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As filed with the Securities and Exchange Commission on March 12, 1998
Registration No.
333-38031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
Post-Effective Amendment No. 1
Registration Statement
Under The
Securities Act of 1933
HALSTEAD ENERGY CORP.
(Name of Small Business Issuer in its Charter)
Nevada 4925 87-0446395
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
33 Hubbells Drive
Mt. Kisco, New York 10549
(914) 666-3200
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
Ms. Claire E. Tarricone
President
33 Hubbells Drive
Mt. Kisco, New York 10549
(914) 666-3200
(Name, Address and Telephone Number of
Agent For Service)
With a copy to:
Paul J. Pollock, Esq.
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, New York 10020-1104
(212) 835-6280
Approximate Date of Proposed Sale to the Public: From time to time
after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ________
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit(1) Price Fee
- -------------------------------------------------------------------------------
Common Stock 2,170,488 $2.25 $4,883,598 $1,479.88
- -------------------------------------------------------------------------------
TOTAL REGISTRATION FEE $1,479.88
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(1) Represents the average of the closing bid and asked prices of the Common
Stock of the Registrant on October 13, 1997.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
HALSTEAD ENERGY CORP.
2,340,035 Shares of Common Stock
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The 2,340,035 shares (the "Shares") of Common Stock, par value $.001 per
share (the "Common Stock"), of Halstead Energy Corp. (the "Company") to which
this Prospectus relates are being offered, from time to time, on behalf of and
for the respective accounts of Infinity Investors Ltd. ("Infinity") and certain
other holders (the "Other Holders"; and individually and collectively, the
"Selling Stockholders"), as more fully described herein under "Selling
Stockholders." The distribution of the Shares by the Selling Stockholders, or by
pledgees, donees, distributees, transferees or other successors in interest, may
be affected from time to time by underwriters who may be selected by the Selling
Stockholders and/or broker-dealers in one or more transactions (which may
involve crosses and block transactions) on the NASDAQ SmallCap Stock Market or
other over-the-counter markets or, in special offerings, exchange distributions
or secondary distributions pursuant to and in accordance with rules of such
over-the-counter markets or exchanges, in negotiated transactions or otherwise,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. In connection with the
distribution of the Shares or otherwise, the Selling Stockholders may enter into
hedging or option transactions with broker-dealers and may sell Shares short and
deliver the Shares to close out such short positions. The Company has agreed to
indemnify the Selling Stockholders, underwriters who may be selected by the
Selling Stockholders, and certain other persons against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Plan of Distribution" and "Selling Stockholders."
The Company has agreed to pay all expenses of registration in connection with
this offering but will not receive any of the proceeds from the sale of the
Shares being offered hereby. All brokerage commissions and other similar
expenses incurred by the Selling Stockholders will be borne by it or them, as
the case may be. The aggregate proceeds to the Selling Stockholders from the
sale of the Shares will be the purchase price of the Shares sold, less the
aggregate brokerage commissions and underwriters' discounts, if any, and other
expenses of issuance and distribution not borne by the Company.
-------------------
See "Risk Factors," beginning on Page 4, for information and a discussion of
certain factors that should be considered by prospective investors.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus is March 12, 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission") (file no. 000-25660). Such reports, proxy and
information statements and other information filed by the Company can be
inspected and copied at the public reference facility maintained by the
Commission in Washington, D.C. at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the Commission's regional offices in New York (7 World Trade
Center, Suite 1300, New York New York 10048) and Chicago (Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611). Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. The Company's Exchange Act filings are
also available to the public on the Commission's Internet site
(http://www.sec.gov).
This Prospectus, which constitutes part of a registration statement on
Form SB-2 filed with the Commission under the Securities Act by the Company,
omits certain of the information contained in the registration statement.
Reference is hereby made to the registration statement and to the exhibits to
the registration statement for further information about the Company and the
Common Stock. Statements in this Prospectus concerning provisions of documents
are summaries of such documents, and each statement is qualified by reference to
the copy of the applicable document filed with the Commission. Copies of such
material, including the complete registration statement and the exhibits, can be
inspected, without charge at the offices of the Commission, or obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, (i) all dollar amounts in this Prospectus are stated in the
lawful currency of the United States, (ii) all information in this Prospectus
assumes no exercise of any outstanding option or warrant to acquire shares of
the Company's Common Stock, and (iii) all references herein to the Company
include the subsidiaries and divisions of the Company.
Page 3
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THE COMPANY
Halstead Energy Corp. (the "Company") was originally incorporated in the
State of Utah on January 15, 1986 under the name of Technical Analysis, Inc.
Effective October 8, 1990, the Company changed its corporate domicile to the
State of Nevada. On August 5, 1993 the Company acquired Halstead Quinn Propane,
Inc. ("HQ Propane") in exchange for 2,170,000 shares of the Company's Common
Stock. Simultaneously with such acquisition, the Company changed its name to
Halstead Energy Corp. The address of the Company's principal executive office is
33 Hubbells Drive, Mt. Kisco, New York 10549, and its telephone number is (914)
666-3200.
The Company's operating entities are engaged in the wholesale and/or
retail distribution of, and the provision of services relating to, fuel oil,
liquid propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company, and Halstead Quinn Terminal ("HQ Terminal"), HQ Gasoline ("HQ
Gasoline") and Dino Oil ("Dino"), which are separate divisions of HQ Propane.
The business of White Plains Fuel, Inc. ("WPF"), a Hawthorne, New York-based
retail distributor of fuel oil and diesel fuel which was acquired by the Company
in June 1995, is being operated by a third party under the terms of a four (4)
year lease.
HQ Propane (formerly Halstead Quinn Fuel Oil Co., Inc.), based in central
Westchester County in Mt. Kisco, New York, was established in 1946 and since
1958 has been a retail distributor of liquid propane gas and propane equipment
and also provides services related thereto. A. Tarricone, Inc. ("ATI") acquired
HQ Propane in 1975 and subsequently spun it off to its stockholders in December
1992. In July 1996, HQ Propane acquired the customer list and certain other
assets of E. F. Osborn & Sons, a Pawling, New York-based retail propane
distributor. Approximately 80% of HQ Propane's customers are Westchester County
residents and businesses, and the remaining 20% are located throughout the
surrounding counties of Putnam and Dutchess in New York State. Of HQ Propane's
customers, approximately 78% use propane for hot water heating and cooking;
approximately 16% use propane for pool heating; and approximately 6% use propane
for home heating. Because hot water heating and cooking use is relatively
constant throughout the year, HQ Propane's business is not subject to
significant seasonal variation.
In September 1996, the Company acquired certain assets of Dino Oil, Inc.,
a Bronx, New York-based commercial gasoline distributor. The addition of the
Company's Dino Oil division has broadened the Company's marketing region by
providing the Company with customer accounts (including various service stations
and fleet garages) located in the Bronx, Queens, Brooklyn, and Manhattan, as
well as Nassau, Suffolk and Westchester counties.
HQ Terminal owns and operates a deep water terminal in Yonkers, New York
near the New York City border. The five million gallon terminaling facility
allows for the wholesale distribution of fuel oil, gasoline and diesel fuel, and
also provides storage facilities for other petroleum companies through
warehousing agreements know as thru-puts. The Company's own product requirements
are often supplied through this facility. Pending the approval of HQ Propane's
application with New York State for a terminal operator's license, the facility
is being operated on its behalf by ATI.
HQ Gasoline operates 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf." The operation of gasoline
stations allows the Company to offset, in part, the seasonal fluctuations that
affect the Company's wholesale fuel oil distribution division. Each station is
combined with either a convenience store and/or an automotive repair shop. Nine
of the 25 gasoline stations are leased from ATI.
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk and is speculative in nature. Prospective investors should
carefully consider the following risk factors, as well as others described
elsewhere in this Prospectus, relating to the business of the Company and this
offering. The discussion below highlights some of the more important risks
regarding the Company and this offering. The risks highlighted below should not
be assumed to be the only factors that could affect future performance. In
addition, the discussion in this Prospectus regarding the Company and its
business and operations contains "forward-looking statements." Such statements
consist of any statement other than a recitation of a historical fact and can be
identified by the use of forward-looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative of any thereof or other
variations thereon or comparable terminology. Prospective investors are
cautioned that all forward-looking statements are necessarily speculative and
there are certain risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. The Company does not have a policy of updating or revising
forward-looking statements, and thus it should not be assumed that silence by
management of the Company over time means that actual events or results are
occurring as estimated in such forward-looking statements.
ATI Bankruptcy
On June 10, 1997, 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, directors of the
Company and its executive officers), filed a voluntary petition for
reorganization pursuant to Chapter 11 of the United States 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 has elected to
write-off, and has taken as a charge against earnings as a bad debt expense, in
the fourth quarter of fiscal 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.
Licensing
The Company's principal terminal facility is currently being operated by
ATI pending the approval of the Company's application with the State of New York
for a terminal operator's and diesel motor fuel license. There can be no
assurance about the prospect of obtaining the approval of such licenses. The
Company has been advised by counsel that, pending the conclusion of ATI's
bankruptcy proceeding, ATI will continue to maintain such licenses, and thus
that ATI will be able to continue operating the Company's terminal and diesel
motor fuel businesses. However, there can be no assurance that at the conclusion
of such proceeding, if the result were a liquidation of ATI (and therefore a
termination of such licenses), that the Company would by that time have received
its own licenses or would have been able to contract with another entity to
operate such businesses. The occurrence of any of these circumstances could have
a material and adverse effect on these businesses and on the Company.
Page 5
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Seasonal Factors
The Company's retail gasoline business, while not seasonal, is subject to
use patterns that vary based on the time of the year. The Company's wholesale
fuel oil business is seasonal, as a substantial portion of its business is
conducted during the fall and winter months. As this is the case, weather
patterns during the winter months can have a material adverse impact on its fuel
oil revenues. Although temperature levels for the heating season have been
relatively stable over time, variations can occur from time to time, and warmer
than normal winter weather will adversely affect the results of the Company's
fuel oil operations.
Competition from Alternate Energy Sources
The Company competes for customers in its wholesale fuel oil and retail
propane distribution businesses with suppliers of alternate energy products,
principally natural gas and electricity. Over the past few years, a small
percentage of HQ Propane's customers have converted to other sources, primarily
natural gas. In addition, the Company may lose additional customers due to
conversions during periods in which the cost of its products exceeds the cost of
such alternative energy sources.
Competition for New Customers
The Company's business is highly competitive. In addition to competition
from alternative energy sources, HQ Propane competes with propane distributors
offering a broad range of services and prices, from full service distributors
similar to HQ Propane, to those offering delivery only. Competition with other
companies in the propane industry is based primarily on customer service and
price. Longstanding customer relationships are typical in the retail propane
industry. Many companies in the industry, including HQ Propane, deliver propane
to their customers based upon weather conditions and historical consumption
patterns without the customers having to make an affirmative purchase decision
each time propane is needed. In addition, most companies, including HQ Propane,
provide propane equipment repair service on a 24 hour a day basis, which tends
to build customer loyalty. As a result, HQ Propane may experience difficulty in
acquiring new retail customers due to existing relationships between potential
customers and other propane distributors.
Competition in the retail gasoline business is based on price, appearance,
location and value added services. Many of HQ Gasoline's competitors are large
multinational oil companies and have greater resources and/or a longer track
record for their operations and can offer the convenience of their own credit
cards. There can be no assurance that future actions by such competitors will
not have a material adverse effect on the Company's business operations.
Insurance
Companies engaged in the petroleum products distribution and storage
business may be sued for substantial damages in the event of an actual or
alleged accident or environmental contamination. The Company maintains
$1,000,000 of liability insurance and $5,000,000 of excess liability insurance.
There can be no assurance that the Company will be able to continue to maintain
liability insurance at a reasonable cost in the future, or that a potential
liability will not exceed the coverage limits. Nor can there be any assurance
that the amount of insurance carried by the Company will enable it to satisfy
any claims for which it might be held liable resulting from the conduct of its
business operations.
Page 6
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Environmental/Governmental Regulation
Regulations regarding underground storage tanks ("USTs") including those
at service stations, have been issued by the U.S. Environmental Protection
Agency (the "EPA") . The regulations cover the design, construction and
installation of new UST systems, and require that existing systems meet certain
EPA standards by December 1998. The regulations require that owner/operators of
UST systems demonstrate financial responsibility for the cleanup of spills or
releases, and/or to compensate third parties for any resulting damages. In
January 1994, HQ Propane was served with a complaint alleging that the Company
discharged petroleum products onto certain leased property and seeking $106,173
in damages for the costs of clean up and removal of the contaminated soil and an
additional $300,000 for diminution of value. Although the Company has retained
outside counsel and is vigorously defending itself in this lawsuit, there can be
no assurance that such defense will be successful or that such litigation will
not have a material adverse effect on the Company. See "Legal Proceedings."
Although the Company has an ongoing program for maintenance, testing,
retrofitting, or replacement of USTs, there can be no assurance that potential
problems will be discovered before a spill or release occurs. Although the
Company believes that adequate pollution insurance is being maintained to cover
its primary environmental-related loss contingencies, there can be no assurance
that such insurance will be maintained at current levels or that even if so
maintained will cover all loss contingencies.
Growth Dependent Upon Acquisitions
Management of the Company believes that future growth will require
acquisitions of other petroleum product businesses. There can be no assurance,
however, that the Company will be able to identify new acquisition candidates
or, even if a candidate is identified, that it will have access to the capital
necessary to consummate such acquisitions.
Possible Need for Financing
The Company's ability to meet its future capital requirements will depend
on many factors, including, but not limited to, the success of the Company's
expansion efforts and the response of competitors to the Company's efforts. If
the Company's cash flow is not sufficient to support its operations and
expansion plans, the Company may curtail its expansion and gasoline station
renovation plans, or the Company may seek to sell additional shares of its
Common Stock or other securities or to borrow funds. There can be no assurance
that any such financing will be available to the Company or, if available, that
such financing will be available on favorable or affordable terms. The inability
of the Company to obtain necessary additional financing would adversely affect
the Company's operations.
Supply of Petroleum Products
One major supplier provides the Company with its propane product
requirements. The loss of such supplier could have a material adverse effect on
the Company. Three major suppliers 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.
Management believes that if the Company's supply of any of the foregoing
products was interrupted, the Company would be able to secure adequate supplies
from other sources without a material disruption in its operations. However,
there can be no assurance that adequate supplies of such petroleum products will
be readily available in the future.
Dependence on Management and Key Personnel
The success of the Company will depend to a considerable degree on the
continued services of Claire E. Tarricone, the Company's President, Anthony J.
Tarricone, the Company's Vice President and Secretary, and Joseph A. Tarricone,
the Company' s Vice President and Treasurer. The loss of the services of any
such person could have a material adverse effect on the Company. The Company
does not maintain any key-man insurance on the life of any of the Tarricones. In
addition, the success of the Company will depend, among other factors, upon the
successful recruitment and retention of additional highly-skilled and
experienced management and technical personnel. The inability to attract and
retain qualified employees could adversely affect the Company's business.
Control by Members of the Tarricone Family
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone are
siblings and jointly beneficially own approximately 46% of the Company's
outstanding Common Stock prior to the conversion of any shares of Preferred
Stock or the exercise of any options or warrants. Further, the Tarricones
collectively beneficially own options and warrants to purchase an additional
1,238,275 shares of Common Stock. If all of such options and warrants were
exercised (but no other options or warrants were exercised or preferred stock
converted), the Tarricones would jointly beneficially own approximately 57% of
the outstanding Common Stock. In addition, the Tarricones are parties to a
buy/sell agreement pursuant to which, upon the death or disability of any of
them, the others are required to purchase the shares owned by such deceased or
disabled stockholder. Since the Company's Articles of Incorporation do not
provide for cumulative voting, the Tarricone family, by virtue of their
beneficial stock ownership and the buy/sell agreement, may be in a position to
elect, and continue to elect, all of the Company's directors and continue to
control the Company's affairs and operations.
Page 7
Conflicts of Interest
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone are also
the sole officers, sole stockholders and represent a majority of the directors
of ATI. HQ Propane has entered into agreements with ATI under which it (i)
leases 9 of the 25 service stations comprising its HQ Gasoline division from ATI
and pays rent for the service stations in the amount of approximately $19,000
per month; (ii) pays a monthly management and royalty fee to ATI for various
services provided to HQ Propane by ATI in the amount of $30,000 per month; and
(iii) is supplied with substantially all of its fuel oil and diesel fuel
supplies by ATI at ATI's cost plus one quarter of one cent ($.0025) per gallon
purchased. While the Company believes that such transactions were on terms no
more favorable than that which could have been obtained from an unrelated party,
there can be no assurance that the Company is correct in such belief.
ATI also operates retail gasoline service stations in addition to those
that are leased to HQ Gasoline. Accordingly, service stations that are owned by
ATI may compete with HQ Gasoline, and conflicts may arise over whether
prospective service station acquisition opportunities are to be taken by the
Company or ATI.
As a result of the foregoing, both present and future conflicts of
interest may exist with respect to matters involving ATI which are brought
before the Tarricones as officers or directors by virtue of their positions with
and ownership of ATI.
