 78% use propane
for hot water heating and cooking; approximately 16% use propane for pool
heating; and approximately 6% use propane for home heating. HQ Propane has
focused its marketing efforts on hot water heating and cooking applications
because these uses are relatively constant throughout the year, thereby reducing
seasonal fluctuations, and because its gross profit margins from hot water
heating use are significantly more than that of a residential propane heating or
commercial propane account.
The Company believes that propane has distinct advantages over alternative
energy sources, including efficiency, cost and availability. These attributes
result in the retail customer realizing reduced utility bills. With an increased
marketing effort, the Company believes that HQ Propane has the opportunity to
gain a larger share of the Westchester County energy market by converting
electricity and fuel oil users to propane and by having owners of newly
constructed buildings select propane as their energy source.
HQ Propane's base of operations is centrally located at the Company's
headquarters in Mount Kisco, New York. HQ Propane also maintains an inland fuel
oil storage terminal and a 30,000 gallon propane storage tank for its own
operations. The fuel oil facility is presently leased to a major independent
fuel oil distributor.
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
known as thruputs. 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.
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 Long Island Sound to the east, the Bronx, New York to the
south and Newburgh, New York to the north that has 17 feet of draft at low tide.
This provides a competitive advantage, particularly with regard to thruput
customers, because the high draft allows large seafaring vessels to dock
independent of tide schedules.
The Company believes that another competitive advantage is the terminal's
location. It is located in the most densely populated area in Westchester County
and it is the only terminal on the Hudson River south of Newburgh, New York
which distributes gasoline. All other gasoline distribution terminals are
located in the eastern part of Westchester County.
The terminal facility has been operated by ATI pending the approval of HQ
Propane's application with New York State for a Terminal Operator's and Diesel
Motor Fuel License. See "Certain Relationships and Related Transactions" and
"BUSINESS--Certain Licenses Relating to the Company's Business."
Gasoline
HQ Gasoline supplies 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf" and effective January 7, 1999
, Getty. 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 fuel oil distribution divisions.
Most of the stations are situated in high traffic areas at major intersections.
Presently, five of the 25 facilities are, or have received permits to construct,
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".
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.
In December 1996, the Company terminated its lease of four of its 21
stations to an independent third party distributor, and simultaneously
therewith, entered into a master lease of eight of its 21 gasoline stations to
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 efforts on changing the image of 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 combing facilities with convenience stores, snack shops and/or car washes.
In most cases, canopies will be installed to improve lighting and provide
shelter in inclement weather. Industry experts estimate that up to a 20%
increase in volume is derived from this improvement alone. Management believes
that, in the Company's geographic region, canopies have contributed increased
revenues of between 15% and 25%. Electronic self-service pumping apparatus will
also be installed for the convenience of the public, and will afford tremendous
overhead savings to the station operator. The addition of a convenience store,
snack shop, or car wash, where applicable, will introduce new sources of revenue
and optimize overall station profitability.
The rebuilding 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. 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".
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 sold the customer list and certain
other assets of White Plains Fuel, Inc. in October 1998, to the third party that
had operated such business since June 1995, for a purchase price of $361,000.
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 their 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 week 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 decision. HQ Gasoline's ability to
market under the trademarks "Gulf" and "ATI", and effective January 1, 1999,
"Getty" 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 standard 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 and propane related businesses. Although average temperatures
over time have varied to a very limited extent and the Company does not expect
that average temperatures will vary significantly in the future, winter
temperatures can vary significantly from one year to the next. A warmer than
usual winter should reduce the number of gallons of fuel oil and propane sold
which would result in reduced profits from the Company's fuel oil and propane
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.
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.
Petroleum Supply
One major supplier provides the Company with its propane product
requirements. Three major suppliers provide the Company with its gasoline
requirements. Approximately 20% of such requirements are met by Gulf Oil
pursuant to an agreement with the Company. All of the fuel oil and diesel fuel
product requirements of the Company's customers are 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 divisions through acquisitions and aggressive sales and
marketing efforts to generate new accounts and increase consumer awareness of
the Company's products and quality.
The Company's acquisition strategy is to grow through the acquisition and
integration of additional distributors in existing and new markets. The Company
believes that many of the proprietors of businesses competitive with the
Company's operating divisions are of retirement age and may be receptive to
selling their operations. Another potential source of acquisitions are companies
that are owned by individual entrepreneurs who find expansion within the
petroleum products industry difficult, either operationally or financially, or
who have other investment opportunities.
More specifically, HQ Propane intends to acquire two types of
distributors. The first type are relatively small distributors which management
believes could easily be 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 units 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 economics 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. Long-standing customer relationships are typical in the 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 customer having to make an affirmative purchase decision each time
propane is needed. In addition, most companies, including HQ Propane, provide
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.
Certain Licenses Relating to the Company's Business
HQ Propane's principal terminal facility is currently operated by ATI
pending the approval of HQ Propane's application with the State of New York for
terminal operator's and diesel motor fuel licenses. On October 6, 1995, New York
State requested HQ Propane 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. There
can be no assurance about the prospect of obtaining the approval of such
licenses. The $.02 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 licenses. See "LEGAL PROCEEDINGS" and"Certain
Relationships and Related Transactions."
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI 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"). 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 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 to compensate third parties for any resulting damages. The
Company has recently upgraded its HQ Terminal Facility and its other storage
facilities to conform with applicable law and the Company has an ongoing program
for maintenance, testing, retrofitting, or replacement of UST's. In addition,
the Company maintains Pollution Liability Coverage on 11 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 exposures.) In addition,
8 stations are leased to a third party distributor which, under the terms of
said lease, is responsible for any environmental liability as of January 1,
1997. The Alexander Street Terminal is also insured under a separate Pollution
Legal Liability Policy.
The Company believes that its operating divisions are in compliance with
all applicable regulatory requirements and have all governmental licenses and
permits (other than those described above in "BUSINESS - Certain Licenses
Relating to the Company's Business") required for their business operations,
except where the failure to be in compliance or maintain such licenses and
permits would not have a material adverse effect on the Company's business.
Management knows of no pending or threatened proceedings or investigations under
Federal or State environmental laws which would have a material adverse effect
on the Company's business. Management cannot predict the impact on the Company
and its operating divisions of new governmental regulations and requirements.
The Company will have to invest an estimated minimum of $283,000 in order
to meet EPA and State regulations for underground storage tanks by December,
1998.
Employees
As of November 1, 1998, the Company had a total of 31 employees, of which
20 are office, clerical and customer service personnel, 4 were drivers, 3 were
mechanics, and 4 were executive officers of the Company. All of the Company's
employees are full time and one is seasonally employed. Seven employees are
represented by the International Brotherhood of Teamsters and Chauffeurs Union,
Local 456 under a contract which expires on December 31, 2001. Management
believes that its relations with both its union and nonunion employees are
satisfactory.
ITEM 2. PROPERTIES
The Company's principal place of business is located at 33 Hubbells Drive,
Mount Kisco, New York, where HQ Propane owns a block and brick building of
approximately 6,000 square feet 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 November 1, 1998, HQ leased the following stations from ATI (See
"Certain Relationships and Related Transactions"):
Station Name and # Address
(1) Elmsford ATI #203 153-162 E. Main Street
Elmsford, New York 10523
(2) Wingdale ATI #405 Route 22 - Box 684
Wingdale, New York 12594
(3) Salt Point #414 Route 44 & 82
Salt Point, New York 12578
(4) Congers ATI #112 21 South Route 303
Congers, New York 10920
(5) Mt. Vernon Lincoln Ave. #205 25 W. Lincoln Avenue
Mt. Vernon, New York 10550
(6) Lakeside P.P. #219 6 N. Lakeside Blvd.
Mahopac, New York 10541
(7) Raceway ATI #221 535 Central Park Avenue
Yonkers, New York 10704
(8) West Hurley #315 1105 Route 28
Kingston, New York 12401
(9) Pine Plains #411 Route 199 - Box 421
Pine Plains, New York 12567
Five of the above leases expire on August 31, 2003, 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 November 28, 2016. The aggregate annual rental
amount under these leases was $213,633 for the fiscal year ending August 31,
1998. For the five leases expiring on August 31, 2003, the aggregate rental
amount will range from $125,633 in the fiscal year ending August 31, 1999 to
$137,885 in the fiscal year ending August 31, 2003. 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 $88,000 in the fiscal year ending August 31, 2018.
ITEM 3. LEGAL PROCEEDINGS
In January 1994, HQ Propane was served with a complaint dated January 5,
1994 relating to an action entitled RAP Holding Corp. v. Halstead Quinn Fuel Co.
Inc., and A. Tarricone, Inc. in the Supreme Court of New York, County of
Westchester. The plaintiff is the owner of property in Westchester County, New
York which was leased by HQ Propane from June 1, 1979 to May 31, 1989. The
complaint alleges that, during the term of the lease, the Company discharged
petroleum products onto the property and seeks $106,173 damages for the costs of
clean up and removal of the contaminated soil and an additional $300,000 for
diminution of value. The Company has retained outside counsel and is vigorously
defending itself in this lawsuit. As of November 1, 1998, there has been no
further action in this case.
