U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 (Fee Required)
For Fiscal Year Ended August 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the Transition Period ______ to ______
Commission File No. 0-25660
HALSTEAD ENERGY CORP.
(Name of small business issuer in its charter)
Nevada 87-0446395
(State or Other Jurisdiction of
(IRS Employer
Incorporation or Organization)
Identification No.)
33 Hubbells Drive
Mt. Kisco, New York 10549
(Address of Principal Executive Offices) (Zip Code)
(914) 666-3200 (Issuer's Telephone Number,
Including Area Code)
Securities registered pursuant to
Section 12(b) of the Exchange Act: None
Securities registered pursuant to
Section 12(g) of the Exchange Act Common Stock, $.001 Par Value
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. ( ) Yes (X) No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in the form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
( ) Yes (X) No
<PAGE>
The issuer's revenues for it most recent fiscal year were $18,667,132.
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of December 29, 1997 was $3,067,001.
As of December 29, 1997, the issuer had 4,523,601 shares of its Common Stock
outstanding.
<PAGE>
PART 1
ITEM 1. BUSINESS
Background
Halstead Energy Corp. (the "Company") was originally incorporated in the
State of Utah on January 15, 1986 under the name of Technical Analysis, Inc.
Effective October 8, 1990, the Company changed its corporate domicile to the
State of Nevada. On August 5, 1993 the Company acquired Halstead Quinn Propane,
Inc. ("HQ Propane") in exchange for 2,170,000 shares of the Company's Common
Stock. Simultaneous with such acquisition, the Company changed its name to
Halstead Energy Corp.
The Company's operating entities are engaged in the wholesale and/or
retail distribution of, and the provision of services relating to fuel oil,
liquid propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company; 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., a Hawthorne, New York-based retail
distributor of fuel oil and diesel fuel which was acquired by the Company in
June 1995, is being operated by a third party under the terms of a four (4) year
lease.
Recent Developments
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 5% per annum. Rockland continues to own a facility in Haverstraw, New
York which houses a 2,432 square foot building and a terminal situation on land
fronting the Hudson River. The terminal is capable of storing 2,500,000 gallons
of oil.
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire
E.Tarricone, Anthony J.Tarricone and Joseph A.Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referenced as "A. Tarricone, Inc., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. The Company is pursuing all appropriate avenues
to protect its interests in this regard. However, there can be no assurance that
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, 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'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 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.
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 in 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 Shares. Under the
terms of the option, Mandel has the option to acquire all of the shares for a
price of $2.00 per share until the 18- month anniversary of the effective date
of the registration statement relating to the above-referenced registration (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.
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 goverance
requirements, such as electing at least two independent directors. The Company
must meet the new requirements within six months of their adoption (i.e., by
February 23,1998). The Company has been notified by Nasdaq that its Common Stock
is subject to delisting due to the Company's failure to timely file its Form
10-KSB for the fiscal year ended August 31, 1997 and its Form 10-QSB for the
fiscal period ended November 30, 1997. Such delisting has been stayed pending
Nasdaq's consideration of the Company's request for continued listing, which
request is to be heard and determined by Nasdaq after a hearing on the matter
which is scheduled to occur on February 5, 1998. The Company has been informed
by Nasdaq that the Company will no longer be subject to delisting due to the
above-referenced filing delinquincies if the Company files the above-referenced
Form 10-KSB and Form 10-QSB prior to the date of the hearing. The Company
expects that it will be successful in so complying. If the Company is
unsuccessful or 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 to
sell their Common Stock in the secondary market. Delisting from The Nasdaq Small
Cap Market may also result in a decline in share price, loss of news coverage of
the Company and difficulty in obtaining subsequent financing.
Retail Propane Distribution
HQ Propane (formerly Halstead Quinn Fuel Oil Co., Inc.), based in central
Westchester County in Mt. Kisco, New York, was established in 1946 and since
1958 has been a retail distributor of liquid propane gas and propane equipment
and also provides services related thereto. ATI acquired HQ Propane in 1975 and
subsequently spun it off to its shareholders in December 1992. In July 1996, HQ
Propane acquired the customer list and certain other assets of E.F. Osborn &
Sons, a Pawling, New York-based retail propane distributor.
HQ Propane has just under 7,000 accounts. Of these accounts, approximately
80% are Westchester County residents and businesses, and the remaining 20% are
located throughout the surrounding counties of Putnam and Dutchess in New York
State.