Concentration of Voting Power; Anti-Takeover Provisions
The Company's board of directors has the authority to issue shares of
Preferred Stock and to determine the price, rights, preferences and privileges,
including voting rights, of those shares without any further action by the
Company's stockholders. The rights of holders of the Company's Common Stock will
be subject to and may be adversely affected by the rights of the holders of any
Preferred Stock. The board of directors has already designated and issued Series
A 7.5% Cumulative Convertible Redeemable Preferred Stock of the Company (the
"Series A Preferred Stock") and the Series B Preferred Stock. Any future
designation and issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire control of the Company. The Company
is also subject to the provisions of the Nevada General Corporation Law
regulating business combinations, takeovers and control share acquisitions,
which also might hinder or delay a change in control of the Company.
Anti-takeover provisions that could be included in the Preferred Stock when
designated and issued and the Nevada statutes can have a depressive effect on
the market price of the Company's Common Stock and can prevent the Company's
stockholders from realizing a premium on the sale of their shares by
discouraging takeover and tender offer bids.
Possible Volatility of Stock Price
The market price of the Common Stock has been highly volatile. Quarterly
operating results of the Company, changes in general conditions in the economy,
the financial markets, or the energy industry, changes in financial estimates by
securities analysts or failure by the Company to meet such estimates, litigation
involving the Company, actions by governmental agencies or other developments
affecting the Company or its competitors could cause the market price of the
Common Stock to fluctuate substantially. In particular, the stock market may
experience significant price and volume fluctuations which may affect the market
price of the Common Stock for reasons that are unrelated to the Company's
operating performance and that are beyond the Company's control.
Outstanding Warrants, Options and Convertible Securities
As of March 1, 1998, the Company had outstanding options and warrants to
purchase an aggregate of 2,046,125 shares of Common Stock. The Company has also
reserved up to an additional 216,000 shares of Common Stock for issuance upon
exercise of options which have not yet been granted under the Company's stock
option plan. In addition, the shares of Series A Preferred Stock and Series B
Preferred Stock are currently convertible into 2,338,508 shares of Common Stock.
Holders of such warrants and options are likely to exercise them, and holders of
such convertible securities may convert them, when in all likelihood the Company
could obtain additional capital on terms more favorable than those provided by
such options, warrants or convertible securities. Further, while its warrants,
options and convertible securities are outstanding, the Company's ability to
obtain additional financing on favorable terms may be adversely affected.
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Possible Future Dilution
The Company has authorized capital stock of 50,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock, par value $.001 per share (the
"Preferred Stock"). Insofar as the Company's Articles of Incorporation permit
the Company to issue authorized but unissued shares of Common Stock and
Preferred Stock without stockholder approval in order to acquire businesses, to
obtain additional financing or for other corporate purposes, there may be
further dilution of the stockholders' interests.
Possible Delisting of Securities From The Nasdaq SmallCap Market
The Company's Common Stock is listed on The Nasdaq SmallCap Market. In
August 1997, the Nasdaq Stock Market, Inc. ("Nasdaq") adopted new requirements
that the Company must meet for continued listing of its Common Stock, including
(i) maintaining a bid price of the Company's Common Stock of at least $1.00,
(ii) having at least $2,000,000 in net tangible assets, (iii) maintaining a
public float of at least 500,000 shares of Common Stock having a market value of
at least $1,000,000, and (iv) complying with certain corporate governance
requirements, such as electing at least two independent directors. If the
Company does not meet NASDAQ's continuing listing criteria, the Common Stock
will be subject to delisting. As a result of delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Common Stock. Additional sales practice requirements would be imposed on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. Consequently, the rule affects the ability
of holders of the Common Stock, including purchasers in this offering, to sell
their Common Stock in the secondary market. Delisting from The Nasdaq SmallCap
Market may also cause a decline in share price, loss of news coverage of the
Company and difficulty in obtaining subsequent financing.
Dividends on Common Stock
The Company has not paid any dividends on shares of its Common Stock, and
the Company has no plans to pay any dividends. For the foreseeable future, it is
anticipated that earnings, if any, which may be generated from the Company's
operations will be used to finance the growth of the Company and that cash
dividends will not be paid to holders of Common Stock.
Possible Preferred Stock Issuance
The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors
without further action by the Company's stockholders, and may include voting
rights (including the right to vote as a class on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. As of December 29, 1997, 168,020 shares of Series A
Preferred Stock and 560,126 shares of Series B Preferred Stock are outstanding.
The issuance of any additional Preferred Stock could affect the rights of the
holders of the Common Stock and, therefore, reduce the value of the Common Stock
and make it less likely that holders of Common Stock would receive a premium for
the sale of their shares. In particular, specific rights granted to future
holders of Preferred Stock could be issued to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by present owners and preventing a takeover of the Company. Any such
issuance could adversely affect holders of the Company's Common Stock who might
want to vote in favor of a proposed merger, asset sale or other transaction.
USE OF PROCEEDS
All of the Shares offered hereby are being offered by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the Shares. See "Selling Stockholders."
Page 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended November 30, 1997 Compared to Three Months Ended November 30,
1996.
Revenues for the three months ended November 30, 1997, decreased by
$786,680 to $3,981,754 from $4,768,434 for the three months ended November 30,
1996. The decrease is primarily due to lost home heating oil sales revenue
resulting from the sale of the Rockland Fuel Oil customer list of approximately
$419,100. Commercial gasoline sales declined by $241,600 as a result of
competitive market pricing. In addition, thru-put income declined by
approximately $94,900.
Cost of sales for the three months ended November 30, 1997 decreased by
$744,863 to $3,008,587 from $3,753,450 for the three months ended November 30,
1996. This decrease is due to lower product purchases of home heating oil of
$298,200 due to the sale of the Rockland Fuel Oil customer list, lower product
purchases of gasoline of approximately $495,800 and a decrease in commercial
account deliveries. These cost decreases were partially offset by an increase in
all other purchases of approximately $49,100 as compared to the same period
during the prior year. The percentage of cost of goods to sales for the three
months ended November 30, 1997 and 1996 are 75.6% and 78.7% respectively. The
decrease is primarily due to increased gross profit from retail gasoline and
propane sales.
Selling, General and Administrative Expenses for the three months ended
November 30, 1997 increased by $12,745 to $776,567 from $763,822 for the three
months ended November 30, 1996. The increase is primarily due to increased
salaries of $71,440, increased equipment leases of $36,881, increased telephone,
uniform and selling expenses of $54,877, increased real estate taxes of $2,651,
which increases total $165,849. These increased costs were mainly offset by
decreases in maintenance and repair and vehicle expense totaling $20,413,
decreases in professional fees of $59,025, decreases in insurance of $36,119 and
all other decreases totaling $37,547. All such decreases total $153,104 as
compared to the same period during the prior year.
Interest income for the three months ended November 30, 1997 decreased by
$61,218 to $11,577 from $72,795 for the three months ended November 30, 1996.
This decrease is primarily due to a decrease in the interest income relating to
the note receivable due from ATI as compared to the same period during the prior
year.
Interest Expense for the three months ended November 30, 1997 increased by
$92,945 to $181,841 from $88,896 for the three months ended November 30, 1996.
The increase is due to an increase in certain indebtedness of the Company as
compared to the same period during the prior year.
Depreciation and amortization for the three months ended November 30, 1997
increased by $92,360 to $278,680 from $186,320 for the three months ended
November 30, 1996. This increase is due to the additions in fixed assets and a
decrease in the estimated lives of certain assets.
Royalty Expense for the three months ended November 30, 1997 decreased by
$25,203 to $0 from $25,203 for the three months ended November 30, 1996. The
decrease is primarily due to the reclassification of the expense of purchasing
the ATI trademark to an intangible asset. The Company currently recognizes the
associated amortization expense.
<PAGE>
Year Ended August 31, 1997 Compared to Year Ended August 31, 1996.
Sales for the year ended August 31, 1997, increased by $3,354,872 to
$18,667,132 from $15,312,260 for the year ended August 31, 1996. The increase
was due to additional gasoline sales revenue totaling $5,361,011 resulting
primarily from the Dino Oil acquisition, and increased propane sales revenue
totaling $205,936. These increases in revenue were partially offset by a
decrease in home heating oil sales in the amount of $2,135,959 primarily due to
a 20% warmer winter, the sale of Rockland Fuel Oil's customer list and lost
thru-put income.
Cost of Sales for the year ended August 31, 1997 increased by $3,943,180 to
$14,677,380 from $10,734,200 for the year ended August 31, 1996. This increase
was due to additional gasoline product purchase requirements primarily relating
to the Dino Oil acquisition of $5,407,280 and increased propane costs of
$87,329. These cost increases were partially off-set by lower product purchases
for home heating oil in the amount of $1,526,700 primarily attributable to a
warmer winter and to the sale of Rockland Fuel Oil's customer list. The
percentage of cost of sales to sales for the twelve month periods ending August
31, 1997 and 1966 were 78.6% and 70.1%, respectively. The increase in the
percentage of cost of sales to sales of 8.5% was due, in part, to the Dino Oil
acquisition, the commercial business of which is characterized by high volume
and low gross profit. In addition, seven year record price increases in the cost
of gasoline and distilates sharply reduced the gross profit, particularly in the
Company's non-residential markets.
Selling, General and Administrative Expenses for the year ended August 31,
1997 increased by $828,209 to $4,069,135 from $3,240,926 for the year ended
August 31, 1996. The increase is primarily due to increased salaries of
$551,242, telephone uniforms and selling expense of $31,310, and office expense
of $34,625 all of which are primarily due to start up costs associated with the
Dino Oil acquisition, increased equipment leases of $118,563, increase in real
estate taxes of $78,505 increased insurance of $33,764, increased professional
fees of $21,585 and all other expenses totaling a net increase of $36,368 as
compared to the previous year. These increases in expenses were partially offset
by a decrease in advertising expense of $64,435 and all other expenses totaling
a net decrease of $13,318 as compared to last year.
Bad Debt expense for the year ended August 31, 1997 increased by $4,655,129
to $4,694,998 from $39,869 for the year ended August 31, 1996. The increase in
bad debt expenses primarily resulting 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 $777,566.
Depreciation and Amortization for the year ended August 31, 1997 increased
by $569,790 to $1,287,674 from $717,884 for the year ended August 31, 1996. The
increase is primarily attributable to fixed asset additions of property and
equipment of $511,031, leaseholds of $703,000 and a customer list totaling
$350,000 for fiscal 1997 and a change in estimated useful lives of certain
assets.
Interest Income for the year ended August 31, 1997 decreased by $96,536 to
$5,451 from $101,987 for the year ended August 31, 1996. This decrease is
primarily due to the decrease of interest income due from the note receivable
from ATI. This amount is partially offset by interest income resulting from
invested funds and the note receivable due from the sale of Rockland Fuel Oil's
customer list.
Interest Expense for the year ended August 31, 1997 increased by $9,080 to
$407,969 from $398,889 for the year ended August 31, 1996. This increase was
primarily due to an increase of indebtedness of the Company.
Net Rental Income for the year ended August 31, 1997 increased by $84,039
to $502,517 from $418,478 for the year ended August 31, 1996. The increase was
due to increased gasoline station and other rental income of $14,039 and the
recovery of bad debt previously written-off of additional rents due under a
third party lease agreement of approximately $70,400.
Royalty Expense for the year ended August 31, 1997 decreased by $64,333 to
$31,769 from $96,102 for the year ended August 31, 1996. The increase is
primarily due to the expense associated with the warrants issued to ATI in
exchange for use of the trademark "ATI."
Other Income for the year ended August 31, 1997 increased by $75,408 to
$114,343 from $38,935 for the year ended August 31, 1996. This increase is due
to rebates earned from available program connected to gasoline purchases.
Gain on the sale of asset for the year ended August 31, 1997 increased by
$175,667. The increase was due to the sale of the retail fuel oil customer list
of Rockland Fuel Oil, Inc., a wholly-owned subsidiary of HQ Propane
("Rockland"), to an independent third party distributor.
Income Tax Expense for the year ended August 31, 1997 decreased by $102,696
to $ -0- from $102,696 for the year ended August 31, 1996. The decrease is
primarily attributable to the Company reporting a net loss.
Page 13
Liquidity and Capital Resources
Management believes that the Company's diversified business operations and
continued growth will result in increased sales revenues and gross profits
(subject, of course, to the effects of price increases which are not
sufficiently passed through to the customers as referenced below) and result in
greater amounts of working capital being generated from operations. However, the
Company's growth through acquisition has significantly increased the Company's
working capital requirements due to increased gasoline purchase requirements,
increases in accounts receivable, and increased operating expenses (including
salary expense). Additionally, expenditures relating to the rebuilding of
certain of the Company's gasoline stations and certain other capital
expenditures have further increased the Company's working capital requirements
and have adversely affected the Company's ability to meet the same. As a result,
without additional financing, there can be no assurance that the Company will be
able to meet its cash requirements for the next twelve months. If it cannot do
so, the Company will be forced to scale back its operations. In this regard, the
Company will continue to pursue additional financing from a lending facility or
an offering of its securities to enable the Company to meet such cash
requirements and to accomplish growth through acquisition which the Company is
actively pursuing. There can be no assurance that the financing will occur or
that the Company can find suitable acquisition in the foreseeable future.
HQ Gasoline will have to invest approximately $325,000 over the next eleven
months in order to meet Federal EPA and State Regulations for underground
storage tanks by December 1998. Through November 30, 1997, the mandatory
requirements for six of the Company's locations have been completed.
In addition the Company plans to rebuild 10 of 25 gasoline stations which
will generally require $20,000 to $550,000 per location for an aggregate of
$1,600,000 (inclusive of the environmental upgrades referenced above). The
rebuilds will be phased in over two years in order to minimize volume losses due
to "downtime" encountered while each station location is under construction.
Capital expenditures for the three months ended November 30, 1997 were
$81,605. Included in this amount are expenditures for land in the amount of
$48,500, and for propane equipment and other equipment and improvements to gas
stations and the terminal facility totaling $33,105. Capital expenditures for
the year ended August 31, 1997 were $1,214,031. 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
totaling $511,032, and leaseholds totaling $703,000.
On June 8, 1995 the Company acquired all of the capital stock of White
Plains Fuel, Inc. in exchange of stock valued at $1,008,128. The shareholders of
White Plains Fuel, Inc. received 168,020 shares of newly created Series A - 7.5%
Cumulative Convertible Redeemable Preferred Stock of the Company. On various
dates throughout the 1997 and 1996 fiscal years, the Company declared dividends
on the Series A Preferred for $.45 per share totaling $75,609 in each such year.
For the fiscal period ended November 30, 1997, the Company declared dividends on
the Series A Preferred Stock totaling $18,902. The fuel oil business of White
Plains Fuel, Inc. is conducted by a third party operator under the terms of a
four (4) year lease under which HQ Propane receives annual rental income of
$288,000.
On January 10, 1996, a total of 650,000 shares of the Company's Common
Stock was reserved for issuance pursuant to the 1996 stock incentive plan for
officers, employees, and consultants. The total options granted through November
30, 1997 are 434,000 leaving a balance of 216,000 shares in reserve as of
November 30, 1997. Additionally, the Company granted to certain of its officers
and employees a total of 1,200,000 options (outside of such plan) on November
14, 1996.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares of
the Company's Common Stock to ATI in exchange for the Company's exclusive use of
the "ATI" trademark. The exercise price is equal to the lessor of $4.30 per
share or a 40% discount to the average closing bid price. The warrants provide
that 59,425 were immediately vested, and the balance become vested in four equal
annual installments. The market price at issuance was $4.30 per share
On September 5, 1996, the Company acquired the customer list of Dino Oil,
Inc. in exchange for 200,000 shares of the Company's Common Stock at $1.25 per
share and $100,000 cash. The acquisition was accounted for as a purchase and
resulted in the recognition of a customer list in the amount of $350,000.
Subsequent to the September 5, 1996 acquisition, the Company acquired 4 trucks
of Dino Oil at fair market value of $166,226. This amount was financed.
On June 10, 1997, 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, directors of the Company and its
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 referred
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 interest 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 has elected to write-off, and has taken as a charge against
earnings as a bad debt expense, in the fourth quarter of fiscal 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.
On December 31, 1996 the Company entered into an agreement with a third
party distributor to lease four (4) gasoline stations for a period of 10 years
with an option for renewal. The distributor prepaid the Company $149,000 for the
first year of rental expense and the Company is carrying $23,353 as deferred
income as of November 30, 1997. Simultaneously, the Company terminated the
previous third party agreement for $192,907 which resulted in the recovery of
bad debt previously written off of approximately $70,400.
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
and accordingly, the Company will recognize gain when payments are received.
Through August 31, 1997, the Company has recognized $175,667 as gain.
During the quarter ended February 28, 1997, the Company issued for certain
consulting services 400,000 five (5) year warrants dated 2/27/97 at $.41 per
warrant exercise price (all of which were exercised during the fiscal quarter
ended November 30, 1997), 100,000 five (5) year warrants (10,000 dated 11/04/96,
and 90,000 dated 2/18/97) at $.3125 per warrant exercise price, and 15,000 five
(5) year warrants dated 11/05/96 at $1.00 per warrant exercise price.