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions(ATI 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 a receivable from ATI in the
amount of $3,877,563 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." 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. 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. The Company is pursuing all appropriate avenues
to protect its interests in this regard. However, 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, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management elected to write-off, and has taken as
a charge against earnings as a bad debt expense, in the fourth quarter of the
fiscal year ending August 31, 1997, the entire amount of the receivable due from
ATI at June 10, 1997, i.e.,$3,877,563. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Effective at the close of business on November 9, 1998, the Company's
Common Stock became delisted from The NASDAQ SmallCap Stock Market (see
discussion below) and became listed in the Nasdaq Bulletin Board under the
symbol "HSNR." From March 13, 1995 through and including November 9, 1998, the
Company's Common Stock was listed on The NASDAQ SmallCap Stock Market under the
symbol "HSNR". Prior to that date, the Company's Common Stock was listed in the
Nasdaq Bulletin Board under the symbol "HSNR." On October 16, 1998, the Company
effected a 1 for 2 reverse stock split, and unless otherwise noted all share
and per share data have been restated herein accordingly.
The following table sets forth the presplit range of high and low closing
bid prices for the Company's Common Stock from August 31, 1996 through August
31, 1998, as reported by NASDAQ, which bid prices reflect inter-dealer prices,
without retail mark-ups, markdowns or commissions and many not represent actual
transactions.
Presplit
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 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
Fiscal 1998
First Quarter................... 2 1/16 2 9/32
Second Quarter.................. 1 13/16 1/2
Third Quarter................... 3 1/32 7/16
Fourth Quarter.................. 1 1/2
As of November 20, 1998, there were 173 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 have not been broken
down.
The Company does not pay dividends on its Common Stock. It is management's
intention not to declare or pay dividends on the Company's Commons 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.
The Company's Common Stock was delisted from The Nasdaq Small Cap Market,
Inc. ("Nasdaq"), effective as of the close of business on November 9, 1998, as a
result of Nasdaq's determination that the Company failed to satisfy the terms of
a Nasdaq qualifications exception which was granted on September 8, 1998.
Although the Company intends to challenge the delisting, there can be no
assurance that the Company's common stock will be re-listed on The Nasdaq Small
Cap Market after completion of the review process. If the Company's securities
are excluded from The Nasdaq Small Cap Market, it may adversely affect the
prices of such securities and the ability of holders to sell them.
In the event that the Company is unable to satisfy Nasdaq's
re-listing/maintenance requirements, trading would be conducted in the "pink
sheets" or on the NASD's Electronic Bulletin Board. If the Common Stock is not
quoted on The Nasdaq SmallCap Market, and if the Company does not have
$2,000,000 in net tangible assets, trading in the Common Stock would be covered
by rules promulgated under the Exchange Act for non-Nasdaq and non-exchange
listed securities. Under such rules, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Consequently, the rule would affect the ability of holders of the Common Stock,
including purchasers in this offering, to sell their Common Stock in the
secondary market. Securities are exempt from these rules if the market price is
at least $5.00 per share.
The SEC has adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on The Nasdaq SmallCap Market and an equity security issued by an issuer that
has (i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years, (ii) net tangible assets of at least
$5,000,000 if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
If the Company's Common Stock were to be subject to the regulations on
penny stocks, the market liquidity for the Common Stock would be severely
affected by the more limited ability of broker/dealers to sell the Common Stock
in the public market. There is no assurance that trading in the Company's
securities will not be subject to these or other regulations that would
adversely affect the market for such securities.
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.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
Year ended August 31, 1998 Compared to Year Ended August 31, 1997.
Revenues for the year ended August 31, 1998, decreased by $5,394,141 to
$13,272,991 from $18,667,132 for the year ended August 31, 1997. The decrease is
primarily due to a 50% decline in the Dino Oil commercial gasoline business
which has experienced strong price undercutting. Revenues also suffered as a
result of lower selling prices which followed declining custs of product. Retail
gasoline product increased due to higher revenue gallon sales. Propane revenues
were flat year to year.
Cost of Revenues for the year ended August 31, 1998 decreased by $4,633,188
to $10,044,192. This decrease is due to the lower cost of product and the other
factors mentioned above.
Gross profit was 24.3% of revenue at August 31, 1998, an increase over the
21.4% at August 31, 1997.
Selling, General and Administrative Expenses for the year ended August 31,
1998 increased to $4,216,569 from $4,122,861 for the year ended August 31, 1997,
due to professional fees. Selling, general and administrative expenses mainly
represent fixed costs.
Depreciation and Amortization for the year ended August 31, 1998 decreased
to $1,269,608 from $1,319,443 for the year ended August 31, 1997. The decrease
is primarily attributable to certain fixed asset being fully depreciated.
Bad debt expense for the year ended August 31, 1998 decreased to $12,562
from $4,694,998 for the year ended August 31, 1997. The bad debt expenses in
1997 primarily resulted from the ATI bankruptcy and management's decision to
write-off the entire pre-petition note receivable due from ATI of $3,877,563 in
addition to the other write-offs of $817,435.
Interest Expense net for the year ended August 31, 1998 increased to
$664,459 from $402,518 for the year ended August 31, 1997 due to an increase in
certain indebtedness of the Company as compared to the same period last year.
Net Rental Income for the year ended August 31, 1998 increased by $125,643.
The increase was due to increased gasoline station and other rental income.
Gain on the sale of asset for the years ended August 31, 1998 and 1997 was
$200,000 and 175,667, respectively. The gain 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.
Factors That May Affect Future Results
This report contains various forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including financial,
operating and other projections. These statements are based on current plans and
expectations of the Company and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statements.
Important factors that could cause actual results to differ include, among
others, risks associated with acquisitions and achieving targeted cost savings
levels, fluctuations in operating results because of acquisitions, changes in
applicable government regulations (environmental and other) the impact of
litigation, competition, changes in prices for petroleum-based products. As a
result of these factors, the Company's revenues and income could vary
significantly from quarter to quarter, and past financial performance should not
be considered a reliable indicator of future performance.
Liquidity and Capital Resources
Management has seen a recent decline in the cost of petroleum products
which has resulted in decreased sales revenues. While the Company has achieved
increased efficiencies in its core businesses, the Company is not in a position
to meet its working capital, capital expenditure and acquisition requirements
through operations. Without additional financing, there can be no assurance that
the Company will be able to meet its cash requirements for the next twelve
months. In this regard, management believes that its underlying assets have been
significantly underutilized for quite some time due to the Company's lack of
success in obtaining the desired level of financing. The Company will continue
to pursue additional financing from a lending facility or an offering of its
securities to enable the Company to meet the above-referenced cash requirements.
There can be no assurance that the financing will occur or that the Company can
find suitable acquisitions in the foreseeable future.
HQ Gasoline will have to invest a minimum of approximately $283,000 by
the end of December 1998 in order to meet Federal EPA and State Regulations for
underground storage tanks. Through August 31, 1998, the mandatory requirements
for 5 of the Company's locations have been completed.
In addition, the Company plans to rebuild 13 of 25 gasoline stations which
will generally require $20,000 to $750,000 per location for an aggregate of
$2,500,000 (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 year ended August 31, 1998 were $270,797.
Included in this amount were expenditures for propane and other equipment,
improvement to gas stations and the terminal facility, and improvements and/or
purchases of trucks and auto.
On June 8, 1995 the Company acquired all of the capital stock of White
Plains Fuel, Inc. in exchange for Company stock valued at $1,008,120. The
shareholders of White Plains Fuel, Inc. received 168,020 shares of newly created
Series A - 7.5% Cumulative Convertible Redeemable Preferred Stock of the
Company. For the fiscal year ended August 31, 1998, the Company declared
dividends on the Series A Preferred Stock totaling $75,609. The Company sold
the customer list and certain other assets of White Plains Fuel, Inc. in
October 1998 (to the third party that had operated such business since June
1995) for a purchase price of $361,000.
On January 10, 1996, a total of 325,000 shares of the Company's common
stock was reserved for the 1996 stock option incentive plan for officers and
employees. Common stock which had been granted under such plan through August
31, 1998 was 242,000 (all of which are five year options granted in either
November 1996, August 1997 or July 1998), at exercise prices ranging from $.6250
per share to $1.26 per share, leaving a balance of 83,000 options in reserve
under such plan as of August 31, 1998. Additionally, certain officers and
employees of the Company were granted five year options (outside of such plan)
to purchase a total of 600,000 shares of the Company's common stock in November
1996, at an exercise price of $.6250 per share (500,000 of which were assigned
to Infinity (as described below) in March 1998), and five year options (also
outside of such plan) to purchase 60,000 shares of the Company's common stock in
July 1998 at an exercise price of $1.06 per share.
During the year ended August 31, 1998, the Company granted ten year
options, in partial payment of the purchase price for a propane customer list
and certain other assets acquired in April 1998, to acquire 10,000 shares of the
Company's common stock at an exercise price of $1.12 per share. Prior thereto,
the Company issued, for certain consulting services, 50,000 five year warrants
(5,000 in November 1996 and 45,000 in February 1997) at an exercise price of
$.6250 per share, and 9,773 five year warrants (in November 1996) at an exercise
price of $1.534 per share.