Westchester County harbors many affluent communities whose lifestyles
create an above average demand for energy-intensive applications and, the
Company believes, are also more resistant to recessionary pressures. This is
partly exemplified by the slow but steady growth in sales revenues over the last
three years. The Company believes that, in Westchester County, HQ Propane has a
market share of approximately 18%. In terms of accounts, the Company believes
that HQ Propane is the second largest propane distributor in Westchester County.
Although propane can be used for virtually all household and business
utility applications, of HQ Propane's customers, approximately 78% use propane
for hot water heating and cooking; approximately 16% use propane for pool
heating; and approximately 6% use propane for home heating. HQ Propane has
focused its marketing efforts on hot water heating and cooking applications
because these uses are relatively constant throughout the year, thereby reducing
seasonal fluctuations, and because its gross profit margins from hot water
heating use are significantly more than that of a residential propane heating or
commercial propane account.
The Company believes that propane has distinct advantages over alternative
energy sources, including efficiency, cost and availability. These attributes
result in the retail customer realizing reduced utility bills. With an increased
marketing effort, the Company believes that HQ Propane has the opportunity to
gain a larger share of the Westchester County energy market by converting
electricity and fuel oil users to propane and by having owners of newly
constructed buildings select propane as their energy source.
HQ Propane's base of operations is centrally located at the Company's
headquarters in Mount Kisco, New York. HQ Propane also maintains an inland fuel
oil storage terminal and a 30,000 gallon propane storage tank for its own
operations. The fuel oil facility is presently leased to a major independent
fuel oil distributor.
Wholesale Distribution and Storage
HQ Terminal, owns a deep water terminal in Yonkers, New York, near the New
York City border. The five million gallon terminaling facility allows for the
wholesale distribution of fuel oil, gasoline and diesel fuel and also provides
storage facilities for other petroleum companies through warehousing agreements
known as thruputs. The Company's own product requirements are often supplied
through this facility.
The terminal facility has 11 above ground tanks that provide an aggregate
storage capacity of 5,000,000 gallons for gasoline, diesel fuel and fuel oil.
These tanks feed three gasoline racks, five oil racks and two diesel fuel racks.
The terminal has been upgraded to comply with all governmental regulations.
The terminal facility has 2.439 acres of above-ground land and an
additional 3.511 acres of land underwater. The large amount of underwater
acreage has enabled the Company to extend the dock lines out to deep water. The
Company believes that the terminal is the only terminal on the east side of the
Hudson River between Long Island Sound to the east, the Bronx, New York to the
south and Newburgh, New York to the north that has 17 feet of draft at low tide.
This provides a competitive advantage, particularly with regard to thruput
customers, because the high draft allows large seafaring vessels to dock
independent of tide schedules.
The Company believes that another competitive advantage is the terminal's
location. It is located in the most densely populated area in Westchester County
and it is the only terminal on the Hudson River south of Newburgh, New York
which distributes gasoline. All other gasoline distribution terminals are
located in the eastern part of Westchester County.
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 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".
In September 1996, the Company acquired certain assets of Dino Oil, Inc.,
a Bronx, New York-based commercial gasoline distributor. The addition of the
Company's Dino Oil division has broadened the Company's marketing region by
providing the Company with customer accounts (including various service stations
and fleet garages) located in the Bronx, Queens, Brooklyn, and Manhattan, as
well as Nassau, Suffolk and Westchester counties.
In December 1996, the Company terminated its lease of 4 of its 21 stations
to an independent third party distributor, and simultaneously therewith, entered
into a master lease with another independent third party distributor. The master
lease has an initial term of ten (10) years, and the lessee thereunder has an
option to renew such lease for an additional ten (10) year term. The lease
requires that annual rental payments be made in advance, on the first day of
each year of the lease term. The lease is a triple net lease agreement which
requires the lessee to maintain, operate, and supply all gasoline to the station
outlets. The lessee must also make the necessary capital improvements to meet
applicable environmental laws by 1998.
The Company intends to focus its efforts on changing the image of HQ
Gasoline facilities. The industry has moved away from the "mom & pop" type
operation and into high volume, automated self-service operations, with a
particular focus on convenience. Repair shop, in particular, are becoming
increasingly less desirable. Accordingly, in order to optimize potential
earnings at a site, the Company intends to follow industry trends by upgrading
approximately 12 of these facilities with state-of-the-art pumping apparatus and
canopies and, where appropriate, converting them to multiple revenue sites by
combing facilities with convenience stores, snack shops and/or car washes.