On June 9, 1997, the Company obtained a one-year revolving credit facility
in the maximum principal amount of $1,000,000. The maturity date has been
extended to September 4, 1998. 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 will increase to 20% per annum. The credit
facility is secured by a security interest in all of the Company's accounts
receivable, 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 November 30, 1997, the outstanding principal balance was
$815,000.
On September 24, 1997, the Company, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone and Infinity Investors Limited ("Infinity")
entered into a certain Restructuring Agreement (the "Restructuring Agreement").
Under the terms of the Restructuring Agreement, Infinity agreed to exchange 77,
419 shares of Series B Preferred Stock of the Company and all accrued and unpaid
dividends on the outstanding shares of Series B Preferred Stock for the
Company's Subordinated Promissory Note in the principal amount of $600,000 (the
"Note"). The Note accrues interest at 12% per annum compounded quarterly through
September 24, 1999 and accrues simple interest at 12% per annum after September
24, 1999. The Note matures on September 24, 2002, although the Company is
required to make mandatory prepayment upon the occurrence of certain events. The
terms of the balance of the 560,126 shares of Series B Preferred Stock owned by
Infinity were amended to provide, among other things, for (i) a fixed conversion
price of $2.00 per share of Series B Preferred Stock, (ii) the removal of
certain limitations on the rights of holders of the Series B Preferred Stock to
convert those shares into the Company's Common Stock, and (iii) an increase in
the dividend rate of the Series B Preferred Stock to 12% from 8% per annum. The
Company also agreed to register such shares of Common Stock. In connection with
the execution and delivery of the Restructuring Agreement, Infinity granted to
Elizabeth Mandel ("Mandel") an option to purchase all of the 2,170,488 shares of
Common Stock into which such 560,126 shares of Series B Preferred Stock may
convert (the "Shares"). Under the terms of the option, Mandel has the right to
acquire all of such Shares for a price of $2.00 per share until June 1, 1999
(the "Effective Date"), subject to earlier termination in the event that Mandel
fails to purchase at least an aggregate of 250,000 Shares on or prior to the
90th day following the Effective Date and an aggregate of 400,000 Shares on or
prior to the last day of each succeeding 90 day period commencing 90 days after
the Effective Date.
At various times during the fiscal quarter ended November 30, 1997, certain
related parties have loaned to the Company an aggregate of $100,006 (net of
repayment of $18,526), which amount accrues interest at a rate of 8% per annum,
payable on demand at anytime on or after September 1, 1998.
The Company had a working capital deficiency of approximately $926,700 and
a ratio of current assets to current liabilities of approximately 76% or 1:1.31
as at November 30, 1997, and a working capital deficiency of $1,131,017, and a
ratio of current assets to current liabilities of approximately 71% or 1:1.41,
as at August 31, 1997.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during fiscal 1997 and the three months ended November 30, 1997.
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 read this to mean 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.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS#128"),
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings (loss)
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings (loss) per share, the dilutive effect of stock
options will be excluded. The Company does not expect the impact on the earnings
(loss) per share to be material.
Page 17
<PAGE>
DESCRIPTION OF BUSINESS
Background
The Company was originally incorporated in the State of Utah on January 15,
1986 under the name of Technical Analysis, Inc. On July 23, 1987, the Company
changed its name to LMD Acquisitions, Inc. and effective October 8, 1990,
changed its corporate domicile to the State of Nevada. On March 12, 1993, the
Company changed its name to Castleview Corp. On August 5, 1993 the Company
acquired Halstead Quinn Propane, Inc. in exchange for 2,170,000 shares of the
Company's Common Stock. Simultaneously with such acquisition, the Company
changed its name to Halstead Energy Corp.
The Company's operating entities are engaged in the wholesale and/or retail
distribution of, and the provision of services relating to, fuel oil, liquid
propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company, and Halstead Quinn Terminal ("HQ Terminal"), HQ Gasoline ("HQ
Gasoline") and Dino Oil ("Dino"), which are separate divisions of HQ Propane.
The business of White Plains Fuel, Inc. ("WPF"), a Hawthorne, New York-based
retail distributor of fuel oil and diesel fuel which was acquired by the Company
in June 1995, is being operated by a third party under the terms of a four (4)
year lease.
Retail Propane Distribution
HQ Propane (formerly Halstead Quinn Fuel Oil Co., Inc.), based in central
Westchester County in Mt. Kisco, New York, was established in 1946 and since
1958 has been a retail distributor of liquid propane gas and propane equipment
and also provides services related thereto. ATI acquired HQ Propane in 1975 and
subsequently spun it off to its stockholders in December 1992. In July 1996, HQ
Propane acquired the customer list and certain other assets of E. F. Osborn &
Sons, a Pawling, New York-based retail propane distributor.
HQ Propane has just under 7,000 accounts. Of these accounts, approximately
80% are Westchester County residents and businesses, and the remaining 20% are
located throughout the surrounding counties of Putnam and Dutchess in New York
State.
Westchester County harbors many affluent communities whose lifestyles
create an above average demand for energy-intensive applications and, the
Company believes, are also more resistant to recessionary pressures. This is
partly exemplified by the slow but steady growth in sales revenues over the last
three years. The Company believes that, in Westchester County, HQ Propane has a
market share of approximately 18%. In terms of number of accounts, the Company
believes that HQ Propane is the second largest propane distributor in
Westchester County.
Page 19
Although propane can be used for virtually all household and business
utility applications, of HQ Propane's customers, approximately 78% use propane
for hot water heating and cooking; approximately 16% use propane for pool
heating; and approximately 6% use propane for home heating. HQ Propane has
focused its marketing efforts on hot water heating and cooking applications
because these uses are relatively constant throughout the year, thereby reducing
seasonal fluctuations, and because its gross profit margins from hot water
heating use are significantly more than that of a residential propane heating or
commercial propane account.
The Company believes that propane has distinct advantages over alternative
energy sources, including efficiency, cost and availability. These attributes
result in the retail customer realizing reduced utility bills. With an increased
marketing effort, the Company believes that HQ Propane has the opportunity to
gain a larger share of the Westchester County energy market by converting
electricity and fuel oil users to propane and by having owners of
newly-constructed buildings select propane as their energy source.
HQ Propane's base of operations is centrally located at the Company's
headquarters in Mount Kisco, New York. HQ Propane also maintains an inland fuel
oil storage terminal and a 30,000 gallon propane storage tank for its own
operations. The fuel oil facility is presently leased to a major independent
fuel oil distributor.
Wholesale Distribution and Storage
HQ Terminal, owns a deep water terminal in Yonkers, New York near the New
York City border. The five million gallon terminaling facility allows for the
wholesale distribution of fuel oil, gasoline and diesel fuel and also provides
storage facilities for other petroleum companies through warehousing agreements
know as thru-puts. The Company's own product requirements are often supplied
through this facility.
The terminal facility has 11 above ground tanks that provide an aggregate
storage capacity of 5,000,000 gallons for gasoline, diesel fuel and fuel oil.
These tanks feed three gasoline racks, five oil racks and two diesel fuel racks.
The terminal has been upgraded to comply with all governmental regulations.
Page 20
<PAGE>
The terminal facility has 2.439 acres of above-ground land and an
additional 3.511 acres of land underwater. The large amount of underwater
acreage has enabled the Company to extend the dock lines out to deep water. The
Company believes that the terminal is the only terminal on the east side of the
Hudson River between the Long Island Sound to the east, the Bronx, New York to
the south and Newburgh, New York to the north that has 17 feet of draft at low
tide. This provides a competitive advantage, particularly with regard to
thru-put customers, because the high draft allows large seafaring vessels to
dock independent of tide schedules.
The Company believes that another competitive advantage is the terminal's
location. It is located in the most densely populated area in Westchester
County, and it is the only terminal on the Hudson River south of Newburgh, New
York which distributes gasoline. All other gasoline distribution terminals are
located in the eastern part of Westchester County.
The terminal facility has been operated by ATI pending the approval of HQ
Propane's application with New York State for a Terminal Operator and Diesel
Motor Fuel License. See "Certain Relationships and Related Transactions" and
"Description of Business--Certain Licenses Relating to the Company's Business."
Gasoline
HQ Gasoline operates 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf." HQ Gasoline's ability to
market under different brand names provides the Company with an opportunity to
reach consumers at the low, middle and high end of the market, thereby allowing
greater flexibility in its marketing strategies. Because gasoline usage is
relatively constant throughout the year, the operation of gasoline stations
allows the Company to offset, in part, the seasonal fluctuations that affect the
Company's fuel oil distribution divisions. Most of the stations are situated in
high traffic areas at major intersections. Presently, 5 of the 25 facilities are
combination convenience store/gasoline pumping facilities. The balance of the
outlets are combination automotive repair shop/gasoline pumping facilities. Nine
of the 25 gasoline stations are leased from ATI. See "Certain Relationships and
Related Transactions" and "Risk Factors."
In September 1996, the Company acquired certain assets of Dino Oil, Inc., a
Bronx, New York-based commercial gasoline distributor. The addition of the
Company's Dino Oil division has broadened the Company's marketing region by
providing the Company with customer accounts (including various service stations
and fleet garages) located in the New York City Boroughs of the Bronx, Queens,
Brooklyn, and Manhattan, as well as Nassau, Suffolk and Westchester counties in
New York State.
In December 1996, the Company terminated its lease of 4 of its 25 stations
with an independent third party distributor, and simultaneously therewith,
entered into a master lease with another independent third party distributor.
The master lease has an initial term of ten (10) years, and the lessee
thereunder has an option to renew such lease for an additional ten (10) year
term. The lease requires that annual rental payments be made in advance, on the
first day of each year of the lease term. The lease is a triple net lease
agreement which requires the lessee to maintain, operate, and supply all
gasoline to the station outlets. The lessee must also make the necessary capital
improvements to meet applicable environmental laws by 1998.
The Company intends to focus its effort on changing the image of the HQ
Gasoline facilities. The industry has moved away from the "mom & pop" type
operation and into high volume, automated self-service operations, with a
particular focus on convenience. Repair shops, in particular, are becoming
increasingly less desirable. Accordingly, in order to optimize potential
earnings at a site, the Company intends to follow industry trends by upgrading
approximately 12 of these facilities with state-of-the-art pumping apparatus and
canopies and, where appropriate, converting them to multiple revenue sites by
combining the pumping facilities with convenience stores, snack shops and/or car
washes.
In most cases, canopies will be installed to improve lighting and provide
shelter in inclement weather. Industry experts estimate that up to a 20%
increase in volume is derived from this improvement alone. Management believes
that, in the Company's geographic region, canopies have contributed increased
revenues of between 15% and 25%. Electronic self-service pumping apparatus will
also be installed for the convenience of the public, and will afford overhead
savings to the station operator. The addition of a convenience store, snack
shop, or car wash, where applicable, will introduce new sources of revenue and
optimize overall station profitability.
The rebuilding program will require expenditures that range from $20,000 to
$550,000 per facility, depending upon the individual station site. The program
is site specific, taking into consideration competition, lot size, building
dimensions, traffic count, community demographics, and area development. By
completing its rebuilding program, the Company believes it will achieve
increased cash flow from operations as a result of increased sales revenues and
rental income. In this regard, as part of the rebuilding program, management
intends to acquire certain station leaseholds from ATI at fair market value
since ATI's underlying leasehold interests extend by an average of 12 years
beyond the Company's sublease with ATI. The acquisition of these leasehold
interests will protect the Company's investment in, and long term earnings
potential, from this revenue source. See "Certain Relationships and Related
Transactions" and "Risk Factors--ATI Bankruptcy."
Retail Fuel Oil
The Company's retail fuel oil distribution business was conducted by HQ
Propane's subsidiary, Rockland Fuel Oil, Inc., until May 16, 1997, when the
Company entered into an agreement with an independent third party distributor
for the sale of its retail fuel oil customer list and related business. The
terms of the sale were $200,000 at closing, $200,000 on the first anniversary,
and $127,000 on the second anniversary, with interest on outstanding amounts at
a rate of 6% per annum. Rockland continues to own a facility in Haverstraw, New
York which houses a 2,432 square foot building and a terminal situated on land
fronting the Hudson River. The terminal is capable of storing 2,500,000 gallons
of oil.
The Company acquired all of the stock of White Plains Fuel, Inc., a retail
distributor of fuel oil and diesel fuel, on June 8, 1995, in exchange for
168,020 shares of newly created Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock of the Company. The Company has leased the White Plains Fuel
business to a third party under the terms of a four (4) year lease.
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Fundamental Characteristics of the Company's Business
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles. As fuel
oil, propane and gasoline are such basic necessities, variations in the amount
purchased as a result of general economic conditions are limited.
Customer Stability
HQ Propane has a relatively stable customer base due to the tendency of
homeowners to remain with their traditional distributors. In addition, a
majority of the home buyers tend to remain with the previous owner's
distributor. As a result, HQ Propane's customer base each year includes most
customers retained from the prior year or home buyers who have purchased from
such customers. Like many other companies in the industry, HQ Propane delivers
propane to each of its customers an average of approximately six times during
the year, depending upon weather conditions and historical consumption patterns.
Most of HQ Propane's customers receive their propane pursuant to an automatic
delivery system, without the customer having to make an affirmative purchase
decision each time propane is needed. In addition, HQ Propane provides home
heating equipment repair service on a seven day a week, 52 weeks a year basis.
Retail gasoline customers are generally brand loyal or price shoppers who
generally factor appearance, convenience, and credit cards into their decision
making process before making an affirmative purchase decision. HQ gasoline's
ability to market under the trademarks "Gulf" and "ATI" largely meet the
criteria exercised by customers in making their purchase decisions. However, the
Company must complete its station rebuilding program in order to ensure that the
standards which are particularly important to the motoring public, such as
appearance, are maintained.
No single customer accounts for 10% or more of the Company's consolidated
revenues.
Weather Stability
The weather patterns during the winter can have a material effect on the
Company's fuel oil-related business. Although average temperatures over time
have varied to a very limited extent, and the Company does not expect that
average temperatures will vary significantly in the future, winter temperatures
can vary significantly from one year to the next. A warmer than usual winter
would reduce the number of gallons of fuel oil sold which would result in
reduced revenues from the Company's fuel oil-related operations. Severe ice and
snow storms can also greatly effect consumers' driving patterns, thereby
reducing the Company's gasoline revenues. Ice and snow can also greatly reduce
delivery productivity, thereby reducing the number of gallons which can
physically be delivered in a certain period of time. Such conditions would most
likely demand significant overtime hours resulting in increased payroll expense.
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Effects of Oil Price Volatility
The price of crude oil remains volatile. While this has not materially
affected the Company's performance in the past (e.g., as a retailer, the Company
has been able to add an increasing gross margin onto its wholesale costs,
whatever their level, to offset the impact of inflation, account attrition and
weather), there can be no assurance that such performance will continue.
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 accounts and increase consumer awareness of the
Company's products and quality.
The Company's strategy is to grow through the acquisition and integration
of additional distributors in existing and new markets. The Company believes
that many of the proprietors of businesses competitive with the Company's
operating divisions are of retirement age and may be receptive to selling their
operations. Another potential source of acquisitions are companies that are
owned by individual entrepreneurs who find expansion within the petroleum
products industry difficult, either operationally or financially, or who have
other investment opportunities.
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More specifically, HQ Propane intends to acquire two types of distributors.
The first type are relatively small distributors which management believes could
be easily integrated into the Company's operations. Management believes that
such distributors could result in significant economies of scale through the
centralization of purchasing, marketing, credit, data processing and other
administrative functions of the acquired distributor. The second type consists
of larger, stand-alone businesses which could not be integrated, but would, in
all probability, be in new markets. The Company expects that acquisitions of
these businesses would provide not only attractive investment returns, but also
provide hubs for future expansion.
The Company also intends to expand HQ Gasoline by pursuing the acquisition
of single unit and chains of retail service stations. Such acquisitions would
provide deeper market penetration in the Company's existing marketing area, and
provide expansion into new marketing areas. Besides the benefits derived from
the economies of scale, the Company would expect to achieve greater buying power
for its petroleum products purchases, and possibly assume additional
distributorships with various major oil companies.
Competition
The Company's business is highly competitive. In addition to competition
from alternative energy sources, HQ Propane competes with propane distributors
offering a broad range of services and prices, from full service distributors
similar to HQ Propane, to those offering delivery only. Competition with other
companies in the propane industry is based primarily on customer service and
price. Longstanding customer relationships are typical in the retail propane
industry. Many companies in the industry, including HQ Propane, deliver propane
to their customers based upon weather conditions and historical consumption
patterns without the customers having to make an affirmative purchase decision
each time propane is needed. In addition, most companies, including HQ Propane,
provide propane equipment repair service on a 24 hour a day basis, which tends
to build customer loyalty. As a result, HQ Propane may experience difficulty in
acquiring new retail customers due to existing relationships between potential
customers and other propane distributors. As of the date of this report, fuel
oil and propane are less expensive sources of energy than electricity. Natural
gas, which is currently less expensive than propane, is not readily available in
upper Westchester and Putnam counties where all of the Company's propane
operations are conducted. Accordingly, the Company believes that an
insignificant number of its customers will switch from fuel oil or propane to
alternative energy sources at this time.