On December 31, 1996 the Company entered into an agreement with a third
party distributor pursuant to which it is leasing to such distributor eight
gasoline stations for a period of 10 years with an option for renewal. In the
second year of the lease, the distributor prepaid the rent to the Company.The
Company is carrying $138,413 as deferred income at August 31, 1998.
On May 16, 1997 the Company entered into an agreement for the sale of its
retail fuel oil customer list 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. The Company is recording this sale on an installment
basis. In connection with this sale, since the related receivable is collectible
over an extended period of time and collectibility is uncertain, profit is
recognized under the installment method as the receivable is collected. The
Company will recognize profit when payments are received.
On June 9, 1997, the Company obtained a one-year revolving credit facility
in the maximum principal amount of $1,000,000. The maturity date has been
extended to September 4, 1998, and thereafter, such indebtedness is payable on
demand. Interest accrues on outstanding balances at the prime rate plus 10% per
annum, subject to a minimum of 17% per annum until June 1, 1998, at which time
the minimum increased to 20% per annum. The credit facility is secured by a
security interest in all of the Company's accounts receivables, 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 August
31, 1998 the outstanding principal balance was $797,500.
The Company has advanced funds to A. Tarricone, Inc. ("ATI") its former
parent and brother-sister corporation with the same majority shareholders, for
necessary and ordinary gasoline and diesel purchases. ATI is currently operating
under Chapter 11 of the Federal Bankruptcy Laws.Such advances are secured by a
first lien of 50% of all of the ATI's post-petition assets and a second lien on
the balance of ATI's post petition assets.In addition, the Company reimburses
ATI, under a management agreement which expired on August 31, 1998, which is now
month to month, for clerical, administrative, payroll and other costs incurred
by ATI. Such management fee is accrued monthly and is recorded as a reduction of
the amount due to ATI. For each of the years ended August 31, 1998 and 1997, the
Company was charged $360,000 in connection with such expenses.
During the year ending August 31, 1998, the Company made additional
advances to ATI of $550,117 of which $360,000 was repaid. At August 31, 1998 the
Company was owed $768,965.
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
6,960 shares of Series B Preferred Stock in the Company, all accrued and unpaid
dividends on the outstanding shares of Series B Preferred Stock and
appriximately $78,000 of indebtedness owing to Infinity 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 prepayment upon the occurrence of certain events. The
terms of the balance of the 560,125 shares of Series B Preferred Stock owned by
Infinity were amended to provide, among other things, for (i) a fixed conversion
price of $4.00 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( which the Company also
agreed to register), and (iii) an increase in the dividend rate of the Series B
Preferred Stock to 12% from 8% per annum. In March 1998, pursuant to the
applicable provisions of the Restructuring Agreement, Infinity elected to
further amend the terms of the Series B Preferred Stock to the effect that
dividends would cease accuring (i.e., the dividend rate would decrease from 12%
per annum to 0% per annum), and in connection therewith, Infinity elected to
cause certain of the Company's officers/directors to transfer to Infinity five
year options to acquire 500,000 shares of the Company's common stock at an
exercise price of $.6250 per share (as referenced above).
At August 31, 1998, certain parties were owed an aggregate of $623,276 by
the Company, which are non-interest bearing, payable on demand at any time on or
after September 1, 1998. In October 1998, approximately $290,000 of this amount
was exchanged for common stock in the company.
The Company had a working capital deficiency of approximately $3,219,551
and a ratio of current assets to current liabilities of approximately 41% or
1:2.44 as at August 31, 1998.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during fiscal 1997 and fiscal 1998.
Year 2000 Computer Software Conversions
The Company relies on numerous computer programs in its day to day
business. Older computer programs use only two digits to identify a year in its
date field. As a result, when the Company has to identify the year 2000, the
computer will think it means the year 1900 and the operation attempting to be
performed may fail or crash thus resulting in the potential interference in the
operations of the Company's business. The Company has formulated plans to
safeguard against the Year 2000 conversion problem. The cost of the
implementation of the Year 2000 safeguards will not be material to the Company.
The Company has completed a portion of the Year 2000 conversion. The remainder
of the conversion is expected by March 1999. The cost for this portion of the
Conversion has been minimal.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for
periods beginning after December 15, 1997. SFAS 130, which will be adopted in
the first quarter of the year ending August 31, 1999, establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources and includes all changes
in equity during a period except those resulting from investments by and
distributions to owners. Adoption of this standard will not require additional
financial statement disclosures.
In June 1997, FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS 131"), effective for periods
beginning after December 15, 1997. SFAS 131, which will be adopted as of August
31, 1999, establishes standards for the reporting by public business enterprises
of information about operating segments in interim and annual financial
statements. The Company is currently evaluating the impact, if any, the
implementation of this standard will have on the disclosures in the consolidated
financial statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the independent auditors' report, are presented beginning
on page F-2.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
MANAGEMENT
The names and ages of the directors and executive officers of the Company are as
follows:
Name Age Position with the Company
- ---- --- -------------------------
Claire E. Tarricone 42 President and Director
Anthony J. Tarricone 37 Vice President, Secretary and Director
Joseph A. Tarricone 36 Vice President, Treasurer and Director
Edwin Goldwasser 66 Director
Joseph Gatti 68 Director
Claire E. Tarricone has been the President and a Director of the Company
since July 27, 1993. Ms. Tarricone has also served as the President and a
Director of HQ Propane and Rockland Fuel since 1992. In June 1995 Ms. Tarricone
also became Director of White Plains Fuel, Inc. From 1991 until 1992, Ms.
Tarricone served as Vice President/General Manager of HQ Propane in charge of
its operating divisions. 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.
Joseph Gatti has been a director of the Company since February 1998. He has
been Managing Director - Corporate Finance at Spencer Trask Securities, Inc.
since May 1996. He was a Vice President - Corporate Finance at Robert Todd
Securities from January 1984 to December 1994 and Vice President - Corporate
Finance at Reich & Company from April 1990 through December 1993.
Claire Tarricone, Anthony Tarricone and Joseph Tarricone are
siblings.
All Directors hold office until the next annual meeting of the
shareholders and the election and qualification of their successors. Directors
currently receive no regular compensation for serving on the Board of Directors,
though Mr. Gatti received certain stock options in connectin therewith. See
"SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." No Director
received any cash compensation for serving as a Director of the Company during
the past fiscal year. Officers of the Company are appointed annually by the
Board of Directors.
As permitted under Nevada law, the Company's Articles of Incorporation
eliminates the personal liability of the Directors to the Company or any of its
shareholders for damages for breaches of their fiduciary duty as Directors. As a
result of such provisions, shareholders may be unable to recover damages against
Directors for actions taken by them which constitute negligence or gross
negligence or that are in violation of their fiduciary duty. The inclusion of
this provision in the Company's Articles of Incorporation may reduce the
likelihood of derivative litigation against directors and other types of
shareholder litigation.
The directors and executive officers of the Company and the owners of more
than ten percent (10%) of the Company's outstanding Common Stock are required to
file reports with the Securities and Exchange Commission and with NASDAQ
reporting changes in the number of shares of the Company's Common Stock
beneficially owned by them. Such persons are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms
furnished to the Company and written representations from the executive officers
and directors, the Company believes that all Section 16(a) filing requirements
were met during fiscal 1997 and 1998, except that Claire Tarricone, Anthony
Tarricone and Joseph Tarricone filed one report after the applicable filing
deadline.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows, as to the Chief Executive Officer and each of
the other executive officers whose salary plus bonus exceeded $100,000,
information concerning compensation paid for service to the Company in all
capacities during the fiscal year ended August 31, 1998, as well as total
compensation paid to each such individual for the Company's two previous fiscal
years (to the extent that such person was the Chief Executive officers and/or an
executive officer, as the case may be, during any part of such fiscal year):
Summary Compensation Table
--------------------------
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Principal Fiscal Other Annual Restricted Options
Position (1) Year Salary/Bonus Compensation(2) Stock Awards SARs(#)
---- ------------ --------------- ----------- -------
Claire E. Tarricone
President 1998 $ 54,600 $ 9,257 15,000 (3)
1997 $ 54,600 $ 9,297 210,000 (3)
1996 $ 54,600 $15,034 50,000 (3)
(1) The Company does not have any executive officers whose compensation
exceeded $100,000 during the applicable fiscal periods.
(2) Represents amount 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 (as described below), which options are not intended to qualify as
"incentive stock options" under Section 422 of the United States Internal
Revenue Code of 1986, as amended and which options are exercisable for a
price of $9.00 per share of the company's common stock, par value $.001 per
share. The 50,000 options were canceled on November 14, 1996 in favor of
the grant of 200,000 new options to Ms. Tarricone, which options (a) were
not granted under the aforesaid plan, (b) are not intended to qualify as
"incentive stock options" under Section 422 of the United States Internal
Revenue Code of 1986, as amended, and (c) are exercisable for a price of
$.6250 per share of the Company's common stock, par value $.001 per share.
In addition, on August 12, 1997, Ms. Tarricone was granted 10,000 options
under the plan with an exercise price of $1.26 per share, and on July 31,
1998, Ms.Tarricone was granted 15,000 options outside of such plan with
an exercise price of $1.06 her share.