In most cases, canopies will be installed to improve lighting and provide
shelter in inclement weather. Industry experts estimate that up to a 20%
increase in volume is derived from this improvement alone. Management believes
that, in the Company's geographic region, canopies have contributed increased
revenues of between 15% and 25%. Electronic self-service pumping apparatus will
also be installed for the convenience of the public, and will afford tremendous
overhead savings to the station operator. The addition of a convenience store,
snack shop, or car wash, where applicable, will introduce new sources of revenue
and optimize overall station profitability.
The rebuilding will require expenditures that range from $20,000 to
$550,000 per facility, depending upon the individual station site. The program
is site specific, taking into consideration competition, lot size, building
dimensions, traffic count, community demographics, and area development. By
completing its rebuilding program, the Company believes it will achieve
increased cash flow from operations as a result of increased sales revenues and
rental income. In this regard, as part of the rebuilding program, management
intends to acquire certain station leaseholds from ATI at fair market value
since ATI's underlying leasehold interest extend by an average of 12 years
beyond the Company's sublease with ATI. The acquisition of these leasehold
interest will protect the Company's investment in, and long term earnings
potential, from this revenue source. See "Certain Relationships and Related
Transactions" and "Recent Developments."
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.
Fundamental Characteristics of the Company's Business.
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles. As
fuel oil, propane and gasoline are such basic necessities, variations in the
amount purchased as a result of general economic conditions are limited.
Customer Stability
HQ Propane has a relatively stable customer base due to the tendency of
homeowners to remain with their traditional distributors. In addition, a
majority of the home buyers tend to remain with the previous owner's
distributor. As a result, HQ Propane's customer base each year includes most
customers retained from the prior year or home buyers who have purchased from
such customers. Like many other companies in the industry, HQ Propane delivers
propane to each of their customers an average of approximately six times during
the year, depending upon weather conditions and historical consumption patterns.
Most of HQ Propane's customers receive their propane pursuant to an automatic
delivery system, without the customer having to make an affirmative purchase
decision each time propane is needed. In addition, HQ Propane provides home
heating equipment repair service on a seven day a week, 52 week a year basis.
Retail gasoline customers are generally brand loyal or price shoppers who
generally factor appearance, convenience, and credit cards into their decision
making process before making an affirmative decision. HQ Gasoline's ability to
market under the trademarks "Gulf" and "ATI" largely meet the criteria exercised
by customers in making their purchase decisions. However, the Company must
complete its station rebuilding program in order to ensure that the standard
which are particularly important to the motoring public, such as appearance, are
maintained.
No single customer accounts for 10% or more of the Company's consolidated
revenues.
Weather Stability
The weather patterns during the winter can have a material effect on the
Company's fuel oil related businesses. Although average temperatures over time
have varied to a very limited extent and the Company does not expect that
average temperatures will vary significantly in the future, winter temperatures
can vary significantly from one year to the next. A warmer than usual winter
should reduce the number of gallons of fuel oil 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.
Effects of Oil Price Volatility
The price of crude oil remains volatile. While this has not materially
affected the Company's performance in the past (e.g. as a retailer, the Company
has been able to add an increasing gross margin onto its wholesale costs,
whatever their level, to offset the impact of inflation, account attrition and
weather), there can be no assurance that such performance will continue. For
instance, in recent months the Company has experienced difficulties maintaining
its gross margin on its sales of gasoline product (when its cost of same has
substantially increased) due primarily to strong competition for market share.
Petroleum Supply
Two major suppliers provide the Company with its propane product
requirements. One supplier provided approximately 65%, and the other
approximately 35%, of the Company's total propane requirements for the fiscal
year ended August 31, 1997.
The Company met substantially all of its gasoline product requirements
through Gulf Oil, BP and ATI for the fiscal year ended August 31, 1997. Gulf Oil
supplied approximately 30%, and ATI provided approximately 65% of such
requirements during such period. All of the Company's fuel oil and diesel fuel
product requirements during such period were met by ATI. Upon the issuance of
its diesel motor fuel licenses from New York State, HQ Propane will assume ATI's
role in procuring the Company's petroleum product requirements. See "Certain
Relationships and Related Party Transactions" and "Business - Certain Licenses
Relating to the Company's Business."
Management believes that if the Company's supply of any of the foregoing
products was interrupted, the Company would be able to secure adequate supplies
from other sources without a material disruption in its operations. However,
there can be no assurance that adequate supplies of such petroleum products will
be readily available in the future.