HQ Gasoline's business operations are sensitive to price and brand
competition. In order to compete with branded competitors who benefit from name
recognition and customer loyalty, the "ATI" branded service stations may
maintain a lower price than these competitors. The "Gulf" branded stations are
not as sensitive to price and, therefore, typically maintain a price consistent
with other brand name competitors.
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Certain Licenses Relating to the Company's Business
HQ Propane's principal terminal facility is currently being operated by ATI
pending the approval of HQ Propane's application with the State of New York for
a terminal operator's and diesel motor fuel license and the application of White
Plains Fuel, Inc. for its diesel motor fuel license. On October 6, 1995, New
York State requested HQ Propane and White Plains Fuel to post certain bonds as a
prerequisite to obtaining the foregoing licenses. On October 25, 1995, these
bonds were obtained by the Company and the State approved the same. Management
believed at the time that the Company had thereby completed substantially all
steps necessary to receiving such licenses. However, these licenses have not as
of yet been granted, though the State has discussed with management the
possibility of approving applications for certain (but not all) of such licenses
(i.e., HQ Propane's terminal operator's license and its diesel motor fuel
license) pending the completion of the licensing process with respect to the
balance of the licenses. There can be no assurance about the prospect of
obtaining the approval of such licenses. The $.0025 per gallon fee charged by
ATI for these services would be eliminated simultaneously with the issuance of
HQ Propane's terminal operator's license and its diesel motor fuel license. See
"Certain Relationships and Related Transactions."
On June 10, 1997, ATI, 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, directors of the Company and its 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.
Environmental/Governmental Regulation
The Company's operating divisions are subject to various governmental
regulations. New regulations regarding underground storage tanks ("UST's"),
including those at service stations, have been issued by the United States
Environmental Protection Agency (the "EPA"). The regulations cover the design,
construction and installation of new UST systems, and require that existing
systems meet certain EPA standards. The regulations require that owner/operators
of UST systems demonstrate financial responsibility for the cleanup of spills or
releases and/or compensate third parties for any resulting damages. The Company
has recently upgraded its HQ Terminal Facility and its other storage facilities
to conform with applicable law, and the Company has an ongoing program for
maintenance, testing, retrofitting, or replacement of UST's. In addition, the
Company maintains pollution liability coverage on 13 of the 22 gasoline stations
presently leased by the Company. (Three of the 25 stations operated by the
Company are supply contracts only, and therefore management does not believe
that the Company would be subject to any environmental exposure). 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 1,1977. The
Alexander Street Terminal is also insured under a separate pollution legal
liability policy.
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The Company believes that its operating divisions are in compliance in all
material respects with all applicable regulatory requirements and have all
governmental licenses and permits (other than those described above in
"Description of Business--Certain Licenses Relating to the Company's Business")
required for their business operations. Management knows of no pending or
threatened proceedings or investigations under federal or state environmental
laws which would have a material adverse effect on the Company's business.
Management cannot predict the impact on the Company and its operating divisions
of new governmental regulations and requirements.
The Company will have to invest an estimated minimum of $325,000 over the
next eleven months in order to meet EPA and State regulations for underground
storage tanks by December, 1998.
Employees
As of March 12, 1998, the Company had a total of 28 employees, of which 18
are office, clerical and customer service personnel, 4 were drivers, 3 were
mechanics, and 3 were executive officers of the Company. All of the Company's
employees are full time 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.
DESCRIPTION OF PROPERTY
The Company's principal place of business is located at 33 Hubbells Drive,
Mount Kisco, New York, where HQ Propane owns a block and brick building of
approximately 6,000 square feet situated on 1.03 acres.
The Company also owns the following facilities:
1. The HQ Terminal facility located in Yonkers, New York, which
facility is situated on 5.95 acres of land, with approximately
2.44 acres above water and 3.51 acres are underwater. Four block
and brick buildings of 3,000 square feet, 234 square feet, 225
square feet and 450 square feet, respectively are situated on the
property. The terminal also has 11 storage tanks with capacities
ranging from 140,000 to 1,000,000 gallons, and an aggregate
capacity of 5,083,000 gallons; a 300 foot dock; three gasoline
racks; five oil racks; and two diesel fuel racks.
2. A terminal facility located in Haverstraw, New York, which
facility is situated on 1.30 acres of land. The property houses
one building of 2,432 square feet. The terminal also has 14
storage tanks with capacities ranging from 15,652 gallons to
508,000 gallons, and an aggregate capacity of 2,509,545 gallons;
and one loading rack.
3. A gasoline station facility in Hartsdale, New York which facility
is situated on 16,700 square feet of land. The property houses a
one story concrete building of 1,827 square feet with three bays
and office. The station is also improved with two islands, each
with two pumps.
As of December 29, 1997, the Company leased the following stations from ATI
(See "Certain Relationships and Related Transactions"):
Station Name and Number Address
(1) Elmsford ATI #203 153-162 E. Main Street
Elmsford, NY 10523
(2) Wingdale ATI #405 Route 22-Box 684 Wingdale,
NY 12594
(3) Salt Point #414 Route 44 & 82 Salt Point, NY
12578
(4) Congers ATI #112 21 South Route 303 Congers,
NY 10920
(5) Mt. Vernon Lincoln Ave. 25 W. Lincoln Avenue
#205 Mt. Vernon, NY 10550
(6) Lakeside P.P. #219 6 N. Lakeside Blvd.
Mahopac, NY 10541
(7) Raceway ATI #221 535 Central Park Avenue
Yonkers, NY 10704
(8) West Hurley #315 1150 Route 28 Kingston, NY
12461
(9) Pine Plains #411 Route 199
Pine Plains, NY 12540
Five of the above leases expire on August 31, 1998, two expire on August
31, 2018, and the other two expire on November 28, 2006 with an option for an
additional ten year term expiring on November 28, 2016. The aggregate annual
rental amount under these leases is $195,976 for the fiscal year ending August
31, 1996, $187,272 for the fiscal year ending August 31, 1997, and $213,633 for
the fiscal year ending August 31, 1998. For the four leases expiring on August
31, 2018 or November 28, 2006, as the case may be, the aggregate rental amount
will range from $89,150 in the fiscal year ending August 31, 1999 to $88,800 in
the fiscal year ending August 31, 2018.
LEGAL PROCEEDINGS
In January 1994, HQ Propane was served with a complaint dated January 5,
1994 relating to an action entitled RAP Holding Corp. v. Halstead Quinn Fuel
Co., Inc. and A. Tarricone, Inc. in the Supreme Court of New York, County of
Westchester. The plaintiff is the owner of property in Westchester County, New
York which was leased by HQ Propane from June 1, 1979 to May 31, 1989. The
complaint alleges that, during the term of the lease, the Company discharged
petroleum products onto the property and seeks $106,173 damages for the costs of
clean up and removal of the contaminated soil and an additional $300,000 for
diminution of value. The Company has retained outside counsel and is vigorously
defending itself in this lawsuit. As of March 1, 1998, there has been no further
action in this case.
On June 10, 1997, 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, directors of the Company and its 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 has elected to write-off, and has taken as a charge against
earnings as a bad debt expense, in the fourth quarter of fiscal 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.
MANAGEMENT
The directors and executive officers of the Company as of March 1, 1998,
are as follows:
Name Age Position with the Company
Claire E. Tarricone 41 President and Director
Anthony J. Tarricone 36 Vice President, Secretary and Director
Joseph A. Tarricone 35 Vice President, Treasurer and Director
Edwin Goldwasser 65 Director
Joseph Gatti 68 Director
The following is a brief description of the professional experience and
background of the directors and executive officers of the Company:
Claire E. Tarricone has been the President and a Director of the Company
since July 27, 1993. Ms. Tarricone has also served as the President and a
Director of HQ Propane and Rockland Fuel since 1992. In June 1995 Ms. Tarricone
also became Director of White Plains Fuel, Inc. From 1991 until 1992, Ms.
Tarricone served as Vice President/General Manager of HQ Propane in charge of
its operating divisions. Ms. Tarricone has been President of Dino since the
acquisition of Dino by HQ Propane in September 1996. 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. Mr.
Tarricone has been a Vice President of Dino and its Secretary since the
acquisition of Dino by HQ Propane in September 1996. 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. Mr. Tarricone has been a Vice President of Dino and its
Treasurer since the acquisition of Dino by HQ Propane in September 1996. 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
Incorporated since May 1996. He was a Vice President - Corporate Finance at
Robert Todd Securities from January 1994 to December 1994 and a Vice President -
Corporate Finance at Reich & Company from April 1990 through December 1993.
The Board of Directors has established an Audit Committee. The Audit
Committee recommends the firm to be appointed as independent accountants to
audit financial statements and to perform services related to the audit, reviews
the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants the Company's annual operating
results, considers the adequacy of the internal accounting procedures of the
Company, and considers the effect of such procedures on the accountants'
independence. The Audit Committee consists of Joseph A. Tarricone, Edwin
Goldwasser and Joseph Gatti.
Claire Tarricone, Anthony Tarricone and Joseph Tarricone are siblings.
All Directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers of the Company are
appointed annually by the Board of Directors.
The directors and executive officers of the Company and the owners of more
than ten percent (10%) of the Company's outstanding Common Stock are required to
file reports with the Securities and Exchange Commission and with the National
Association of Securities Dealers, Inc. reporting changes in the number of
shares of the Company's Common Stock beneficially owned by them. Such persons
are required to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements were met during
fiscal 1996 and 1997, except that each of Claire Tarricone, Anthony Tarricone
and Joseph Tarricone filed one report after the applicable filing deadline.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the Company's fiscal
years ended August 31, 1997, 1996 and 1995 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended August 31, 1997 and (ii) each other executive officer of the Company
whose total annual salary and bonus equaled or exceeded $100,000 in the fiscal
year ended August 31, 1997 or either of the two previous fiscal years (to the
extent that such person was the Chief Executive Officer and/or an executive
officer, as the case may be, during any part of such fiscal year).
Annual Long-Term
Compensation Compensation Award
Restricted Securities
Stock Underlying
Name and Principal Year Salary ($) Bonus Other (2) Awards Options
Position
(1) ($) (#)
Claire E. Tarricone 1997 $54,600 -------- $ 9,297 -------- 420,000(3)
President 1996 $54,600 -------- $15,034 -------- 100,000(3)
1995 $54,600 -------- $ 6,931 -------- --------
- ---------------------
(1)The Company does not have any executive officers whose compensation exceeded
$100,000 during the applicable fiscal periods.
(2)Represents amounts payable under Ms. Tarricone's employment agreement with
the Company for certain insurance premiums and for taxes resulting from such
additional compensation.
(3)Reflects the grant of options under the Company's 1996 Stock Incentive
Plan, which options are not intended to qualify as "incentive stock options"
under Section 422 of the United States Internal Revenue Code of 1986, as
amended, and which options were exercisable for a price of $4.50 per share of
the Company's Common Stock, par value $.001 per share. The 100,000 options were
canceled on November 14, 1996 in favor of the grant of 400,000 new options to
Ms. Tarricone, which options (a)were not granted under the aforesaid plan,(b)
are not intended to qualify as "incentive stock options" under Section 422 of
the United States Internal Revenue Code of 1986, as amended, and (c) are
exercisable for a price of $.3125 per share of the Company's common stock, par
value $.001 per share. In addition, on August 12, 1997, Ms. Tarricone was
granted 20,000 options under the Plan with an exercise price of $0.63 per share.
Compensation of Directors
Directors of the Company are not compensated for their services, although
the Company reimburses directors for their expenses of attending meetings of the
board of directors.
Stock Incentive Plan
The Company has adopted its 1996 Stock Incentive Plan (the "Plan") on
January 10, 1996. The Plan gives the Company the flexibility to enable it to
obtain and retain the continued services of the personnel necessary for its
growth and development. The Plan provides, among other things, for the granting
of options to acquire up to 650,000 shares of the Company's Common Stock. Such
options may qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended, or as non-qualified options.
The Company does not presently maintain any other stock option or other
stock or long-term compensatory plans for its employees.
Employment Agreements, Termination of Employment, and Change in Control
Arrangements
The Company has entered into five year Employment Agreements with each of
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone. The
Employment Agreements automatically extend for an additional one year at the end
of each year of the term unless either party notifies the other of his, her or
its election not to so further extend the term. The Employment Agreements which
became effective on August 5, 1993, provide for annual salaries to such
individuals of (i) $100,000, $75,000 and $75,000 in years one and two,
respectively, (ii) $125,000, $100,000 and $100,000 in years three and four,
respectively, (iii) $150,000, $125,000 and $125,000 in year five, respectively.
Each of the Tarricones has waived her or his rights (as the case may be) to any
unpaid annual salary attributable to the fiscal years ending August 31, 1994,
August 31, 1995, August 31, 1996, 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
Tarricones 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. Each Employment Agreement is terminable by the Company on 60 days notice
for "cause" or if any of the Tarricones have become so incapacitated that they
are unable to resume, within the ensuing 540 days, their respective employment
with the Company by reasons of physical or mental illness or injury, or if any
shall not have substantially performed their duties for 540 consecutive days by
reason of any such physical or mental illness.
Each of the Tarricones will be entitled to terminate his or her employment
and receive a severance payment equal to 2.99 times his or her base salary at
the time of termination upon (i) the acquisition of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities in a transaction to which any of the Tarricone's does not
consent, (ii) the future disposition by the Company of all or substantially all
of its business and/or assets in a transaction to which any of the Tarricone's
does not consent, (iii) the occurrence of any circumstance which, in the
reasonable judgment of any of the Tarricone's has the effect of significantly
reducing their duties or authority, (iv) the breach by the Company of its
material obligations under the Employment Agreement or (v) the termination of
the Employment Agreement by the Company for any reason other than for cause or
by mutual agreement of the Company and any of the Tarricones. Additionally, upon
termination, each of the Tarricones would receive (a) the estimated amount which
would have been payable to each pursuant to any bonus pool established by the
Company for the fiscal year during which such termination occurred; (b) health,
accident, life and disability insurance for the longer of one (1) year or the
balance of the Employment Agreement; and (c) immediate rights to exercise any
stock options granted, regardless of whether such options were exercisable at
the time of termination.
Each of the Employment Agreements contains a covenant not to compete with
the Company or solicit its customers or employees for a period of one (1) year
after the employment of any of the Tarricones is terminated, provided that such
person is entitled to be engaged as an employee by ATI.
Indemnification of Directors and Officers/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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 1992, ATI distributed all of the capital stock of HQ Propane
to its sole stockholders, Claire E. Tarricone, Anthony J. Tarricone and Joseph
A. Tarricone. Simultaneously with the distribution, ATI transferred the assets
of the HQ Terminal division and all of the outstanding capital stock of Rockland
to HQ Propane in partial satisfaction of ATI's indebtedness to HQ Propane of
$4,200,000 previously incurred by ATI in order to provide certain capital
improvements and additional working capital. The appraised fair market value of
the assets transferred by ATI to HQ Propane was $2,200,000. However, the
transaction was recorded at ATI's book value.
ATI's indebtedness to the Company is evidenced by a 6% Promissory Note,
dated August 31, 1993, with accrued interest and principal due on August 31,
1998 (the "ATI Note"), the balance of which aggregated $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
station leaseholds having an appraised fair market value of $690,000 in partial
satisfaction of the ATI Note. See "Risk Factors--ATI Bankruptcy."
On June 10, 1997, ATI, 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, directors of the Company and its 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 "Litigation." 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.
In December 1992, HQ Propane entered into a management agreement with ATI
pursuant to which ATI furnishes clerical, administrative, accounting, payroll
and insurance services to HQ Propane. ATI receives a fee of $30,000 per month
for its services. The management agreement expires on August 31, 1998. Further,
HQ Propane entered into agreements with ATI under which it leased 21 of the
service stations comprising its HQ Gasoline Division from ATI until August 31,
1998 and paid rent for the service stations in the approximate amount of $54,000
per month. Additionally, until March 5, 1996, the Company was paying to ATI a
license fee of $.01 per gallon of gasoline and diesel fuel sold for the rights
to use the "ATI" trademark (see the immediately succeeding paragraph). The
Company currently leases 9 service stations from ATI at a reduced rent payment
in the approximate amount of $19,000 per month.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares of
the Company's Common Stock to ATI in exchange for the Company's exclusive right
to use the "ATI" trademark. The exercise price of the warrants is equal to the
lessor of $4.30 per share or a 40% discount to the average closing bid price on
the date of exercise. The average closing bid price is calculated based on the
average of the closing bid prices of the Company's Common Stock as reported by
the NASDAQ SmallCap stock market for the five trading days immediately preceding
the date of the exercise of the warrant. The warrants provide that 59,425 were
immediately vested on March 5, 1996, an additional 59,425 vested on March 5,
1997, and the balance become vested in three equal annual installments. The
market price at issuance was $4.30 per share. In consideration of the issuance
of such warrants, the Company is no longer required to pay the license fee of
$.01 per gallon for gasoline station sales.