The Board of Directors of the Company voted to adopt the Company's 1996
Stock Incentive Plan (the "Plan") on January 10, 1996, subject to shareholder
approval. The shareholders of the Company approved of the Plan on April 22,
1996. The Plan was amended by the Board of Directors effective December 1,1996.
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 325,000 shares of the Company's common stock, $.001 per 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 plan for its employees.
Employee Agreements
The Company has entered into five year Employment Agreements with each of
Claire E. Tarricone, Anthony Tarricone and Joseph Tarricone. The Employment
Agreements automatically extend for an additional one year at the end of each
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 Tarricone's has waived her or his rights (as the case may be) to any
unpaid annual salary (in excess of $54,600, $60,000 and $60,000, respectively)
attributable to the fiscal years ending August 31, 1994, August 31, 1995, August
31, 1996, August 31, 1997 and August 31, 1998. 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 terminated 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 is any
shall not have substantially performed their duties for 540 consecutive days by
reason of any such physical or mental illness.
Each of the Tarricone's 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 Tarricone's. Additionally,
upon termination, each of the Tarricone's 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 (10) year
term 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 Employee 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 Tarricone's is terminated, provided that such
person is entitled to be engaged as an employee by ATI.
Indemnification of Directors and Officers/Liability 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Principal Stockholders
The following table sets forth information regarding ownership of the
Company's voting securities as of November 1, 1998 by (a) each person known by
the Company to beneficially own more than five percent (5%) of any class of the
Company's voting securities, (b) each Director of the Company and (c) all
Directors and Officers of the Company as a group. Except as otherwise indicated,
the named person has sole voting and investment power with respect to such
person's shares.
Name and Address of Title of No.of Shares Percentage of General
Beneficial Owner Class Owned Class Owned (1) Voting Power
- ------------------ -------- ------------ --------------- ------------
Claire E. Tarricone Common Stock 358,046(3) 11.7%(3) 11.4%(3)
33 Hubbells Drive
Mt. Kisco, NY 10549
Anthony J. Tarricone Common Stock 408,046(4) 13.3%(4) 12.9%(4)
33 Hubbells Drive
Mt. Kisco, NY 10549
Joseph A.Tarricone Common Stock 408,046(5) 13.3%(5) 12.9%(5)
33 Hubbells Drive
Mt. Kisco, NY 10549
Alan Cianflone Series A 84,010 50.0% 1.4%
42 Virginia Lane Cumulative
Thornwood, NY 10549 Convertible
Redeemable
Preferred Stock
Jack Troccoli Series A 84,010 50.0% 1.4%
40 Reservoir Court Cumulative
Carmel, NY 10512 Convertible
Redeemable
Preferred Stock
Infinity Investors, Ltd. Series B 560,125(6) 100.0% 35.3%(6)
27 Wellington Road Cumulative
Cork, Ireland Convertible
Redeemable
Preferred Stock
Common Stock 567,285(6) 16.1%
Laurence Hughes Common Stock 225,000 7.2% 6.9%(7)
49 Mountain Road
Pleasantville, NY 10570
Edwin Goldwasser Common Stock -0- (8) (8)
7616 Mansfield Hollow Drive
Delray Beach, Florida 33446
Joseph Gatti Common Stock 20,000 (9) (9)
535 Madison Avenue
New York, NY 10022
All Executive Officers and
Directors as a group(5 persons) 1,194,138 36.89% 35.96%
(1) Based upon 3,013,750 shares of Common Stock outstanding as of November
1, 1998.
(2) Based on 3,013,750 common and 168,020 Series A Cumulative Convertible
Redeemable Preferred Shares outstanding as of November 1, 1998. 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 25,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options and 128,274 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 128,274 shares, which disclaimed amount
correlates to the aggregate ownership percentage in ATI held by Anthony J.
Tarricone and Joseph A. Tarricone.
(4) Includes 25,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options and 128,274 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 128,274 shares, which disclaimed amount
correlates to the aggregate ownership percentage in ATI held by Anthony J.
Tarricone and Claire E.Tarricone.
(5) Includes 25,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options and 128,274 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 128,274 shares, which disclaimed amount
correlates to the aggregate ownership percentage in ATI held by Joseph A.
Tarricone and Claire E. Tarricone.
(6) The Series B Cumulative Convertible Redeemable Preferred Stock is
convertible into 1,085,244 shares of Common Stock. Additionally, Infinity
has the right to acquire an additional 500,000 shares of Common Stock upon
the exercise of options previously held by the Tarricones.
(7) Includes 125,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options.
(8) Less than one percent.
(9) Less than one percent; and includes presently exercisable stock
options to purchase 20,000 shares of Common Stock.
- ----------------------------------------
As of July 16, 1998, 984,248 shares of Common Stock (approximately 33% of
the outstanding Common Stock) were owned of record by Cede & Co., a nominee
of the Depository Trust Company. The Company has been advised by each of
the firms which Cede & Co. indicates own more than 5% of the Common Stock that,
except as set forth above, as of the most recent practical date it did not hold
more than 5% of the Company's outstanding voting securities for any single
person or, to its knowledge, any group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 1992, ATI distributed all of the capital stock of HQ
Propane to its sole shareholders Claire E. Tarricone, Anthony Tarricone and
Joseph Tarricone. Simultaneously with the distribution, ATI transferred the
assets of the HQ Terminal division and all of the outstanding capital stock of
Rockland to HQ Propane in partial satisfaction of ATI's indebtedness to HQ
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 to $3,877,563 on August
31, 1997 (see immediately succeeding paragraph). 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
leaseholds having an appraised fair market value of $690,000 in partial
satisfaction of the ATI Note. See "LEGAL PROCEEDINGS."
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI 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 a receivable from ATI in the
amount of $3,877,563 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." 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 (see "LEGAL PROCEEDINGS").
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 Company has advanced funds to A. arricone, Inc. ("ATI") its former
parent and brother-sister corporation with the same majority shareholders, for
necessary and ordinary gasoline and diesel purchases. ATI is currently operating
under Chapter 11 of the Federal Bankruptcy Laws.Such advances are secured by a
first lien of 50% of all of the ATI's post-petition assets and a second lien on
the balance of ATI's post petition assets.In addition, the Company reimburses
ATI, under a management agreement which expired on August 31, 1998, which is now
month to month, for clerical, administrative, payroll and other costs incurred
by ATI. Such management fee is accrued monthly and is recorded as a reduction of
the amount due to ATI. For each of the years ended August 31, 1998 and 1997, the
Company was charged $360,000 in connection with such expenses.
During the year ending August 31, 1998, the Company made additional
advances to ATI of $550,117 of which $360,000 was repaid. At August 31, 1998 the
Company owed $768,965.
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 term of the management agreement extends on a
month-to-month basis. Further HQ Propane entered into agreements with ATI under
which it leased the 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.
On March 5, 1996, the Company issued warrants to purchase 148,563 shares of
the Company's common stock to a related party 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 $8.60 per share or a 40% discount to the average
closing bid price. The average closing bid price is calculated based on the
average of the closing bid prices of the Company's Common Stock as reported by
the NASDAQ Small Cap stock market for the five trading days immediately
preceding the date of the exercise of the warrant. The warrants provide that
59,425 were immediately vested on March 5, 1996, an additional 29,713 vested on
March 5, 1997, and the balance become vested in three equal annual
installments. The market price at issuance was $8.60 per share. In consideration
of the issuance of such warrants, the Company is no longer required to pay the
license fee of $.01 per gallon for gasoline station sales.
HQ Propane cannot operate its principal terminal facility until such time
as the pending applications for a terminal operator's license and diesel license
from the State of New York have been approved. Accordingly, ATI has continued to
operate the terminal facility on behalf of HQ Propane. Upon the issuance of such
licenses, HQ Propane will assume operations of its facilities directly. ATI also
supplies the Company's operating divisions with fuel oil and diesel fuel, and
previously supplied the Company with gasoline, at ATI's cost plus one quarter of
one cent ($.0025) per gallon purchased, which aggregated $22,500 during the
fiscal year ended August 31, 1997; and $13,669 during the fiscal year ended
August 31, 1998.
The Company has outstanding certain promissory notes in the aggregate
principal amount of $307,000 issued in connection with a private placement of
825,000 shares of Common Stock of the Company ("Bridge Notes"). Interest on the
Bridge Notes payable quarterly at a rate of 8% per annum, and payment of
principal thereof was tied to the exercise of the Company's 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 4,125 shares of the Company's common stock.
Claire, Anthony and Joseph Tarricone are also parties to a Buy/Sell
Agreement pursuant to which, upon the death or disability of any of them, the
non-deceased or non-disabled shareholders are required to purchase the shares of
the Company owned by the deceased or disabled shareholder for a price equal to
the fair market value of such shares. Each of the Tarricone's 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 Tarricone's 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.
At August 31, 1998, certain parties were owed an aggregate of $623,276 by
the Company, which is non interest bearing, payable on demand at any time on or
after September 1, 1998. In October 1998, approximately $290,000 of this amount
was exchanged for common stock of the company.