HQ Propane cannot operate its principal terminal facility until such time
as the pending applications for a terminal operator's license and diesel license
from the State of New York have been approved. See "Description of
Business--Certain Licenses Relating to the Company's Business." Accordingly, ATI
has continued to operate the terminal facility on behalf of HQ Propane. Upon the
issuance of such licenses, HQ Propane will assume operations of its facilities
directly. ATI also supplies the Company's operating divisions with fuel oil and
diesel fuel, and previously supplied the Company with gasoline, at ATI's cost
plus one quarter of one cent ($.0025) per gallon purchased, which aggregated
$51,112 during the fiscal year ended August 31, 1994; $42,494 during the fiscal
year ended August 31, 1995; $38,671 during the fiscal year ended August 31,
1996; and $22,500 during the fiscal year ended August 31, 1997.
The Company has outstanding certain promissory notes in the aggregate
principal amount of $317,000 issued in connection with a private placement of
165,000 shares of Common Stock of the Company ("Bridge Notes"). Interest on the
Bridge Notes is payable quarterly at a rate of 8% per annum, and payment of
principal thereof was tied to the exercise of the Company's 1,600,000 Class A
and 1,600,000 Class B Redeemable Warrants (the "Warrants") which were issued,
and subsequently redeemed, by the Company. In light of the Company's redemption
of its outstanding Warrants, it is unclear when its obligation to make principal
payments on the outstanding Bridge Notes will come due. However, the Company
acknowledges an obligation to make principal payments on the Bridge Notes and
continues to maintain such obligation on its balance sheet. Don Guarnieri, a
former Director of the Company, purchased one unit in connection with such
private placement, which unit was comprised of a $25,000 promissory note from
the Company and 8,250 shares of the Company's Common Stock.
Claire, Anthony and Joseph Tarricone are also parties to a Buy/Sell
Agreement pursuant to which, upon the death or disability of any of them, the
non-deceased or non-disabled stockholders are required to purchase the shares of
the Company owned by the deceased or disabled stockholder for a price equal to
the fair market value of such shares. Each of the Tarricones holds a $3,000,000
insurance policy on the life of the others to partially fund the buyout of the
shares upon death. In addition, the Tarricones have $1,000,000 of disability
buyout insurance which will fund the buyout of such shares in the event of
permanent disability. In the event that the proceeds of such insurance policies
are insufficient to pay the full price for such shares, the balance of the
purchase price for the shares will be paid over a ten year period.
On August 30, 1996, Claire Tarricone loaned to the Company $80,000, with
interest at 8% per annum, payable on demand at any time on or after September 1,
1998. At various times since then, Claire E. Tarricone, Anthony J. Tarricone and
Joseph A. Tarricone, directly or indirectly, have loaned to the Company an
aggregate of $359,280, with interest at 8% per annum, payable on demand at
anytime on or after September 1, 1998.
See "Executive Compensation--Employment Contracts, Termination of
Employment and Change in Control Arrangements" for a description of the
Employment Agreements between the Company and Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone.
See "Executive Compensation--Indemnification of Directors and Officers" for
a description of indemnification agreements between the Company and each of its
executive officers.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth information regarding ownership of the
Company's voting securities as of December 29, 1997 by (a) each person known by
the Company to beneficially own more than five percent (5%) of any class of the
Company's voting securities, (b) each director and executive officer of the
Company and (c) all directors and officers of the Company as a group. Except as
otherwise indicated, the named person has sole voting and investment power with
respect to such person's shares.
Name and Address Title Of Class No. of Percentage of General
of Beneficial Shares Class Owned Voting
Owner Owned (1) Power(2)
Claire E. Tarricone Common Stock 1,221,609(3) 23.87%(3) 23.12%(3)
33 Hubbells Drive
Mt. Kisco, NY 10549
Anthony J. Tarricone Common Stock 1,221,608(4) 24.35%(4) 23.56%(4)
33 Hubbells Drive
Mt. Kisco, NY 10549
Joseph A. Tarricone Common Stock 1,221,608(5) 24.35%(5) 23.56%(5)
33 Hubbells Drive
Mt. Kisco, NY 10549
Alan Cianflone Series A 84,010 50.0% 1.8%
42 Virginia Lane Cumulative
Thornwood, NY 10549 Convertible
Redeemable
Preferred Stock
Jack Troccoli Series A 84,010 50.0% 1.8%
42 Virginia Lane Cumulative
Thornwood, NY 10549 Convertible
Redeemable
Preferred Stock
Infinity Investors, Ltd. Series B 560,126(6) 100.0% 41.23%(6)
42 Virginia Lane Cumulative
Thornwood, NY 10549 Convertible
Redeemable
Preferred Stock
Elizabeth R. Mandel Common Stock 2,170,488 32.45%(7) 31.65%(7)
885 Araphoe Avenue
Boulder, CO 80302
Laurence Hughes Common Stock 420,000 8.86%(8) 8.56%(8)
49 Mountain Road
Pleasantville, NY 10570
Edwin Goldwasser Common Stock -0- (9) (9)
7616 Mansfield Hollow Drive
Delray Beach, Florida 33446
Joseph Gatti -0- (9) (9)
535 Madison Avenue
New York, NY 10022
All Executive Officers and
Directors as a group(5 persons) 3,308,275 57.47% 55.84%
(1) Based upon 4,518,601 shares of Common Stock outstanding as of December
29, 1997.
(2) Based on 4,518,601 common and 168,020 Series A Cumulative Convertible
Redeemable Preferred Shares outstanding as of December 29, 1997. Each of
the 168,020 shares of Series A Cumulative Convertible Redeemable Preferred
Stock is entitled to vote, together with the holders of the Company's
Common stock, based upon the number of shares of Common Stock into which
such shares are convertible.
(3) Includes 420,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options and 178,275 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 178,275 shares, which disclaimed amount
correlates to the aggregate ownership percentage in ATI held by Anthony J.
Tarricone and Joseph A.
Tarricone.
(4) Includes 320,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options and 178,275 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 178,275 shares, which disclaimed amount
correlates to the aggregate ownership percentage in ATI held by Anthony J.
Tarricone and Claire E.
Tarricone.
(5) Includes 320,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options and 178,275 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 178,275 shares, which disclaimed amount
correlates to the Tarricone and Claire E. Tarricone.
(6) The Series B Cumulative Convertible Redeemable Preferred Stock is
convertible into 2,170,488 shares of Common Stock. Additionally, Infinity has
the right under the Restructuring Agreement to acquire an additional 1,000,000
options from the Tarricones if certain conditions are not met.
(7) Includes option to purchase all of the Infinity Shares
exercisable within 60 days.
(8) Includes 220,000 shares of Common Stock that may be purchased pursuant
to presently exercisable stock options.
(9 ) Less than one percent.
- ----------------------------------------
As of December 29, 1997, 1,907,961 shares of Common Stock (approximately
42.2% of the outstanding Common Stock) were owned of record by Cede & Co., a
nominee of the Depository Trust Company. The Company has been advised by each of
the firms which Cede & Co. indicates own more than 5% of the Common Stock that,
except as set forth above, as of the most recent practical date it did not hold
more than 5% of the Company's outstanding voting securities for any single
person or, to its knowledge, any group.
SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock which
may be offered for sale from time to time by the Selling Stockholders. The
shares offered for sale constitute all of the shares of Common Stock known to
the Company to be beneficially owned by the Selling Stockholders. None of the
Selling Stockholders has or have any material relationship with the Company.
Name of Selling Stockholder Fully-Diluted # of Shares of
Common Stock Offered
Infinity Investors Ltd. 2,170,488
D.H. Blair & Co., Inc. 100,000
Sloan Securities 19,547
Boulder Financial Group 2,220,488(1)
(1) Includes the 2,170,488 owned by Infinity which Elizabeth Mandell, a
beneficial owner of Boulder Financial Group has the option to acquire as
described below.
Infinity Investors Ltd. has the right to acquired 2,170,488 of the shares
of Common Stock offered by this Prospectus upon the conversion of the Company's
Series B Preferred Stock, while the balance of the Shares have been, or will be
(upon and assuming the exercise of certain warrants), acquired by the Other
Holders upon the exercise of currently outstanding options and/or warrants. As
of March 12, 1998 Infinity owned 560,126 shares of Series B Preferred Stock.
The maximum aggregate number of shares of Common Stock into which the
Series B Preferred Stock issued to Infinity is convertible and which Infinity
may offer and sell pursuant to this prospectus is 2,170,488 Shares (the
"Infinity Shares"), based on a conversion price of $2.00 per share.
In accordance with Rule 416 under the Securities Act, the registration
statement to which this Prospectus is a part also covers an indeterminate number
of additional shares of Common Stock as may become issuable upon the conversion
of the Series B Preferred Stock or exercise of the aforesaid warrants to prevent
dilution resulting from stock splits, stock dividends or similar transactions or
by reason of changes in the conversion or exercise price as aforesaid. Because
Infinity and/or the Other Holders may sell all or a portion of the shares of
Common Stock offered hereby at any time and from time to time after the date
hereof, no estimate can be made of the number of Shares that Infinity or the
Other Holders may retain upon completion of the offering. The number of shares
offered hereby that may actually be sold by the Selling Stockholders will be
determined by each Selling Stockholder and may depend upon a number of factors,
including, among other things, the market price of the Common Stock.
The Infinity Shares are subject to an Option Agreement dated September 24,
1997 between Infinity and Elizabeth R. Mandel. See "Description of
Business--Recent Developments." Accordingly, all or a substantial portion of the
Infinity Shares may be transferred to Ms. Mandel. In addition, Infinity may have
otherwise sold, transferred or disposed of all or a portion of the Infinity
Shares since the date on which it provided the information regarding its
ownership of the Infinity Shares in transactions exempt from the registration
requirements of the Securities Act. Additional information concerning Selling
Stockholders may be set forth from time to time in prospectus supplements to
this Prospectus. See "Plan of Distribution."
The Company has agreed to file the Registration Statement to which this
Prospectus forms a part for the purpose of registering the potential resale of
the shares offered hereby and to maintain the effectiveness of such Registration
Statement until the Shares are sold and all steps have been taken to remove any
legends or restrictions on transfer thereon or until the Shares have otherwise
are available for resale pursuant to Rule 144(k) promulgated under the
Securities Act, in each case, as contemplated by a certain Restructuring
Agreement dated September 24, 1997 by and among the Company, Infinity, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone (the "Restructuring
Agreement). In addition, the Company and Infinity agreed to indemnify each other
and certain affiliated parties from and against any losses or claims arising out
of, among other things, (1) any alleged untrue statement of a material fact or
(2) any material omission contained or referred to in the Registration
Statement. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company, pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. All of the registration and filing fees, printing
expenses, blue sky fees, if any, fees and disbursements of counsel for the
Company, and certain fees and disbursements of one counsel for Infinity will be
paid by the Company; provided, however, that fees and disbursements of experts
and counsel retained by Infinity and any underwriting discounts and selling
commissions will be borne by Infinity. The Company has granted the Other Holders
similar rights to those granted to Infinity (as referenced above) with respect
to the balance of the Shares which are issuable upon the exercise of certain
warrants.
Except as specifically set forth herein, none of the Selling Shareholders
have, and within the past three years has not had, any position, office or other
material relationship with the Company or any of its predecessors or affiliates.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.001 per share ("Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.01 per share ("Preferred Stock"). As of
March 12, 1997, 4,518,601 shares of Common Stock and 728,146 shares of Preferred
Stock were outstanding, of which 168,020 shares are designated as Series A
Preferred Stock and 560,126 are designated Series B Preferred Stock.
Common Stock
Holders of Common Stock are entitled to one vote per share on each matter
submitted to the stockholders. Holders of Common Stock do not have cumulative
voting rights, which means that the holders of a majority of the Company's
Common Stock and voting Preferred Stock are able to elect all of the Company's
directors. Holders of Common Stock share equally in dividends and distributions
that may be declared by the Company's Board of Directors out of funds legally
available for that purpose after dividends and distributions have been paid in
full to the holders of any series of Preferred Stock that the Company's Board of
Directors has determined shall have a preference in the payment of dividends and
distributions. Upon liquidation or dissolution of the Company, holders of Common
Stock will share equally in the assets of the Company remaining after the
payment of the Company's debts and liabilities and of the liquidation preference
of, and accrued dividends on, any series of Preferred Stock. The Common Stock is
not convertible or redeemable and holders of Common Stock do not have
subscription rights or preemptive rights. The shares of Common Stock currently
outstanding are, and the shares to be sold in connection with this offering will
be, duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock in one or more series. The Company's Board of Directors is authorized to
designate one or more series of Preferred Stock and to determine the number of
shares, price, preferences, rights and limitations of each series of Preferred
Stock, without any action by the Company's stockholders. The issuance of
Preferred Stock or the issuance of rights to acquire Preferred Stock, may have
the effect of delaying or preventing a change in control of the Company or an
unsolicited takeover bid.
The board of directors has designated and issued Series A Preferred Stock
and Series B Preferred Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Series A Preferred Stock bears a cumulative cash dividend rate of $0.45
per annum, payable quarterly, commencing June 8, 1995, when, as and if declared
by the board of directors of the Company. The Series A Preferred Stock becomes
convertible after June 8, 1998 into shares of Common Stock at a conversion rate
of one share of Common Stock for each share of Preferred Stock, subject to
adjustment in certain events. The Series A Preferred Stock is redeemable at the
option of the Company, in whole or in part, at any time at a redemption price of
$6.00 per share, plus accrued and unpaid dividends. Holders of Series A
Preferred Stock may request to have their shares redeemed by the Company at
$6.00 per share at any time commencing on June 8, 2000 and ending June 7, 2004.
The Company is not required to redeem from any holder during any twelve (12)
month period a number of shares of Series A Preferred Stock greater than twenty
percent (20%) of the shares of Series A Preferred Stock then held by the
applicable holder, nor is the Company required to redeem shares of Series A
Preferred Stock from any holder more than once during any twelve (12) month
period. Each share of Series A Preferred Stock entitles its holder to a number
of votes equal to the number of shares of Common Stock (including fractional
shares) that such share would be converted into, if it were so converted, as of
the close of business on the day immediately prior to the date of such vote, and
with respect to such votes, a holder of shares of Series A Preferred Stock has
full voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock, is entitled to a notice of any stockholders' meeting
in accordance with the By-laws of the Company, and is entitled to vote with
holders of Common Stock together as a single class.
The Series B Preferred Stock bears a cumulative cash dividend at a rate of
12% per annum on a stated value of $7.75 per share, payable quarterly after
payment of dividends on the Series A Preferred Stock; provided, however that if
such dividends are not paid in cash, to the extent permitted by law, dividend
payments shall be made, in the somkle discretion of the Board of Directors, in
additional shares of Common Stock. The Series B Preferred Stock is convertible
into Common Stock based on the stated value plus accrued and unpaid dividends at
a conversion price of $2.00 per share of Common Stock, subject to adjustment in
certain events. The Preferred Stock is redeemable at the option of the Company,
in whole or in part, at any time at a redemption price equal to 129% of the
stated value per share, plus accrued and unpaid dividends, subject to
adjustment. Except as required by applicable law, shares of Series B Preferred
Stock do not entitle the holder to any voting rights, but such holder is
entitled to notice of any stockholder meetings in accordance with the by-laws of
the Company.
Warrants and Options
As of December 29, 1997, the Company has issued warrants and options to
purchase up to an aggregate of 2,046,125 shares of Common Stock.
The following table sets forth the outstanding options and warrants of the
Company as of December 29, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 40% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
209,000 5 yrs. 08/12/97 .6300
All of the foregoing warrants and options have been issued pursuant to
agreements that contain anti-dilutive provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the warrants or options should any one or more of certain specified events
occur.
Anti-Takeover Provisions
The Company's by-laws provide that directors may not be removed without
cause, which limits the ability of stockholders to effect a change in control of
the Company.
Sections 78.378 through 78.3793 of the Nevada General Corporation Law may
affect attempts to acquire control of the Company. In general under those
sections, an entity that acquires "control shares" of an "issuing corporation"
may vote the control shares only if approved by the holders of a majority of the
voting power of the issuing corporation, excluding (i) the acquirer of the
control shares, (ii) officers of the issuing corporation and (iii) those
directors of the issuing corporation who are also employees of the issuing
corporation. An issuing corporation is a corporation that is organized in
Nevada, does business in Nevada, directly or through a subsidiary, and has at
least 200 stockholders, at least 100 of whom are Nevada residents. Control
shares are shares that when added to shares already owned by an entity, would
give that entity voting power in the election of directors of any of three
thresholds: one-fifth, one-third and a majority. The effect of these sections is
to condition the acquisition of voting control of a corporation on the approval
of a majority of the pre-existing disinterested stockholders. An issuing
corporation may exclude itself from the coverage of these sections by inserting
a provision to that effect in its articles of incorporation or by-laws on or
before the tenth day after the relevant acquisition is made.
Sections 78.411 through 78.444 of the Nevada General Corporation Law may
also affect attempts to acquire control of the Company. In general those
sections restrict "business combinations" (defined to include, among other
transactions, mergers, disposition of assets or shares and recapitalizations)
between a Nevada corporation having at least 200 stockholders and an "interested
stockholder" (defined as a stockholder who is the beneficial owner of 10% or
more of the voting power of the covered corporation's outstanding securities).
If occurring within three years from when a stockholder becomes an interested
stockholder, a business combination between that corporation and that interested
stockholder may be consummated only if either the business combination or the
purchase of shares that caused that stockholder to become an interested
stockholder has been approved by the board of directors of that corporation
prior to the date of such purchase. If occurring after three years from when
that stockholder becomes an interested stockholder, a business combination
between that corporation and that interested stockholder may be consummated only
if certain statutory requirements concerning the compensation to be received by
that corporation's stockholders are satisfied or if the business combination is
made in accordance with that corporation's articles of incorporation and either
(i) the business combination or the purchase of shares that caused that
stockholder to become an interested stockholder has been approved by that
corporation's board of directors prior to the date of such purchase or (ii) the
business combination has been approved by the vote of holders of stock
representing a majority of the voting power not beneficially owned by the
interested stockholder at a meeting called for that purpose not earlier than
three years after the date of the purchase of shares that caused that
stockholder to become an interested stockholder. A corporation may elect in its
original articles of incorporation not to be subject to these sections or the
stockholders representing a majority of the voting power not beneficially owned
by the interested stockholder may adopt an amendment to the corporation's
articles of incorporation to make that election, but the amendment will take
effect 18 months after the stockholder vote and will not apply to any
combination with an interested stockholder who was such on the effective date of
the amendment. The Company has not made such an election.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Interwest Transfer
Company whose address is P.O. Box 17136, Salt Lake City, Utah 84117.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NASDAQ SmallCap Stock Market
under the symbol "HSNR". The following table sets forth the range of high and
low bid prices for the Company's Common Stock from September 1, 1995 through
March 1, 1998, as reported by NASDAQ, which bid prices reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions and may not represent
actual transactions.
Bid
Prices
High Low
Fiscal 1996
First Quarter $ 6 19/32 $ 5
Second Quarter 6 31/64 4 5/16
Third Quarter 7 4 5/16
Fourth Quarter 6 13/32 1 5/32
Fiscal 1997
First Quarter 1 5/16 3/64
Second Quarter 9/16 5/64
Third Quarter 1 5/64 9/32
Fourth Quarter 1 5/16
Fiscal 1998
First Quarter 2 1/16 29/32
Second Quarter 1 13/16 1/2
As of December 29, 1997, there were 172 holders of record of the Company's
Common Stock. However, those shares being held at various clearing houses,
including the Depository Trust Company and Cede & Company, have not been broken
down. Accordingly, the Company believes there are numerous beneficial owners of
the Company's Common Stock whose shares are held in "street name", including the
Depository Trust Company and Cede & Company.
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Company's Common
Stock, but to retain earnings, if any, for the operation and expansion of the
Company's business. In any event, until such time as all accrued dividends on
the Company's Series A Preferred Stock and Series B Preferred Stock have been
paid, the Company is restricted, pursuant to the instruments/documents
authorizing the issuance of such preferred stock, from paying any dividends on
its Common Stock. Any dividends that may be declared in the future will be
determined by the Board of Directors based on the Company's financial condition,
results of operations, market conditions and other factors that the Board deems
relevant.
PLAN OF DISTRIBUTION
Sales of the Shares may be made from time to time by the Selling
Stockholders, or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on the
NASDAQ SmallCap Stock Market, in another over-the-counter market, on a national
securities exchange (any of which may involve crosses and block transactions),
in privately negotiated transactions or otherwise or in a combination of such
transactions at prices and at terms then prevailing or at prices related to the
then current market price, or at privately negotiated prices. In addition, any
Shares covered by this Prospectus which qualify for sale pursuant to Section
4(1) of the Securities Act or Rule 144 promulgated thereunder may be sold under
such provisions rather than pursuant to this Prospectus. Without limiting the
generality of the foregoing, the Shares may be sold in one or more of the
following types of transactions: (a) a block trade in which the broker-dealer so
engaged will attempt to sell the Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) an exchange distribution in accordance
with the rules of such exchange; (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (e) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate in the resales.
In connection with the execution and delivery of the Restructuring
Agreement, Infinity granted to Elizabeth Mandel ("Mandel") an option to purchase
all of the Infinity Shares. Under the terms of the option, Mandel has the option
to acquire all of the Infinity Shares for a price of $2.00 per share until the
June 1, 1999 (the "Effective Date"), subject to earlier termination in the event
that Mandel fails to purchase at least an aggregate of 250,000 Infinity Shares
on or prior to the 90th day following the Effective Date and an aggregate of
400,000 Infinity Shares on or prior to the last day of each succeeding 90-day
period commencing 90 days after the Effective Date.
In connection with distributions of the Shares or otherwise, the Selling
Stockholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares registered hereunder in the course of hedging the positions they
assume with the Selling Stockholders. The Selling Stockholders may also sell
Shares short and deliver the Shares to close out such short positions. the
Selling Stockholders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares
registered hereunder, which the broker-dealer may resell pursuant to this
Prospectus.
The Selling Stockholders may also pledge the Shares registered hereunder to
a broker or dealer and upon a default, the broker or dealer may effect sales of
the pledged Shares pursuant to this Prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Stockholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the Selling
Stockholders, or any other broker-dealers, is acting as principal or agent for
the Selling Stockholders, the compensation to be received by underwriters who
may be selected by the Selling Stockholders, or any broker-dealer, acting as
principal or agent for the Selling Stockholders and the compensation to be
received by other broker-dealers, in the event the compensation of such other
broker-dealers is in excess of usual and customary commissions, will, to the
extent required, be set forth in a supplement to this Prospectus (the
"Prospectus Supplement"). Any dealer or broker participating in any distribution
of the Shares may be required to deliver a copy of this Prospectus, including
the Prospectus Supplement, if any, to any person who purchases any of the Shares
from or through such dealer or broker.
The Company has advised the Selling Stockholders that during such time as
they may be engaged in a distribution of the Shares included herein they are
required to comply with Regulation M promulgated under the Exchange Act. With
certain exceptions, Regulation M precludes any selling shareholder, any
affiliated purchasers and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Stock.
It is anticipated that the Selling Stockholders will offer all of the
Shares for sale. Further, because it is possible that a significant number of
Shares could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a depressive effect on the market price of the Company's
Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Piper & Marbury L.L.P., New York, New York.
EXPERTS
The financial statements of the Company as of August 31, 1997 and for the
year then ended, included in this prospectus and elsewhere in the registration
statement, have been audited by Mahoney Cohen & Company, CPA, P.C., independent
certified public accountants, as indicated in their report with respect thereto
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing in giving said report.
The audited financial statements of the Company for the year ended August
31, 1996, included in this prospectus and elsewhere in the registration
statement, have been audited by Goldman and Murphy, LLP independent public
accountants, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in, or incorporated by
reference in, this prospectus, in connection with the offering covered by this
prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company, Infinity, the Other
Holders, or any selling agent. This prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the Common Stock in any jurisdiction
where, or to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this prospectus or incorporated by
reference herein or in the affairs of the Company since the date hereof.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Consolidated Balance Sheet as of
November 30, 1997 (unaudited)................ F-2 -F-3
Consolidated Statements of Operations for the three
months ended November 30, 1997 and 1996
(unaudited)..................................... F-4
Consolidated Statements of Stockholder's Equity for
the years ended August 31, 1996 and 1997 (audited),
and for the three months ended November 30, 1997
(unaudited)..................................... F-5 - F-6
Consolidated Statements of Cash Flows for the three
months ended November 30, 1997 and 1996
(unaudited)...................................... F-7
Notes to the Consolidated Financial Statements.... F-8 - F-9
Independent Auditors' Reports........................ F-10 - F-11
Consolidated Balance Sheet as of
August 31, 1997................................. F-12 - F-13
Consolidated Statements of Operations for
the years ended August 31, 1997 and
1996............................................ F-14
Consolidated Statements of Stockholders'
Equity for the years ended August 31,
1997 and 1996................................... F-15 - F-16
Consolidated Statements of Cash Flows for
the years ended August 31, 1997 and
1996............................................ F-17 - F-18
Notes to the Consolidated Financial
Statements...................................... F-19 - F-25
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
November 30, 1997
(Unaudited)
<TABLE>
A S S E T S
-----------
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash................................................. $ 61,229
Accounts Receivable - Trade, Net of Allowance
for Doubtful Accounts of $110,000.................. 1,157,233
Inventories.......................................... 202,032
Notes Receivable..................................... 230,000
Note Receivable - Related Party...................... 590,959
Stock Subscription Receivable........................ 88,150
Prepaid Expenses and Other Current Assets............ 627,761
Deferred Tax Asset................................... 45,000
-----------
TOTAL CURRENT ASSETS.......................... 3,002,364
PROPERTY PLANT AND EQUIPMENT - NET
Land................................................. 942,500
Property Plant and Equipment......................... 11,093,022
------------
TOTAL PROPERTY PLANT AND EQUIPMENT............ 12,035,522
OTHER ASSETS
Deferred Tax Asset................................... 337,000
Notes Receivable - Net of Current Portion............ 359,767
Intangible Assets - Net.............................. 1,421,544
Deposits......................................... 2,045
-------------
TOTAL OTHER ASSETS............................ 2,120,356
TOTAL ASSETS.................................. $ 17,158,242
-------------
-------------
<FN>
See selected notes to financial statements
</FN>
</TABLE>
F-2
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 1997
(Unaudited)
<TABLE>
LIABILITIES And STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Cash Overdraft........................................ $ 95,369
Accounts Payable Trade................................ 1,910,773
Notes Payable......................................... 500,000
Current Portion of Long-Term Debt..................... 450,230
Deferred Revenue ..................................... 530,087
Accrued Expenses and Other Current Liabilities........ 442,605
------------
TOTAL CURRENT LIABILITIES.................... 3,929,064
Subordinated Debt.......................................... 600,000
Long-Term Debt - Net of Current Portion.................... 3,019,410
Security Deposits Payable.................................. 229,595
Due to Related Parties..................................... 383,354
------------
TOTAL LONG-TERM LIABILITIES.................. 4,232,359
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................................. 1,064,001
------------
1,064,169
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 Par Value
580,646 Shares Authorized-Series B
12.0% Cumulative Convertible Redeemable 560,126
Shares Issued and Outstanding
($4,340,969 aggregate liquidation preference).... 560
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, 4,518,601 Issued and Outstanding..... 4,519
Paid in Capital: Preferred....................... 3,638,004
Common.......................... 6,014,867
Accumulated Deficit.............................. (1,625,300)
Subscription Receivable.......................... (100,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 7,932,650
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,158,242
===========
<FN>
See selected notes to financial statements
</FN>
</TABLE>
F-3
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended
November 30
(Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C>
Sales............................................. $3,981,754 $4,768,434
Cost of Sales..................................... 3,008,587 3,753,450
---------- ----------
GROSS PROFIT...................................... 973,167 1,014,984
OPERATING EXPENSES
Selling, General and Administrative Expenses..... 776,567 763,822
Management Fee, Related Party ................... 90,000 90,000
Net Rental Income................................ (154,767) (139,827)
Royalty Fee ..................................... 0 25,203
Depreciation & Amortization...................... 278,680 186,320
----------
- ----------
TOTAL OPERATING EXPENSES 990,480 925,518
INCOME (LOSS) FROM OPERATIONS................. (17,313) 89,466
OTHER INCOME (EXPENSES)
Interest Income............................ 11,577 72,795
Interest Expense........................... (181,841) (88,896)
Other Income............................... 1,223 0
---------- ----------
NET OTHER EXPENSES (169,041) (16,101)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (186,354) 73,365
INCOME TAX EXPENSE 0 13,573
--------- ----------
Net Income (Loss) (186,354) 59,792
Preferred Stock Dividends (573,773) (198,639)
--------- ----------
Net Loss Applicable to Common Shares $ (760,127) $ (138,847)
========= ==========
Net Loss Per Share............................... ($.18) ($.04)
======= =======
Weighted Average Number of Common
Shares Outstanding............................. 4,308,601 3,752,082
========= =========
<FN>
See notes to selected financial statements
</FN>
</TABLE>
F-4
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS STOCK
$.001 PAR VALUE .001 PAR VALUE PAID IN (ACCUMULATED SUB. TOTAL
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT) REC. EQUITY
--------------- ------------- ------- ------------ ------ ------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
August 31,
1996
(as restated
in 1997) 572,246 $572 3,491,340 $3,492 $9,172,925 $5,320,634 $0 $14,497,623
Private
Placement
Costs 0 0 0 0 (5,151) 0 0 (5,151)
Cash
Dividends
Declared
Preferred
Series A 0 0 0 0 0 (75,610) 0 (75,610)
Cash
Dividends
Declared:
Preferred,
Series B 0 0 0 0 0 ( 1,471) 0 (1,471)
Common
Shares
Issued to
Employees 0 0 15,000 15 8,560 0 0 8,575
Common
Shares
issued for
acquisition of
customer
list 0 0 200,000 200 249,800 0 0 250,000
Conversion
of Preferred Shares
and Unpaid
Dividend to
Common
Shares (5,161) (5) 162,261 162 1,314 0 0 1,471
Common
Shares
issued to
employees 0 0 200,000 200 99,800 0(100,000) 0
Common Shares
issued on
Conversion of
Options 0 0 50,000 50 15,950 0 0 16,000
Net (Loss)
August 31,
1997 0 0 0 0 0 (6,117,531)$ 0(6,117,531)
----- ------ ------ ----- ------- --------- --- ---------
Balance
at August 31,
1997 567,085 $567 4,118,601 $4,119 $9,543,198($873,978)($100,000)$8,573,906
</TABLE>
F-5
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS STOCK
$.001 PAR VALUE .001 PAR VALUE PAID IN (ACCUMULATED SUB. TOTAL
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT) REC. EQUITY
--------------- ------------- ------- ------------ ------ ------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Dividends
Declared:
Preferred
Series A 0 $ 0 0 $ 0 0 $ ($18,902) $ 0 ($18,902)
Preferred Shares
Series B Issued in
Exchange for Unpaid
Dividends 70,460 70 0 0 545,996 (546,066) 0 0
Common Shares
Issued on
Conversion of
Options 0 0 400,000 400 163,600 0 0 164,000
Restructuring of
Series B Preferred
and Conversion
to Debt (77,419) (77) 0 0 (599,923) 0 0 (600,000)
Net (Loss) -
November 30,
1997 0 0 0 0 0 (186,354) 0 (186,354)
---- ----- ----- ---- ---- ------- ---- --------
Balances at
November 30,
1997 560,126 $560 4,518,601 $4,519 $9,652,871($1,625,300)($100,000)$7,932,650
======= ==== ========= ====== ========= ========== ======== =========
</TABLE>
F-6
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
November 30,
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Cash flows from Operating Activities:
Net Income (Loss)....................... ($186,354) $ 59,792
Adjustments to Reconcile Net Income (Loss)
to Net Cash used in Operating Activities:
Depreciation & Amortization............ 278,680 211,523
Changes in Operating Assets and Liabilities:
Accounts Receivable......................... (108,769) (474,049)
Inventory................................... (33,102) (937,295)
Prepaid Expenses and other Current Assets... (33,940) (95,384)
Accounts Payable, Accrued Expenses and Other
Current Liabilities....................... 187,023 431,133
Deferred Revenue............................ (145,059) 113,898
Income Tax Payable.......................... 0 6,408
-------- ---------
Net Cash Used In Operating Activities...... (41,521) (683,974)
Cash Flows From Investing Activities:
Intangible Assets........................... 0 (487,500)
Proceeds From Capital Contribution.......... 0 (11,158)
Acquisition of Property and Equipment...... (81,605) (765,427)
Advances to ATI............................. (1,256,595) (16,757)
Repayment of Notes Receivable ATI.......... 1,244,484 0
Security Deposits Payable................... (8,211) 0
--------- -------
Net Cash Used In Investing Activities...... (101,927) (1,280,842)
Cash Flows From Financing Activities:
Decrease in Cash Overdraft.................. (3,106) 0
Net Proceeds from the Issuance of Common Stock 75,850 0
Proceeds from Long Term Debt Borrowings..... 96,734 197,709
Net Borrowing from Related Parties.......... 118,532 0
Repayment of Long Term Debt................ (109,200) (86,289)
Repayment of Stockholder's Loan............ (18,526) 0
Preferred Stock Dividends................... (18,902) (20,374)
Net Cash Provided by Financing Activities 141,382 91,046
Net Decrease in Cash and Cash Equivalents... (2,066) (1,873,770)
Cash and Cash Equivalents at Beginning of Period 63,295 2,061,474
Cash and Cash Equivalents at End of Period... $ 61,229 $ 187,704
-------- ---------
Supplemental Disclosure - Cash Paid During the Period For:
Interest Expense............................. $181,841 $ 88,896
Income Taxes................................. $ 0 $ 0
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Acquisition of Leaseholds in Exchange
for Repayment of Note Receivable ATI......... 0 $965,000
Acquisition of Customer List in Exchange for
Common Stock............................... $ 0 $250,000
Acquisition of Equipment in Exchange for
Note Payable............................... $ 0 $387,500
Preferred Stock Issued in Exchange for
Unpaid Dividends........................... $546,066 $ 0
Conversion of Preferred Stock to Long-Term
Debt....................................... $600,000 $ 0
</TABLE>
F-7
<PAGE>
Selected Notes to the Financial Statements
Three Months Ended November 30, 1997
(1) Summary of Significant Accounting Policies:
The accompanying condensed financial statements are not audited for the
interim period, but include all adjustments (consisting of only normal recurring
accruals) which management considers necessary for the fair representation of
results at November 30, 1997.