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.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Halstead Energy Corp. and Subsidiaries
Independent Auditors'Report...............................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet as of
August 31, 1998....................................F-3 - F4
Consolidated Statements of Operations for
the years ended August 31, 1998 and
1997...............................................F-5
Consolidated Statements of Stockholders'
Equity for the years ended August 31,
1998 and 1997......................................F-6 - F-7
Consolidated Statements of Cash Flows for
the years ended August 31, 1998 and
1997...............................................F-8
Notes to the Consolidated Financial
Statements.........................................F-9 - F-17
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO The Stockholders and
Board of Directors of
Halstead Energy Corp.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Halstead
Energy Corp. and subsidiaries as of August 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended August 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Halstead
Energy Corp. and Subsidiaries as of August 31, 1998, and the results of their
operations and their cash flows for the years ended August 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(C) to the financial statements, the Company has sustained substantial losses
in the years ended August 31, 1998 and 1997, has experienced a deficiency in
cash flows from operations in the year ended August 31, 1998 and has a working
capital deficiency at August 31, 1998 that raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1(C) to the accompanying
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainly.
MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
November 9, 1998
F-2
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1998
<TABLE>
<CAPTION>
A S S E T S
<S> <C>
CURRENT ASSETS
Accounts Receivable - Trade, Net of Allowance
for Doubtful Accounts of $67,000 ............... $ 753,928
Inventories ...................................... 195,324
Notes Receivable .................................. 170,055
Notes Receivable - Related Party .................. 768,965
Prepaid Expenses and Other Current Assets ......... 314,144
Deferred Tax Asset................................. 27,000
---------
TOTAL CURRENT ASSETS.......................... 2,229,416
PROPERTY, PLANT AND EQUIPMENT - NET 11,558,110
OTHER ASSETS
Deferred Tax Asset ................................ 355,000
Intangible Assets - Net ........................... 1,321,113
----------
TOTAL OTHER ASSETS............................ 1,676,113
----------
TOTAL ASSETS.................................. $15,463,639
===========
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-3
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
AUGUST 31,1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts Payable -Trade........................ $ 2,426,112
Notes Payable - Related Party.................. 330,282
Current Portion of Long-Term Debt ............. 1,927,546
Deferred Revenue............................... 247,558
Accrued Expenses and Other Current Liabilities. 517,469
-----------
TOTAL CURRENT LIABILITIES...................... 5,448,967
Long-Term Debt - Net of Current Portion ............. 2,406,768
Notes Payable Related Party - Net of Current Portion. 292,994
Security Deposits Payable............................ 229,110
Deferred Revenue..................................... 111,084
-----------
TOTAL LIABILITIES.............................. 8,488,923
Preferred Stock, $.001 Par Value, 168,020 Shares
Authorized-Series A 7.5% Cumulative Convertible
Redeemable 168,020 Shares Issued and Outstanding
($1,008,120 aggregate liquidation preference) 168
Paid-In Capital:Preferred Stock ..................... 1,064,001
-----------
1,064,169
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Prefeferred Stock,$.001 Par Value,
580,646 Shares Authorized Series B
8.0% Cumulative Convertible 560,125
Shares Issued and Outstanding
($4,338,580 aggregate iquidation
preference) ................................... 560
Common Stock, $.001 Par Value, 25,000,000 Shares
Authorized, 2,524,081 Issued and Outstanding..... 2,524
Paid-in Capital:Preferred Stock.................. 3,614,800
Common Stock .................... 6,475,411
Accumulated Deficit.............................. (4,082,748)
Subscription Receivable.......................... (100,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 5,910,547
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,463,639
===========
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-4
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended August 31,
<TABLE>
<CAPTION>
1998 1997
------------- ----------
<S> <C> <C>
Sales........................................ $ 13,272,991 $18,667,132
Cost of Sales................................ 10,044,192 14,677,380
------------- ----------
GROSS PROFIT................................. 3,228,799 3,989,752
OPERATING EXPENSES
Selling, General and Administrative Expenses 4,216,569 4,122,861
Management Fee, Related Party .............. 360,000 360,000
Net Rental Income .......................... (742,513) (616,870)
Gain on Sale of Asset....................... (200,000) (175,667)
Depreciation and Amortization............... 1,269,608 1,319,443
Bad Debt Expense ........................... 12,562 4,694,998
------------ ----------
TOTAL OPERATING EXPENSES 4,916,226 9,704,765
------------ ----------
LOSS FROM OPERATIONS.................... (1,687,427) (5,715,013)
INTEREST EXPENSE, NET......................... 664,459 402,518
------------ ----------
LOSS BEFORE PROVISION FOR INCOME TAX.......... (2,351,886) (6,117,531)
PROVISION FOR INCOME TAX ..................... 44,394 0
------------- ----------
Net Loss (2,396,280) (6,117,531)
Preferred Stock Dividends (812,490) (429,393)
------------- -----------
Net Loss Applicable to Common Shares $ (3,208,770) $(6,546,924)
============= ===========
Basic and Diluted Loss Per Share.............. $ (1.38) $ (3.32)
============= ===========
Weighted Average Number of Common
Shares Outstanding...................... 2,328,713 1,974,740
============ ===========
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-5
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
Retained
Preferred Stock, Common Stock, Paid Earnings Stock
$.001 Par $.001 Par In (Accumulated Sub. Total
Issued Amount Issued Amount Capital Deficit) Rec. Equity
------ ------ ------ ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
at August 31,
1996 572,246 $572 1,745,670 $1,746 $9,174,671 $5,320,634 $0 $14,497,623
Private
Placement
Costs 0 0 0 0 (5,151) 0 0 (5,151)
Cash
Dividends
Declared
Preferred
Series A 0 0 0 0 0 (75,610) 0 (75,610)
Cash
Dividends
Declared:
Preferred,
Series B 0 0 0 0 0 (1,471) 0 (1,471)
Common Shares
issued to
employees 0 0 7,500 8 8,567 0 0 8,575
Common
Shares
issued for
acquisition of
customer
list 0 0 100,000 100 249,900 0 0 250,000
Conversion
of Preferred
Shares and
Unpaid
Dividend
to Common
Shares (5,161) (5) 81,131 81 1,395 0 0 1,471
Common Shares
issued to
employee 0 0 100,000 100 99,900 0(100,000) 0
Common Shares
issued on
Conversion of
Options 0 0 25,000 25 15,975 0 0 16,000
Net Loss
August 31,
1997 0 0 0 0 0 (6,117,531) 0 (6,117,531)
----- ------ ------- ------- ------- -------- --- ---------
Balance
at August 31,
1997 567,085 567 2,059,301 2,060 9,545,257 (873,978) (100,000) 8,573,906
Dividends
Declared:
Preferred
Series A 0 0 0 0 0 (75,609) 0 (75,609)
F-6
Dividends
Declared:
Preferred
Series B 0 0 0 0 0 (467,814) 0 (467,814)
Common Shares
Issued on
Conversion of
Options 0 0 200,000 200 163,800 0 0 164,000
Common Shares
Issued to
Consultant for
Services
Rendered 0 0 172,495 172 232,761 0 0 232,933
Conversion of
Series B Preferred
Stock to Debt
(6,960) (7) 0 0 (56,261) 0 0 (56,268)
Restructuring of
Series B Preferred
Stock 0 0 0 0 (75,881) 0 0 (75,881)
Exercise of
Warrants 0 0 25,000 25 11,535 0 0 11,560
Common Shares
Issued in Exchange
for Dividends 0 0 67,285 67 269,000 (269,067) 0 0
Net Loss -
August 31,
1998 0 0 0 0 0 (2,396,280) 0 (2,396,280)
---- ---- ------- ------- ------- ---------- -- ---------
Balances at
August 31,
1998 560,125 $560 2,524,081 $2,524 $10,090,211($4,082,748)($100,000)$5,910,547
======= ==== ========= ====== ========== ========== ======== ==========
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-7
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended August 31,
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss..................................... $(2,396,280) $(6,117,531)
Adjustments to Reconcile Net Loss
to Net Cash provided by (used in)Operating Activities:
Non-Employee Compensation Expense from Common
Stock issued during the year................ 232,933 0
Depreciation and Amortization................ 1,269,608 1,319,443
Deferred Revenue............................. 0 661,386
Deferred Rent................................ 111,084 0
Gain on the Sale of Customer List............ (200,000) (175,667)
Bad Debt Expense ............................ 12,562 4,694,998
Deferred Income Tax Expense.................. 0 230,406
Change in Operating Assets and Liabilities:
Accounts Receivable........................ 281,974 (82,646)
Inventory.................................. (26,394) 82,520
Prepaid Expenses and other Curent Assets... 303,724 (286,609)
Accounts Payable, Accrued Expenses and Other
Current Liabilities........................ 346,714 1,278,538
--------- -----------
Net Cash Provided by (used in)
Operating Activities........................ (64,075) 1,604,838
Cash Flows From Investing Activities:
Net Proceeds From the Sale of Customer List.. 200,000 175,667
Acquisition of Intangible Assets............. (108,894) (72,067)
Acquisition of Property and Equipment........ (270,797) (263,907)
Note Receivable.............................. 397,710 (487,765)
Advances to ATI.............................. (550,117) (4,306,018)
Repaymet of Notes Receivable ATI............. 360,000 360,000
Security Deposits Payable.................... (8,696) (21,752)
---------- -----------
Net Cash Provided by (used in) Investing
Activities 19,206 (4,615,842)
Cash Flows From Financing Activities:
Increase (Decrease)in Cash Overdraft.......... (98,475) 98,475
Net Proceeds from the Issuance of Common Stock 164,000 19,424
Proceed from Short Term Borrowings............ 82,500 715,000
Proceeds from Long Term Debt Borrowing........ 407,752 265,000
Net Borrowing from Related Parties............ 263,996 359,280
Repayment of Long Term Debt................... (686,709) (288,744)
Repayment of Stockholder's Loan............... 0 (80,000)
Preferred Stock Dividends..................... ( 75,609) (75,610)
Cost of Restructuring Series B Preferred Stock ( 75,881) ----
---------- ---------
Net Cash Provided by (used in) Financing
Activities................................... (18,426) 1,012,825
Net Decrease In Cash and Cash Equivilents..... (63,295) (1,998,179)
Cash and Cash Equivelents at Beginning of Year 63,295 2,061,474
---------- ---------
Cash at End of Year........................... $ 0 $ 63,295
---------- ---------
Supplemental Disclosure - Cash Paid During the Year For:
Interest Expense.............................. $ 516,644 $ 407,969
---------- ---------
Income Taxes.................................. $ 44,394 $ 6,597
---------- ---------
F-7
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Acquisition of Leaseholds in Exchange for
Repayment of Note Receivable ATI $ ---- $ 690,000
---------- -----------
Acquisition of Customer List in Exchange
for Common Stock $ ---- $ 250,000
---------- -----------
Common Stock Issued in Exchange for Note
Receivable $ ---- $ 100,000
---------- -----------
Acquisition of Customer List and Equipment
in Exchange for Note Payable $ 155,000 $ 260,124
---------- -----------
Note Payable Issued for Unpaid Preferred
Series B Dividends $ 524,119 ------
---------- -----------
Exercise of Warrants in Exchange for Debt $ 11,560 ------
---------- -----------
Common Stock Issued in Exchange for
Unpaid Dividends $ 269,067 $ 1,471
---------- -----------
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
The Company is engaged in the retail sale of propane, propane equipment,
gasoline and diesel fuel. Fuel oil, gasoline and diesel fuel are also sold
to wholesalers. The Company also services propane, heating equipment and
appliances.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of Halstead
Energy Corp.(the "Company") and its wholly-owned subsidiaries, White
Plains Fuel, Inc.,and Halstead Quinn Propane,Inc.("HQP"),and Rockland Fuel
Oil, Inc.,a wholly-owned subsidiary of HQP (together the "Company"). All
inter-company accounts have been eliminated.