Moreover, these financial statements do not purport to contain complete
disclosures in conformity with generally accepted accounting principles and
should be read in conjunction with the Company's audited financial statements
at, and for the fiscal year ended, August 31, 1997 contained in the Company's
Annual Report on Form 10-KSB.
The results reflected for the three month period ended November 30, 1997
are not necessarily indicative of the results for the entire fiscal year ending
August 31, 1998.
(2) Options and Warrants:
The following table sets forth the options and warrants of the Company as
of November 30, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 40% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
209,000 5 yrs. 08/12/97 .6300
(3) Earnings (loss) per share is computed by dividing net earnings (loss) less
preferred dividends by the weighted average number of shares of common stock
joutstanding during the year. Common stock equivalents are not included in
earnings (loss) per share computations since their effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS#128), which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings (loss) per
share and to restate all prior periods. Under the new requirements for
calculating basic earnings (loss) per share, the dilutive effect of stock
options will be excluded. The Company does not expect the impact on the earnings
per share to be material.
F-8
Selected Notes To Financial Statements
Three Months Ended November 30, 1997
(4) Note Receivable - Related Party:
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 of the Company and its 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 referred 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 interest 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 has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, in the fourth quarter
of fiscal 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.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Halstead Energy Corp.
We have audited the accompanying consolidated balance sheet of Halstead
Energy Corp. and subsidiaries as of August 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presently fairly, in all material respects, the financial position of Halstead
Energy Corp. and Subsidiaries as of August 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
MAHONEY COHEN & COMPANY, CPA, P.C.
January 12, 1998
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Halstead Energy Corp.
We have audited the accompanying consolidated statements of operations.
stockholders' equity and cash flows for the year ended August 31, 1996 of
Halstead Energy Corp. and Subsidiaries. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The August 31, 1996 consolidated statement of stockholders' equity has been
restated to give effect to the transaction disclosed in Note 2 to the Financial
Statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Halstead Energy Corp. and Subsidiaries for the year ended August 31,
1996 in conformity with generally accepted accounting principles.
GOLDMAN & MURPHY, LLP
January 16, 1997
F-11
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1997
<TABLE>
<CAPTION>
A S S E T S
<S> <C>
CURRENT ASSETS
Cash............................................... $ 63,295
Accounts Receivable - Trade, Net of Allowance
for Doubtful Accounts of $110,000 (Note 7)...... 1,048,464
Inventories (Notes 1D and 7)...................... 168,930
Notes Receivable (Note 5).......................... 230,000
Note Receivable - Related Party (Note 6)........... 578,848
Prepaid Expenses and Other Current Assets (Note 3). 615,823
Deferred Tax Asset (Note 8)........................ 45,000
---------
TOTAL CURRENT ASSETS.......................... 2,750,360
PROPERTY, PLANT AND EQUIPMENT - NET (Notes 4 and 7) 12,173,547
OTHER ASSETS
Deferred Tax Asset (Note 8)........................ 337,000
Notes Receivable - Net of Current Portion (Note 5). 337,765
Intangible Assets - Net (Notes 1G and 7)........... 1,480,593
Deposits........................................... 2,045
----------
TOTAL OTHER ASSETS............................ 2,157,403
----------
TOTAL ASSETS.................................. $17,081,310
===========
<FN>
See Accompanying Notes
</FN>
</TABLE>
F-12
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31,1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Cash Overdraft................................. $ 98,475
Accounts Payable -Trade........................ 1,789,718
Notes Payable (Note 7)......................... 500,000
Current Portion of Long-Term Debt (Note 7)..... 441,401
Deferred Revenue............................... 675,146
Accrued Expenses and Other Current Liabilities. 376,637
-----------
TOTAL CURRENT LIABILITIES...................... 3,881,377
Long-Term Debt - Net of Current Portion (Note 7)..... 2,964,772
Security Deposits Payable............................ 237,806
Due to Related Parties (Note 6)...................... 359,280
-----------
TOTAL LONG TERM LIABILITIES.................... 3,561,858
Preferred Stock, $.001 Par Value, 168,020 Shares
Authorized-Series A 7.5% Cumulative Convertible
Redeemable 168,020 Shares Issued and Outstanding
($1,008,120 aggregate liquidation preference)(Note 12) 168
Paid-In Capital:Preferred Stock ..................... 1,064,001
-----------
1,064,169
===========
COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 11)
STOCKHOLDERS' EQUITY
Preferred Stock,$.001 Par Value,
580,646 Shares Authorized Series B
8.0% Cumulative Convertible 567,085
Shares Issued and Outstanding
($4,394,909 aggregate liquidation
preference) (Note 12).......................... 567
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, 4,118,601 Issued and Outstanding..... 4,119
Paid-in Capital: Preferred Stock.................. 3,770,183
Common Stock .................... 5,773,015
Accumulated Deficit.............................. (873,978)
Subscription Receivable.......................... (100,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 8,573,906
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,081,310
===========
<FN>
See Accompanying Notes
</FN>
</TABLE>
F-13
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
August 31,
1997 1996
------------- ----------
<S> <C> <C>
Sales........................................ $ 18,667,132 $15,312,260
Cost of Sales................................ 14,677,380 10,734,200
------------- ----------
GROSS PROFIT................................. 3,989,752 4,578,060
OPERATING EXPENSES
Selling, General and Administrative Expenses 4,122,851 3,240,926
Management Fee, Related Party (Note 6)...... 360,000 360,000
Net Rental Income (Note 10)................. (502,517) (418,478)
Royalty Fee (Note 6)........................ 31,769 96,102
Gain on Sale of Asset....................... (175,667) -0-
Depreciation and Amortization............... 1,287,674 717,884
Bad Debt Expense (Note 6)................... 4,694,998 39,869
------------ ----------
TOTAL OPERATING EXPENSES 9,819,108 4,036,303
------------ ----------
INCOME (LOSS) FROM OPERATIONS........... (5,829,356) 541,757
OTHER INCOME (EXPENSES)
Interest Income......................... 5,451 101,987
Interest Expense........................ (407,969) (398,889)
Other Income............................ 114,343 38,935
------------ ----------
NET OTHER EXPENSES (288,175) (257,967)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (6,117,531) 283,790
INCOME TAX EXPENSE (Note 8) 0 102,696
------------- ----------
Net Income (Loss) (6,117,531) 181,094
Preferred Stock Dividends (429,393) (164,308)
------------- -----------
Net Income (Loss) Applicable to Common Shares $ (6,546,924) $ 16,786
============= ===========
Net Income (Loss) Per Share................... $ (1.66) $ 0.00
============= ===========
Weighted Average Number of Common
Shares Outstanding...................... 3,949,479 3,416,743
============ ===========
<FN>
See Accompanying Notes
</FN>
</TABLE>
F-14
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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,
1995 0 $ 0 3,338,117 $ 3,338 $4,364,721 $5,215,906 $ 0 $9,583,965
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 (756) 0 (756)
Debentures
Converted
into Common
Shares 0 0 104,647 105 363,740 0 0 363,845
Common Shares
Issued 0 0 2,250 2 12,092 0 0 12,094
Preferred
Stock
Issued 580,646 580 0 0 4,499,420 0 0 4,500,000
Private Placement
Costs 0 0 0 0 (625,246) 0 0 (625,246)
Conversion of
Preferred
Shares to
Common
Shares (8,400) (8) 18,816 19 745 0 0 756
Conversion
of Note
Payable to
Common
Shares 0 0 27,510 28 46,398 0 0 46,426
Issuance of
Stock
Warrants 0 0 0 0 511,055 0 0 511,055
Net Income
August 31,
1996 0 0 0 0 0 181,094 0 181,094
----- ----- ------ ---- ------- ------- --- -------
Balance at
August 31,
1996
(as restated
in 1997)
(Note 2)572,246 572 3,491,340 3,492 9,172,925 5,320,634 0 14,497,623
F-15
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 15,000 $ 15 $ 8,560 $ 0 $0 $ 8,575
Common
Shares
issued for
acquisition of
customer
list 0 0 200,000 200 249,800 0 0 250,000
Conversion
of Preferred
Shares and
Unpaid
Dividend
to Common
Shares (5,161) (5) 162,261 162 1,314 0 0 1,471
Common Shares
issued to
employee 0 0 200,000 200 99,800 0(100,000) 0
Common Shares
issued on
Conversion of
Options 0 0 50,000 50 15,950 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 4,118,601 $4,119 $9,543,198 ($873,978)($100,000)$8,573,906
======= ==== ========= ====== ========== ======== ======== ==========
<FN>
See Accompanying Notes
</FN>
</TABLE>
F-16
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended
August 31,
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss)........................ $(6,117,531) $ 181,094
Adjustments to Reconcile Net Income (Loss)
to Net Cash provided by Operating Activities:
Depreciation and Amortization................ 1,287,674 717,884
Gain on the Sale of Customer List............ (175,667) 0
Bad Debt Expense ............................ 4,694,998 38,052
Deferred Income Tax Expense.................. 230,406 103,756
Change in Operating Assets and Liabilities:
Accounts Receivable........................ (82,646) (316,771)
Inventory.................................. 82,520 (59,212)
Prepaid Expenses and other Current Assets... (286,609) (99,778)
Accounts Payable, Accrued Expenses and Other
Current Liabilities........................ 1,310,307 (87,825)
Deferred Revenue........................... 661,386 (444)
Income Taxes Payable....................... 0 (157,133)
Discount Deposits Payable.................. 0 12,363
--------- -----------
Net Cash Provided by Operating Activities.... 1,604,838 331,986
Cash Flows From Investing Activities:
Net Proceeds From the Sale of Customer List.. 175,667 0
Intangible Assets............................ (72,067) (84,235)
Acquisition of Property and Equipment........ (263,907) (1,922,013)
Note Receivable.............................. (487,765) (80,000)
Advances to ATI.............................. (4,306,018) (1,888,190)
Repayment of Notes Receivable ATI............. 360,000 1,725,000
Security Deposits Payable.................... (21,752) 40,358
--------- -----------
Net Cash Used In Investing
Activities (4,615,842) (2,209,080)
Cash Flows From Financing Activities:
Increase (Decrease)in Cash Overdraft.......... 98,475 (66,351)
Net Proceeds from the Issuance of Common Stock 19,424 4,297,875
Proceed from Short Term Borrowings............ 715,000 0
Proceeds from Long Term Debt Borrowing........ 265,000 0
Net Borrowing from Related Parties............ 359,280 0
Repayment of Long Term Debt................... (288,744) (296,590)
Repayment of Stockholder's Loan............. (80,000) 80,000
Preferred Stock Dividends..................... (75,610) (76,366)
--------- ---------
Net Cash Provided by Financing Activities..... 1,012,825 3,938,568
Net Increase (Decrease) In Cash and Cash
Equivalents.............................. (1,998,179) 2,061,474
Cash and Cash Equivalents at Beginning of Year 2,061,474 0
---------- ---------
Cash and Cash Equivalents at End of Year..... $ 63,295 $ 2,061,474
---------- -----------
Supplemental Disclosure - Cash Paid During the Year For:
Interest Expense.............................. $ 407,969 $ 361,931
---------- -----------
Income Taxes.................................. $ 6,597 $ 162,631
---------- -----------
F-17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Schedule of Non-cash Investing and Financing Activities:
1997 1996
---- ----
<S> <C> <C>
Acquisition of Leaseholds in Exchange for
Repayment of Note Receivable ATI $ 690,000 $ 1,365,000
---------- -----------
Acquisition of Customer List in Exchange
for Common Stock $ 250,000 $ 0
---------- -----------
Common Stock Issued in Exchange for Note
Receivable $ 100,000 $ 0
---------- -----------
Acquisition of Trademark in Exchange for
Warrants $ 0 $ 511,055
---------- -----------
Acquisition of Equipment in Exchange for
Note Payable $ 260,124 $ 0
---------- -----------
Common Stock Issued in Exchange for
Unpaid Dividends $ 1,471 $ 0
---------- -----------
<FN>
See Accompanying Notes
</FN>
</TABLE>
F-18
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
The Company is engaged in the retail sale of propane, propane equipment,
fuel oil, gasoline and diesel fuel. Fuel oil, gasoline and diesel fuel are
also sold to wholesalers. The Company also services propane and fuel oil
heating equipment.
(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 "Companies").All
inter-company accounts have been eliminated.
(C) 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.
(D) 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.
(E) Depreciation and Amortization
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 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-19
(F) 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.
(G) 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, 1997, intangible
assets, net of accumulated amortization of $524,591, was $1,480,593.
(H) 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.
(I) Income Taxes
Deferred income taxes are provided for the effect of items which are
reported for income tax purposes in year different from that in which they
are recorded for financial statement purposes.
(J) Revenue Recognition
Revenue is recognized at the time the products are shipped to and accepted
by the customer either directly from the Company or a vendor, on drop
shipments or from pick-up company facilities. Retail revenue is recognized
when delivered to the customer. In connection with certain sales, when the
related receivable is collectible over extended periods of time and
collectibility is uncertain, profit is recognized under the installment
method as receivable is collected.
(K) 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.
F-20
2. Major Vendors
The Company purchases a majority of its gasoline and oil for its operations
from five vendors (including A. Tarricone, Inc. ("ATI")). Those vendors
represent approximately 98% and 88% of total purchases for years ended
August 31, 1997 and 1996. At August 31, 1997, these five vendors
represented 39.8% 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.
(L) 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.
(M) Earnings (Loss)Per Share
Earnings (loss) per share is computed by dividing net earnings (loss) less
preferred dividends by the weighted average number of shares of Common
Stock outstanding during the year. Common stock equivalents are not
included in earnings (loss) per share computations since their effect is
anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS#128"),
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings (loss) per share and to restate all prior periods. Under the new
requirements for calculating basic earnings (loss) per share, the dilutive
effect of stock options will be excluded. The Company does not expect the
impact on the earnings per share to be material.
Note 2 - RESTATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
The August 31,1996 consolidated stockholders' equity previously reported as
$14,036,973 has been restated to reflect the recording of an intangible
asset of $460,650 net of accumulated amortization relating to the
acquisition of a trademark from ATI (see Note 6), which was recorded as a
reduction to stockholders' equity in the year ended August 31, 1996.
Accordingly, Stockholders' equity has been restated at August 31, 1996 to
$14,497,623. F-21
Note 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and other current assets consist of the following:
Income Tax Refund Receivable $241,000
Prepaid Insurance 182,262
Miscellaneous 192,561
---------
TOTAL $615,823
---------
---------
Note 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists of the
following:
Land $ 894,000
Gas Station Leaseholds 8,813,000
Building and Improvements 2,449,434
Equipment 1,914,899
Furniture and Fixtures 83,587
Vehicles 1,425,555
------------
TOTAL 15,580,475
Less: Accumulated Depreciation (3,406,928)
-------------
NET $12,173,547
-----------
-----------
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 through June 1, 2004.
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 Code. 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 expiring
on August 31, 1998, 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, 1997 and 1996, the Company was charged $360,000 in connection with such
expenses.
F-22
(B) For the period September 1, 1995 through February 28, 1996, the Company
paid ATI a royalty fee of $45,697 for the use of the ATI trademark. On
March 1, 1996, the Company granted warrants to ATI for the purchase of its
trademark which was valued at $511,055 (see Note 13). Amortization expense
for the years ended August 31, 1997 and 1996 was $31,769 and $50,405,
respectively.
(C) For the year ended August 31, 1996, the Company paid ATI $38,671 for
the storage of fuel oil at the terminals' operated by ATI.
(D) Notes payable to stockholders and affiliated entities are non-interest
bearing and are payable on demand at anytime on or after September 1, 1998.
(E) During the year ended August 31, 1997, the Company acquired four
gasoline station leaseholds from ATI (see Note 5) for $690,000 (the
leaseholds were valued by an independent appraiser). In consideration for
the leaseholds, the Company forgave $690,000 of the note receivable from
ATI.
(F) During the year ending August 31, 1997, the Company made advances to
ATI of $4,237,563 of which $360,000 was repaid and the remaining balance of
$3,877,563 was written off as a bad debt. At August 31, 1997 the Company is
owed $578,848, which is due on June 10, 1998.
Note 7- DEBT
Short-term borrowings consists of the following:
$500,000 revolving line of credit with a bank due
5/17/98 with interest at 11.75%(3.25% above prime)(B) $ 500,000
--------
--------
Long-Term debt consists of the following:
$1,000,000,000 revolving line of credit with a
bank originally due 6/8/98, which has been extended
to September 4, 1998 with interest at 18.5% (10%
above prime)(A) $ 715,000
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) 452,064
F-13
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) $ 435,600
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) 391,667
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 317,000
Unsecured notes payable due on 7/1/01 and 8/31/02 with
interest at 10% and 11% (2.5% above prime) and aggregate
annual principal and interest payments of $60,400, through
7/1/01 with a final payment of $40,000 due on 8/31/02 265,849
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) 132,757
Mortgage due 12/01/99 with interest at 9.5% (1% above
prime) and monthly principal payments of $3,300 (C) 94,400
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 $698,000 601,836
----------
Total 3,406,173
Less: Current Portion 441,401
----------
Total Long-Term Debt $2,964,772
----------
----------
(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 $700,000.
Aggregate principal payments for each of the next five years relating to long
term debt are as follows:
Year Ending
August 31,
------------
1998 $ 441,401
1999 1,712,785
2000 255,503
2001 940,434
2002 56,050
------------
$3,406,173
------------
------------
F-23
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:
1997 1996
---- ----
Expected tax (benefit) at statutory federal
income tax rate of 34% ($2,079,961) $ 96,489
State taxes, net of federal benefit (363,256) -----
Net operating loss carry back 241,000 -----
Valuation Allowance 2,128,000 -----
Other 74,217 6,207
--------- --------
$ -0- $102,696
========= ========
Deferred income taxes are provided for the temporary differences between
the financial statement and tax bases of the company's assets and
liabilities .
The components of deferred tax assets are as follows:
1997
----------
Deferred Tax Assets:
Current:
Allowance for Doubtful Accounts $ 45,000
==========
Non Current:
Property Plant and Equipment $ 337,000
Net Operating Loss Carry forward $2,128,000
Valuation Allowance (2,128,000)
-----------
Total Non Current Deferred Asset $ 337,000
===========
The Company has a net operating loss carry forward of approximately
$5,100,000 for federal and New York State tax purposes, which will expire
in the year ending August 31, 2012. The Company will carry back
approximately $710,000 of its net operating loss and has recognized an
income tax receivable of $241,000 on the accompanying balance sheet.
Management has established a valuation allowance of $2,128,000 for the year
ended August 31, 1997.
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, 1997 are as follows:
For the Year Ending Lease Sublease
August 31, Payments Receipts Net
------------------- ----------- ----------- ----------
1998 $ 868,100 $ 841,000 $ 27,100
1999 770,100 498,700 271,400
2000 775,300 396,400 378,900
2001 652,500 240,500 412,000
2002 370,900 145,200 225,700
Thereafter 1,730,400 371,500 1,358,900
---------- ----------- ----------
$5,167,300 $2,493,300 $2,674.000
========== =========== ==========
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, 1997 and 1996 amounted to $502,517 and $568,052, respectively,
inclusive of $288,000 of income relating to the rental of a customer list
to a third party.
F-24
<PAGE>
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, 1998. The remaining aggregate
compensation to be paid for the year ending August 31, 1998 is $174,000.
(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 its diesel motor fuel license. 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.
(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.
NOTE 12 - PREFERRED STOCK
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 Series A 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 Series A Preferred Stock becomes
convertible after June 8, 1998 into shares of Common Stock at a
conversion rate of one share of Common Stock for each share of Series
A Preferred Stock subject to adjustment in certain events.
The Series A Preferred Stock is redeemable at the option of the
Company, in whole or in part, at any time at a redemption price of
$6.00 per share, plus accrued and unpaid dividends.
Holders of Series A Preferred Stock may request to have their shares
redeemed by the Company at $6.00 per share at any time commencing on
June 8, 2000 and ending June 7, 2004.
The Company shall not be required to redeem from any holder during any
twelve (12) month period a number of shares of Series A Preferred
Stock greater than twenty percent (20%) of the shares of Series A
Preferred Stock then held by the applicable holder and the Company
shall not be required to redeem shares of Series A Preferred Stock
from any holder more than once during any twelve (12) month period.
Each share of Series A Preferred Stock entitles its holder to a number
of votes equal to the number of shares of Common Stock (including
fractional shares) that such share would be converted into, if it were
so converted, as of the close of business on the day immediately prior
to the date of such vote, and with respect to such votes, a holder of
shares of Series A Preferred Stock 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.
F-25
C) The Company has issued Series B 8% Cumulative Convertible Redeemable
Preferred Stock, $0.001 par value ("Series B Preferred Stock" - see Note
15). The holders of the outstanding shares of Series B Preferred Stock are
entitled to the following:
The Series B Preferred Stock bears a cumulative cash dividend rate of
$0.62 per annum, payable quarterly after payment of dividends on the
Series A Preferred Stock; provided, however that if such dividends are
not paid in cash, to the extent permitted by law, dividend payments
shall be made, in the sole discretion of the Board of Directors, in
additional shares of Common Stock.when, as and if declared by the
Board of Directors of the Company. The Series B Preferred Stock is
convertible into an unspecified number of shares of Common Stock at a
conversion rate formula based in part on the market value of the
Common Stock on the date of conversion. During the year ended August
31, 1997, 5,161 shares of Series B Preferred Stock were converted into
162,261 shares of Common Stock.
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.
NOTE 13 - STOCK OPTIONS
During the year ended August 31, 1996, the Company granted 297,125
warrants to a related party to purchase Common Stock at the lesser of $4.30
or 40% discount to the market price on the exercise date. The fair market
value of the underlying Common Stock on the grant date was $4.30 per
share. The options are exercisable for a period of 5 years beginning on the
grant date (see Note 6).
During the year ended August 31, 1997, the Company granted 515,000 options
to consulting firms to purchase common stock at an average exercise price
of $.41 per share, in connection with the Restructuring Transaction
disclosed in Note 15(A).The options are exercisable for a period of 5 years
beginning on the grant date. 400,000 options expire on February 27, 2000
with the remaining 115,000 options expiring November 2001.
During the year ended August 31, 1997, the Company granted 1,634,000
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. 1,425,000 options expire November 13, 2001 with the remaining 209,000
options expiring on August 12, 2002.
The Company accounts for stock based compensation 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 has been recognized for the year ended August 31, 1997.
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 $573,000 and $.15, respectively.
The weighted average fair value at the date of grant for the year ended
August 31, 1997 was approximately $.32 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 293%, a risk-free interest rate of 5.6%, 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.
F-26
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,
1997 and 1996, 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) Restructuring Agreement: On September 24, 1997, the Company, entered into a
Restructuring Agreement with the holder of the Series B Preferred Stock
(the "Restructuring Agreement"). Under the terms of the Restructuring
Agreement, the holder of the Preferred Series B Stock agreed to exchange
77,419 shares and all accrued and unpaid dividends on the outstanding
shares of Series B Preferred Stock for the Company's Subordinated
Promissory Note in the principal amount of $600,000 (the "Note"). The Note
will accrue interest at 12% per annum compounded quarterly through
September 24, 1999 and accrue simple interest at 12% per annum after
September 24, 1999. The Note matures on September 24, 2002, although the
Company is required to make mandatory prepayments upon the occurrence of
certain events.
The terms of the designation of the Series B Preferred Stock were amended
to provide, among other things, for (i) a fixed conversion price of $2.00
per share of Series B Preferred Stock, (ii) the removal of certain
limitations on the rights of holders of the Series B Preferred Stock to
convert those shares into the Company's Common Stock, and (iii) an increase
in the dividend rate of the Series B Preferred Stock to 12% from 8% per
annum.
(B) Pending Delisting
The Company has been notified by NASDAQ that its stock will be delisted due
to the failure to meet the filing requirements of its Form 10-KSB for the
fiscal year ended August 31, 1997. The delisting has been stayed and a
hearing will be held on February 5, 1998.
F-27
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
Until April 6, 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 4
Use of Proceeds 9
Management's Discussion and 9
Analysis of Financial
Condition and Results of
Operations
Description of Business 14
Description of Property 20
Legal Proceedings 21
Management 22
Executive Compensation 23
Certain Relationships and
Related Transactions 26
Security Ownership of Certain
Beneficial Owners and
Management 28
Selling Stockholders 30
Description of Securities 30
Market for Common Equity and
Related Stockholder Matters 33
Plan of Distribution 34
Index to Consolidated Financial F-1
Statements
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 78.751 of the Nevada General Corporation Law, as amended, a
director, officer, employee or agent of a Nevada corporation may be entitled to
indemnification by the corporation under certain circumstances against expenses,
judgments, fines and amounts paid in settlement of claims brought against them
by a third person or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims brought against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such director reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if such director had no reason to believe his or her conduct was
unlawful. However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit indemnification in respect of any claim,
issue or matter as to which such director is adjudged liable for negligence or
misconduct in the performance is his or her duties to the Company, unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify other persons except against gross negligence or
willful misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officer and other persons who have acted as a representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company has agreed to indemnify its
directors to the fullest extent permitted by applicable corporate law and its
Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by The Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
The Company currently maintains liability insurance in the amount of
$1,000,000 for the benefit of its officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting discounts and commissions,
in connection with the Offering are as follows:
SEC Registration Fee.............................. $ 1,500*
Nasdaq Fees....................................... 7,500*
Blue Sky Fees and Expenses........................ 5,000*
Printing Expenses................................. -0-*
Legal Fees and Expenses........................... 15,000*
Accounting Fees and Expenses...................... 5,000*
Transfer Agent Fees and Expenses.................. 100*
Miscellaneous..................................... -0-*
================
$34,100*
================
----------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The following securities of the Company were sold by the Company during
the past three years without being registered under the Securities Act:
On October 19, 1995, the Company received $500,000 and issued $500,000 in
principal amount of 8.5% convertible debentures due on October 19, 1997. As of
May 31, 1996, $250,000 principal amount debentures remained outstanding. On
December 4, January 19, March 6, April 16, June 27 and August 14, 1996, the
subscriber converted a total of $350,000 of debentures for 104,647 common shares
of the Company. On August 20, 1996 the Company purchased the balance of the
outstanding convertible debentures for $150,000 plus accrued interest of
$10,793.84. The securities issued in this private transaction were exempt from
registration under Section 4(2) of the Securities Act.
The Company received $974,998.50 from the proceeds of the private sale
pursuant to Regulation D of 557,142 shares of Common Stock at a price of $1.75
per share. Included as additional paid in capital were $35,000 of legal expenses
associated with the private placement memorandum and commission expenses of
$48,750.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares of
the Company's Common Stock to ATI in exchange for the Company's exclusive use of
the "ATI" trademark. The exercise price is equal to the lessor of $4.30 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 SmallCap stock market for the
five trading days immediately preceding the date of the exercise of the warrant.
The warrants provide that 59,425 were immediately vested on March 5, 1996, an
additional 59,425 vested on March 5, 1997, and the balance become vested in
three equal annual installments. The market price at issuance was $4.30 per
share. The securities issued in this private transaction were exempt from
registration under Section 4(2) of the Securities Act.
On May 31, 1996 the Company issued 580,646 shares of Series B 8% Cumulative
Convertible Redeemable Preferred Stock with a stated value of $7.75 per share
totaling $4,500,000 in a private placement to potential foreign investors
pursuant to Regulation S. The Company received proceeds, net of commissions of
approximately $630,000, equal to $3,870,000. On July 23 and November 20, 1996,
the Private Placement Holder converted $65,100 (8,400 shares) and $39,998 (5,161
shares) of the Series "B" Preferred Stock plus accrued dividends of $756.23 and
$1,472.79 respectively, into 18,816 and 162,261 shares of Common Stock.
On September 5, 1996, the Company acquired the customer list of Dino Oil,
Inc. in exchange for 200,000 shares of the Company's Common Stock at $1.25 per
share and $100,000.
In March 1995 and March 1996, the Company issued 1,925 and 2,250 shares of
Common Stock, respectively, at a price of $2.50 and $5.38 per share, as employee
compensation.
In January 1997, the Company issued 200,000 shares of Common Stock to an
employee at a price of $0.50 per share. The Company also issued 22,500 shares of
Common Stock in August 1996 and an additional 22,500 shares of Common Stock in
September 1997, in each case at a price of $2.00 per share, to Donnie and Vito
Tarricone in private transactions.
Item 27. Exhibits.
Exhibit
Number Description
3.1 Articles Of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers,
Preferences, Limitations, Restrictions and Relative Rights
of series A 7.5% Cumulative Convertible Redeemable
Preferred Stock**
3.4 Certificate of Amendment and Restatement to Certificate to
Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series B
8% Cumulative Convertible Redeemable Preferred Stock,
$.001 Par Value*****
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate**
4.3 Specimen Series B Preferred Stock Certificate***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock
Option Plan****
5 Opinion of Piper & Marbury L.L.P. (contains Consent of
Counsel)*****
10.1 Agreement and Plan of Reorganization dated as of July 5,
1993 between Halstead Quinn Propane, Inc. and the Company.*
10.2 Lease Agreement between HQ Propane and ATI.*
10.5 Management Agreement by and between HQ Propane and ATI.*
10.6 Form of Employment Agreement by and between the Company
and Claire E. Tarricone.*
10.7 Form of Employment Agreement by and between the Company
and Anthony Tarricone.*
10.8 Form of Employment Agreement by and between the Company
and Joseph Tarricone.*
10.9 Promissory Note, dated August 31, 1993, of ATI in favor of
HQ Propane.*
10.10 ATI Purchase Agreements**
10.11 Agreement & Plan of Reorganization by and among Halstead
Energy Corp., Allan Cianflone and Jack Troccoli.**
10.12 Consulting and Warrant Compensation Agreement between the
Company and Boulder Financial Group.****
10.13 Restructuring Agreement, dated September 24, 1997, by and
among the Company, Infinity Investors Limited, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone.*****
10.14 12% Subordinated Promissory Note of the Company dated
September 24, 1997.*****
21.1 Subsidiaries of the Small Business Issuer**
23.1 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5)
23.2 Consent of Mahoney Cohen & Company, CPA, P.C.
23.3 Consent of Goldman & Murphy, L.L.P.
- ---------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed with the SEC on November 19, 1993.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on December 14, 1996.
***Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the SEC on July 15, 1996.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the SEC on September 10, 1997.
***** Incorporated by reference to the Company's Registration Statement on Form
SB-2/A filed with the SEC on December 1, 1997.
--------------------------
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement to:
(i) include any prospectus required by section 10(a)(3) of
Securities Act of 1933, as amended (the "Securities Act");
(ii) reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the high or low end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement; and
(iii) include any additional or changed material information on the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
PROVIDED HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or Section 15(d) of the Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The Company hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Company under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Securities and Exchange Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Mount Kisco, State
of New York, on March 12, 1998.
HALSTEAD ENERGY CORP.
By /s/ Claire E. Tarricone
---------------------------------
Claire E. Tarricone
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Claire E. Tarricone President and Director March 12, 1998
Claire E. Tarricone
/s/ Anthony J. Tarricone Vice President, Secretary March 12, 1998
Anthony J. Tarricone and Director
/s/ Joseph A. Tarricone Vice President, Treasurer March 12, 1998
Joseph A. Tarricone and Director
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
HALSTEAD ENERGY CORP.
----------
EXHIBITS
TO
FORM SB-2/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Articles Of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers,
Preferences, Limitations, Restrictions and Relative Rights
of series A 7.5% Cumulative Convertible Redeemable
Preferred Stock**
3.4 Certificate of Amendment and Restatement to Certificate to
Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series B
8% Cumulative Convertible Redeemable Preferred Stock,
$.001 Par Value*****
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate**
4.3 Specimen Series B Preferred Stock Certificate***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock
Option Plan****
5 Opinion of Piper & Marbury L.L.P. (contains Consent of
Counsel)*****
10.1 Agreement and Plan of Reorganization dated as of July 5,
1993 between Halstead Quinn Propane, Inc. and the Company.*
10.2 Lease Agreement between HQ Propane and ATI.*
10.5 Management Agreement by and between HQ Propane and ATI.*
10.6 Form of Employment Agreement by and between the Company
and Claire E. Tarricone.*
10.7 Form of Employment Agreement by and between the Company
and Anthony Tarricone.*
10.8 Form of Employment Agreement by and between the Company
and Joseph Tarricone.*
10.9 Promissory Note, dated August 31, 1993, of ATI in favor of
HQ Propane.*
10.10 ATI Purchase Agreements**
10.11 Agreement & Plan of Reorganization by and among Halstead
Energy Corp., Allan Cianflone and Jack Troccoli.**
10.12 Consulting and Warrant Compensation Agreement between the
Company and Boulder Financial Group.****
10.13 Restructuring Agreement, dated September 24, 1997, by and
among the Company, Infinity Investors Limited, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone.*****
10.14 12% Subordinated Promissory Note of the Company dated
September 24, 1997.*****
21.1 Subsidiaries of the Small Business Issuer**
23.1 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5)
23.2 Consent of Mahoney Cohen & Company, CPA, P.C.
23.3 Consent of Goldman & Murphy, L.L.P.
- ---------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed with the SEC on November 19, 1993.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on December 14, 1996.
***Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the SEC on July 15, 1996.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the SEC on September 10, 1997.
***** Incorporated by reference to the Company's Registration Statement on Form
SB-2/A filed with the SEC on December 1, 1997.
--------------------------
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Halstead Energy Corp.:
We consent to the inclusion in this registration statement on Form SB-2/A
(File No. 333-38031) of our report dated January 12, 1998, on our audit of the
financial statements of Halstead Energy Corp. We also consent to the reference
to our firm under the caption "Experts" in the Prospectus.
MAHONEY COHEN & COMPANY, CPA, P.C.
/s/ Mahoney Cohen Company, CPA, P.C.
New York, New York
March 12, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Halstead Energy Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
GOLDMAN AND MURPHY, LLP
/s/ Goldman and Murphy, LLP
Valley Stream, New York
February 12, 1998