(C) Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate the
continuation of the Company as a going concern. However, the Company
has sustained substantial losses in the last two years and has experienced
a deficiency in cash flows from operations in the fiscal year ended August
31, 1998. The Company had a working capital deficiency of $3,219,551 as of
August 31, 1998. While the Company has achieved increased efficiencies in
its core business, the Company is not in a position to meet its working
capital, capital expenditure and acquisition requirements through
operations. Without additional financing there can be no assurance that
the Company will be able to meet its cash requirements for the next twelve
months. In this regard, management believes that its underlying assets
have been significantly underutilized for quite some time due to the
Company's lack of success in obtaining the desired level of financing.
Management is reviewing its alternatives of raising additional capital.
It is presently working with several financial and strategic partners to
refinance existing debt obligations of the Company. This financing is
intended to extend the terms of its present debt obligations, and make
available additional funds necessary to allow the Company to increase its
purchasing power thereby reducing product cost and take advantage of the
opportunities in the gasoline division to increase the number of stations
in the chain and more appropriately utilize its underlying assets.
Certain prior year amounts were reclassified to conform to this years
presentation.
(D) Use of Estimates
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
(E) Inventories
Inventories, primarily finished petroleum products, are stated at the
lower cost or market. A monthly moving average method is used for
determining petroleum product costs. Other materials and supplies are
valued at average cost.
(F) Property Plant & Equipment
Property Plant & Equipment are recorded at cost. Assets recorded under
Leaseholds are amortized on the straight-line method over the shorter of
the term of the lease or the useful life of the related assets.
Depreciation of property plant and equipment is computed by use of the
straight line method over their estimated useful lives. The useful lives
are as follows:
Buildings and improvements 10-30 years
Equipment 3-20 years
Furniture and fixtures 3-10 years
Vehicles 3-10 years
F-9
(G) Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying
amount of long-lived assets, including intangible assets. A loss is
recognized when expected future cash flows (undiscounted and without
interest) are less than the carrying amount of the asset. The impairment
loss is determined as the difference by which the carrying amount of the
asset exceeds it fair value. Any resulting writedown is charged to
expense.
(H) Intangible Assets
Intangible assets, consisting of customer lists and a trademark, are being
amortized on a straight-line basis over 4 - 15 years, the period the
Company expects to receive benefits. At August 31, 1998, intangible
assets, net of accumulated amortization of $853,951, was $1,321,113.
(I) Customer Credit Balances
Customer credit balances, which is included in accrued expenses and other
current liabilities, 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.
(J) Income Taxes
Deferred income taxes are provided for the effect of items which are
reported for income tax purposes in years different from that in which
they are recorded for financial statement purposes. Future tax benefits,
such as net operating loss carry forwards, are recognized to the extent
that realization of such benefits are more likely than not.
(K) 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 at the companies facilities. Retail revenue is
recognized when delivered to the customer. In connection with certain
sales, when the related receivables are collectible over extended periods
of time and collectibility is uncertain, profit is recognized under the
installment method as receivables are collected.
(L) Concentration of Credit Risk
1. Geographic Area
Substantially all of the Company's customers are located in the
Westchester, Rockland, Putnam, Orange, Dutchess and Bronx Counties.
2. Major Vendors
The Company purchased a majority of its gasoline for its operations
from three and five vendors (including ATI) for the years ended August 31,
1998 and 1997, respectively. Those vendors represent approximately 100%
and 98% of total purchases for years ended August 31, 1998 and 1997. At
August 31, 1998, these three vendors represented approximately 18% of the
accounts payable balance.
3. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
records reserves for potentially uncollectible accounts receivable,which
are declared credit risks as determined by management.
4. Cash
The Company maintains its cash in bank deposit accounts at high credit
quality financial institutions. These amounts are insured up to the
federally insured limits.
(M) 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 remediation of environmental
pollution when it becomes probable that a liability has been incurred and
the amount can be reasonably estimated.
F-10
(N) Earnings (Loss)Per Share
On October 16, 1998 the Company effected a 1 for 2 reverse stock split.
All share and per share data have been restated.
During the year ended August 31, 1998, the Company adopted Statement of
Financial Accounting Standard No. 128 (SFAS 128) "Earnings Per Share."
This statement requires the presentation of basic and diluted earnings per
share ("EPS"). Basic EPS excludes dilution and is computed by dividing
income (loss) less preferred dividends by the weighted average number of
common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential common shares that were outstanding during the period.
The effect on loss per share of the Company's outstanding stock options
and convertible warrants is anti dilutive for all periods presented and
accordingly not included in the calculation of the weighted average number
of common shares outstanding.
Note 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and other current assets consist of the following:
Due from Employee $ 30,401
Due from Officers 72,320
Finance Costs 23,212
Prepaid Real Estate Taxes 99,098
Prepaid Insurance 16,158
Miscellaneous 72,955
---------
TOTAL $ 314,144
=========
Note 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists of the
following:
Land $ 944,000
Gas Station Leaseholds 8,813,000
Building and Improvements 2,513,820
Equipment 2,071,309
Furniture and Fixtures 83,587
Vehicles 1,425,555
------------
TOTAL 15,851,271
Less: Accumulated Depreciation (4,293,161)
-----------
NET $11,558,110
===========
NOTE 5 - NOTES RECEIVABLE
Notes receivable consist of various notes relating to the sale of certain
equipment, customer lists and issuance of common stock. These notes have
interest rates ranging from 6% to 9% and are payable in monthly and annual
installments.
NOTE 6 RELATED PARTY
TRANSACTIONS
(A) The Company has advanced funds to A. Tarricone, Inc. ("ATI") its former
parent and brother-sister corporation with the same majority shareholders,
for necessary and ordinary gasoline and diesel purchases. ATI is currently
operating under Chapter 11 of the Federal Bankruptcy Laws.Such advances are
secured by a first lien of 50% of all of the ATI's post-petition assets and
a second lien on the balance of ATI's post petition assets.In addition, the
Company reimburses ATI, under a management agreement which expired on
August 31, 1998, which is now month to month, for clerical, administrative,
payroll and other costs incurred by ATI. Such management fee is accrued
monthly and is recorded as a reduction of the amount due to ATI. For each
of the years ended August 31, 1998 and 1997, the Company was charged
$360,000 in connection with such expenses.
F-11
(B) Notes payable to stockholders and affiliated entities are non-interest
bearing and are payable on demand at anytime on or after September 1, 1998.
In October 1998, approximately $290,000 was exchanged for common stock of
the company.
(C) During the year ending August 31, 1998, the Company made additional
advances to ATI of $550,117 of which $360,000 was repaid. At August 31,
1998 the Company was owed $768,965.
(D) The Company leases several gasoline stations and storage space from
related parties and at August 31, 1998, the Company has recorded in
accounts payable $159,750 for rents due.
(E) During the fiscal year ended August 31, 1998, the Company purchased
for and resold to ATI approximately $1,600,000 of gasoline.
Note 7- DEBT
Long-term debt consists of the following:
$1,000,000 revolving line of credit with a bank
originally due 6/8/98,which was extended to
September 4, 1998 and is now payable upon demand
with interest at 18.5% (A) $ 797,500
Unsecured notes payable principal due on 9/24/02
with interest at 12% 688,811
Mortgage Payable with interest at 12.5% payable
in monthly payments of $3,487 and matures 3/1/03
secured by a customer list with a book value of
$151,556. 145,440
Mortgage payable with interest at 9% and monthly
principal and interest payments of $5,038 with a
balloon payment of $378,359 due 1/16/01 (D) 431,457
Mortgage payable with interest at 9.5% (1% above
prime) and monthly principal payments of $2,800 with
a balloon payment of $334,800 due 10/01/00 (C) 407,600
Mortgage payable with interest at 8.5% and monthly
principal payments of $2,778 with a balloon payment
of $333,333 due 5/17/99 (B) 364,290
Mortgage payable with interest at 11% and monthly
principal payments of $2,778 with a balloon payment
of $475,364 due 12/28/98 (B) 483,701
Notes payable with interest at 8%, 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 warrant conversion never took place and,
accordingly, there is no payment date and terms on the
notes 307,000
Mortgage with interest at 12.5% and monthly principal
and interest payments of $1,704, with a balloon payment
of $116,913 due 1/15/01 (D) 128,672
Mortgage due 12/01/99 with interest at 9.5% (1% above
prime) and monthly principal payments of $3,300 (C) 61,235
Vehicle and Equipment Notes:
Notes payable for equipment payable in various monthly
principal and interest payments with interest ranging
from 7.95%, to 12.3% and due dates ranging from 3/1/98
to 7/1/02, collateralized by equipment with a market
value of approximately $650,000 518,608
----------
Total 4,334,314
Less: Current Portion 1,927,546
----------
Total Long-Term Debt $2,406,768
----------
----------
F-12
A) The loan is secured by the Company's accounts receivable, inventories and
intangible assets. Certain officers of the Company have personally guaranteed
the loan.
(B) The loan is secured by a first mortgage on the Company's headquarters and
terminal facility at Alexander Street. Certain officers of the Company have
personally guaranteed the loan.
(C) The loan is secured by a second mortgage on the property noted in (B).
(D) Secured by a gas station with a book value of $680,000.
Aggregate principal payments for each of the next five years relating to long
term debt are as follows:
Year Ending
August 31,
------------
1999 $ 1,927,546
2000 256,114
2001 1,004,406
2002 93,270
2003 1,052,978
------------
$ 4,334,314
============
NOTE 8 - INCOME TAXES
The following is a reconciliation of the expected federal income tax
provision (benefit) and the actual provision (benefit) for income taxes:
1998 1997
---- ----
Expected tax (benefit) at statutory federal
income tax rate of 34% ($ 799,641) ($2,079,961)
State taxes, net of federal benefit (139,702) (363,256)
Net operating loss carry back 241,000
Valuation Allowance 939,343 2,128,000
Other 44,394 74,217
--------- ---------
$ 44,394 $ -0-
========= =========
Deferred income taxes are provided for the temporary differences between
the financial statement and tax bases of the company's assets and
liabilities . Income tax expense for the year ended August 31, 1998, is a
result of New York State tax calculated on the Company's capital base.
The components of deferred tax assets are as follows:
1998
-----------
Deferred Tax Assets:
Current:
Allowance for Doubtful Accounts $ 27,000
==========
Non Current:
Property Plant and Equipment $ 657,000
Net Operating Loss Carry forward 3,250,000
Valuation Allowance (3,552,000)
-----------
Total Non Current Deferred Asset $ 355,000
===========
The Company has a net operating loss carry forward of approximately
$7,500,000 for federal and New York State tax purposes, which will expire
at various times through August 31, 2013. A valuation allowance has been
recorded for the full amount of the operating loss carry forward and for
$302,000 for the property plant and equipment. The valuation allowance
increased by $1,424,000 during the year ended August 31, 1998.
F-13
NOTE 9 - FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, notes receivable and
debt instruments. The carrying amount of cash and short-term instruments
approximates their fair values because of the relatively short period of
time between the origination of the instruments and their expected
realization. The fair value of the Company's debt is based on the current
market interest rates being paid, and as a result, it approximates fair
value. The Company cannot estimate the fair value of the notes receivable
and payable from its related parties due to the repayment terms.
NOTE 10 - OPERATING LEASES
The Company leases gas stations and equipment under operating leases which
expire at various dates through August 2013. The Company also sub-leases
the above gas stations under operating leases which expire at various dates
through January 2007.
Minimum future rental payments and receipts under the operating leases as
at August 31, 1998 are as follows:
For the Year Ending Lease Sublease
August 31, Payments Receipts Net
------------------- ----------- ----------- ----------
1999 862,041 889,960 (27,919)
2000 863,449 923,890 (60,441)
2001 827,836 921,373 (93,537)
2002 720,676 898,593 (177,917)
2003 715,576 807,499 (91,923)
Thereafter 3,357,216 3,507,803 (150,587)
---------- ----------- ----------
$7,346,794 $7,949,118 $ (602,324)
========== =========== ===========
The rental payments under the leases are subject to annual cost of living
increases. Net rental income credited to operations for the years ended
August 31, 1998 and 1997 amounted to $742,513 and $616,870, respectively,
inclusive of $288,000 of income relating to the rental of a customer list
to a third party in each year.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
(A) Employment Agreements
The Company has entered into employment agreements with its officers for a
five year term ending on August 31, 2004 (with automatic one year
extension each year unless prior notice not to further extend is delivered
ninety (90)days before each year end).
(B) Licenses Pending
HQP's principal terminal facility is currently operated by ATI pending
approval of HQP's application with the State of New York for a terminal
operator's and diesel motor fuel license, and the application of White
Plains Fuel, Inc.("WPF") for their respective diesel motor fuel licenses.
Management believes the Company has substantially completed all steps
necessary to receive such licenses. However, these licenses have not yet
been granted. Management is awaiting approval of these licenses, although
there can be no assurances in this regard.
(C) Litigation
The Company has pending certain legal actions and claims incurred in the
normal course of business and is actively pursuing the defense thereof. In
the opinion of management these actions and claims are either without merit
or are covered by insurance and will not have a material adverse effect on
the Company's financial position.
F-14
(D) Environmental Compliance
The Company's operating divisions are subject to various governmental
regulations. New regulations regarding underground storage tanks ("UST's"),
including those at service stations, have been issued by the United States
Environmental Protection Agency (the "EPA"). The regulations cover the
design, construction and installation of new UST systems, and require that
existing systems meet certain EPA standards. The regulations require that
owner/operators of UST systems demonstrate financial responsibility for the
cleanup of spills or releases, and/or to compensate third parties for any
resulting damages. The Company has recently upgraded its HQ Terminal
Facility and its other storage facilities to conform with applicable law
and the Company has an ongoing program for maintenance, testing,
retrofitting, or replacement of UST's. In addition, the Company maintains
Pollution Liability Coverage on 11 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 exposures. In addition,
8 stations are leased to a third party distributor which, under the terms
of said lease, is responsible for any environmental liability as of
January 1, 1997. The Alexander Street Terminal is also insured under a
separate Pollution Legal Liability Policy.
The Company will have to invest an estimated minimum of $283,000 in order
to meet EPA and State regulations for underground storage tanks by
December, 1998.
NOTE 12 - CAPITAL STOCK
PREFERRED
A) The Company has 5,000,000 shares of Authorized Preferred Stock with a
par value of $.001.
B) The Company has issued Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock, $0.001 par value ("Series A Preferred Stock"). The holders
of the outstanding shares of Series A Preferred Stock are entitled to the
following:
The Preferred Stock bears a cumulative cash dividend rate of $0.45 per
annum, payable quarterly, when, 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.
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 Bylaws of the Company and shall be entitled to
vote with holders of Common Stock together as a single class.
C) 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 6,960 shares of Series B Preferred Stock in the
Company, all accrued and unpaid dividends on the outstanding shares of
Series B Preferred Stock and approximately $78,000 of indebtedness owing to
Infinity 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, 1998 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 prepayment
upon the occurrence of certain events. The
F-15
terms of the balance of the 560,125 shares of Series B Preferred Stock owned by
Infinity were amended to provide, among other things, for (i) a fixed conversion
price of $4.00 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( which the Company also
agreed to register), and (iii) an increase in the dividend rate of the Series B
Preferred Stock to 12% from 8% per annum. In March 1998, pursuant to the
applicable provisions of the Restructuring Agreement, Infinity elected to
further amend the terms of the Series B Preferred Stock to the effect that
dividends would cease accuring (i.e., the dividend rate would decrease from 12%
per annum to 0% per annum), and in connection therewith, Infinity elected to
cause certain of the Company's officers/directors to transfer to Infinity five
year options to acquire 500,000 shares of the Company's common stock at an
exercise price of $.6250 per share).
The Preferred Stock bears a cumulative cash dividend rate of
$0.93 per annum, payable quarterly, when, as and if declared by the Board
of Directors of the Company.
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 bylaws of the Company.
Common Stock
On October 16, 1998, the Company recorded a two-for-one reverse
stock split of its common stock. Accordingly, all references to the number of
shares outstanding have been adjusted for all the periods presented to give
effect to the aforementioned stock split.
During the period September 1997 to November 1997, the holder of options issued
for payment of consulting expenses, exercised 200,000 options to purchase
200,000 shars of common stock at an exercise price at $.82 per share.
During the fiscal year ended August 31, 1998, the Company issued 172,495 shares
of common stock in exchange for consulting services valued at $232,933.
During the fiscal year ended August 31, 1998, unpaid preferred stock dividends
in the amount of $269,067 were converted at approximately $4.00 per share into
67,285 shares of common stock.
On July 30, 1998, 25,000 warrants were exercised into 25,000 shares of common
stock at the market price of $.46 per share.
NOTE 13 - STOCK OPTIONS
During the year ended August 31, 1997, the Company granted 257,500 options
to consulting firms to purchase common stock at an average exercise price
of $.82 per share, in connection with the Restructuring Transaction
disclosed in Note 12(c). The options are exercisable for a period of 5
years beginning on the grant date, 200,000 options expire on February 27,
2000 with the remaining 57,500 options expiring November 2001.
During the year ended August 31, 1997, the Company granted 817,000
options to employees at an average exercise price of $.35 per share. The
options are exercisable for a period of 5 years beginning on the grant
date. 712,500 options expire November 13, 2001 with the remaining 104,500
options expiring on August 12, 2002.
The following summarizes the stock options for the two years ended August
31, 1998;
Weighted Average
Number of Exercise Price
Options Per Share
--------- ----------------
Outstanding at September 1, 1996 0
Granted 217,000 $ .23
------- ------
------
Outstanding at August 31, 1997 217,000
Granted 25,000 .23
------- ------
------
Outstanding at August 31, 1998 242,000 .27
------- ------
------- ------
Weighted average fair value of
options granted during the year. $.56
----
----
Weighted average remaining life
of options granted during the year 5 Years
During the year ended August 31, 1998, the Company granted 85,000 options
to employees at an average exercise price of $1.06 per share. The options
are exercisable for a period of five (5) years beginning on the grant date.
The Company accounts for stock based compensation for employees using the
intrinsic value-based method provided in APB Opinion 25, "Accounting for
Stock issued to Employees." The Company has adopted the disclosure-only
provisions of SFAS 123, "Accounting for Stock Based Compensation."
Accordingly, no compensation cost for employees has been recognized for the
year ended August 31, 1998. Had compensation cost been determined based on
the fair value method on the date of grant, the Company's net loss and loss
per common share would have increased by approximately $75,599 and $.03,
respectively.
The weighted average fair value at the date of grant for the year ended
August 31, 1998 was approximately $.96 per option. The fair value of each
option granted was estimated using the Black- Scholes option-pricing model
based on the following assumptions: expected dividend yield of 0%, expected
volatility of 120%,a risk-free interest rate of 6.0%, and expected lives of
5 years. The compensation cost as generated by this method may not be
indicative of the future benefit, if any, that will be received by the
option holder.
Additionally, certain officers and employees of the Company were granted
five year options (outside of such plan) to purchase a total of 600,000
shares of the Company's common stock in November 1996. At an exercise
price of $.6250 per share (500,000 which were assigned to Infinity in March
1998), and five year options (also outside of such plan) to purchase 60,000
shares of the Company's common stock in July 1998 at an exercise price of
$1.06 per share.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company maintains a qualified 401(k) plan for non-union employees
meeting certain requirements. Under the plan, annual discretionary
contributions to the plan are determined by the Board of Directors and
employees may make voluntary contributions. For the years ended August 31,
1998 and 1997, the Company did not make any contributions to the plan.
The Company contributes, along with many other employers, to the
International Brotherhood of Teamsters and Chauffeurs Union, Local 456, a
multi-employer defined benefit plan. The Pension Plan Amendment Act of
1980, imposes certain liabilities upon employers who are contributors to
multi-employer plans in the extent that employers withdraw from such a
plan.
NOTE 15 - SUBSEQUENT EVENTS
(a) Company's Common Stock was delisted from The Nasdaq Small Cap Market,
Inc. ("Nasdaq"), effective as of the close of business on November 9, 1998,
as a result of Nasdaq's determination that the Company failed to satisfy
the terms of a Nasdaq qualifications exception which was granted on
September 8, 1998. Although the Company intends to challenge the delisting,
there can be no assurance that the Comany's common stock will be re-listed
on The Nasdaq Small Cap Market after completion of the review process.
If the Company's securities are excluded from The Nasdaq Small Cap Market,
it may adversely affect the prices of such securities and the ability of
holders to sell them.
(b) The Company sold the customer list and certain other assets of its
wholly-owned subsidiary, White Plains Fuel, Inc., in October 1998, to the
third party that had operated such business since June 1995, for a purchase
price of $361,000.
NOTE 16 - RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income," ("SFAS 130"),
effective for periods beginning after December 15, 1997, SFAS 130, which
will be adopted in the first quarter of the year ending August 31, 1999,
establishes standards for reporting and displaying comprehensive income and
its components. Comprehensive income is defined as the change in equity
during a period from transactions and other events and circumstances from
non-owner sources and includes all changes in equity during a period except
those resulting from financial statement disclosures.
F-16
In June 1997, FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information," ("SFAS 131"), effective for periods
beginning after December 15, 1997. SFAS 131, which will be adopted in the
first quarter of the year ending August 31, 1999, establishes standards for
the reporting by public business enterprises of information about operating
segments in interim and annual financial statements. The Company is
currently evaluating the impact, if any, the implementation of this
standard will have on the disclosures in the consolidated financial
statements.
NOTE 17 - SEGMENT INFORMATION
The Company's revenue and income are derived from one industry segment
which includes the sale of propane, propane equipment, fuel oil, gasoline
and diesel fuel.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series A 7.5%
Cumulative Convertible Redeemable Preferred Stock.**
3.4 Certificate 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. ****
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.*
10.3 Management Agreement by and between HQ Propane and ATI.*
10.4 Form of Employment Agreement by and between the Company and Claire E.
Tarricone.*
10.5 Form of Employment Agreement by and between the Company and Anthony
Tarricone.*
10.6 Form of Employment Agreement by and between the Company and Joseph
Tarricone.*
10.7 Promissory Note, dated August 31, 1993, of ATI in favor of HQ Propane.*
10.8 ATI Purchase Agreements.**
10.9 Agreement and Plan of Reorganization by and among Halstead Energy
Corp., Allan Cianflone and Jack Troccoli.**
10.10 Consulting and Warrant Compensation Agreement between the Company
and Boulder Financial Group. ****
10.11 Restructuring Agreement, dated September 24, 1997, by and among the
Company, Infinity Investors Limited, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A.Tarricone. *****
10.12 12% Subordinated Promissory Note of the Company dated September 24,
1997.*****
21.1 Subsidiaries of the Small Business Issuer.**
---------------------------
* 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.
F-17
*** Incorporated by reference to the Company 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.
***** Incorporated by reference to the Company's Registration on Form SB-21/A
filed with the SEC on December 1, 1997.
(b) Reports on Form 8-K - None
F-18
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 25, 1998 Halstead Energy Corp.
By: s/s Claire E. Tarricone
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
PRINCIPAL EXECUTIVE
OFFICER:
/s/ Claire E. Tarricone President November 30, 1998
Claire E. Tarricone
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER:
/s/ Joseph A. Tarricone Vice President November 30, 1998
Joseph A. Tarricone and Treasurer
DIRECTORS:
/s/ Claire E. Tarricone Director November 30, 1998
Claire E. Tarricone
/s/ Anthony J. Tarricone Director November 30, 1998
Anthony J. Tarricone
/s/ Joseph A. Tarricone Director November 30, 1998
Joseph A. Tarricone
Edwin Goldwasser Director November 30, 1998
Joseph Gatti Director November 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> AUG-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 820,928
<ALLOWANCES> 67,000
<INVENTORY> 195,324
<CURRENT-ASSETS> 2,229,416
<PP&E> 11,558,110
<DEPRECIATION> 1,269,608
<TOTAL-ASSETS> 15,463,639
<CURRENT-LIABILITIES> 5,448,967
<BONDS> 0
1,064,169
3,615,360
<COMMON> 6,477,935
<OTHER-SE> (4,182,748)
<TOTAL-LIABILITY-AND-EQUITY> 15,463,639
<SALES> 13,272,991
<TOTAL-REVENUES> 14,215,504
<CGS> 10,044,192
<TOTAL-COSTS> 15,902,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 664,459
<INCOME-PRETAX> (2,351,886)
<INCOME-TAX> 44,394
<INCOME-CONTINUING> (1,687,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,396,280)
<EPS-PRIMARY> (1.38)
<EPS-DILUTED> (1.38)
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