Expansion
The industries in which the Company's petroleum products division compete
are highly fragmented and characterized by numerous local and national fuel oil,
gasoline, diesel fuel and propane distributors. The Company intends to expand
its operating divisions through acquisitions and aggressive sales and marketing
efforts to generate new divisions through acquisitions and aggressive sales and
marketing efforts to generate new accounts and increase consumer awareness of
the Company's products and quality.
The Company's acquisition strategy is to grow through the acquisition and
integration of additional distributors in existing and new markets. The Company
believes that many of the proprietors of businesses competitive with the
Company's operating divisions are of retirement age and may be receptive to
selling their operations. Another potential source of acquisitions are companies
that are owned by individual entrepreneurs who find expansion within the
petroleum products industry difficult, either operationally or financially, or
who have other investment opportunities.
More specifically, HQ Propane intends to acquire two types of
distributors. The first type are relatively small distributors which management
believes could easily be integrated into the Company's operations. Management
believes that such distributors could result in significant economies of scale
through the centralization of purchasing, marketing, credit, data processing and
other administrative functions of the acquired distributor. The second type
consists of larger, stand-alone businesses which could not be integrated, but
would, in all probability, be in new markets. The Company expects that
acquisitions of these businesses would provide not only attractive investment
returns, but also provide hubs for future expansion.
The Company also intends to expand HQ Gasoline by pursuing the acquisition
of single units and chains of retail service stations. Such acquisitions would
provide deeper market penetration in the Company's existing marketing area, and
provide expansion into new marketing areas. Besides the benefits derived from
the economics of scale, the Company would expect to achieve greater buying power
for its petroleum products purchases, and possibly assume additional
distributorships with various major oil companies.
Competition
The Company's business is highly competitive. In addition to competition
from alternative energy sources, HQ Propane competes with propane distributors
offering a broad range of services and prices, from full service distributors
similar to the HQ Propane, to those offering delivery only. Competition with
other companies in the propane industry is based primarily on customer service
and price. Long-standing customer relationships are typical in the propane
industry. Many companies in the industry, including HQ Propane, deliver propane
to their customers based upon weather conditions and historical consumption
patterns without the customer having to make an affirmative purchase decision
each time propane is needed. In addition, most companies, including HQ Propane,
provide equipment repair service on a 24-hour a day basis, which tends to build
customer loyalty. As a result, HQ Propane may experience difficulty in acquiring
new retail customers due to existing relationships between potential customers
and other propane distributors. As of the date of this report, fuel oil and
propane are less expensive sources of energy than electricity. Natural gas,
which is currently less expensive than propane, is not readily available in
Upper Westchester and Putnam Counties where all of the Company's propane
operations are conducted. Accordingly, the Company believes that an
insignificant number of its customers will switch from fuel oil or propane to
alternative energy sources at this time.
HQ Gasoline's business operations are sensitive to price and brand
competition. In order to compete with branded competitors who benefit from name
recognition and customer loyalty, the "ATI" branded service stations may
maintain a lower price than these competitors. The Gulf branded stations are not
as sensitive to price and therefore, typically maintain a price consistent with
other brand name competitors.
Certain Licenses Relating to the Company's Business
HQ Propane's principal terminal facility is currently operated by ATI
pending the approval of HQ Propane's application with the State of New York for
a terminal operator's license and the applications of HQ Propane and White
Plains Fuel, Inc. for their respective diesel motor fuel licenses. 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
fuel licenses) 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 licenses. See
"Certain Relationships and Related Transactions."
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). The Company's
principal terminal facility is currently being operated by ATI pending the
approval of the Company's application with the State of New York for a terminal
operator's and diesel motor fuel license. There can be no assurance about the
prospect of obtaining the approval of such licenses. The Company has been
advised by counsel that pending the conclusion of ATI's bankruptcy proceeding,
ATI will continue to maintain such licenses and will be able to continue
operating the Company's terminal and diesel motor fuel businesses. However,
there can be no assurance that at the conclusion of such proceeding, if the
result were a liquidation of ATI (and therefore, a termination of such
licenses), that the Company would by that time have received its own licenses or
would have been able to contract with another entity to operate such businesses.
The occurrence of any of these circumstances could have a material and adverse
effect on these businesses and on the Company.
Environmental/Governmental Regulation
The Company's operating divisions are subject to various governmental
regulations. New regulations regarding underground storage tanks ("UST's"),
including those at service stations, have been issued by the United States
Environmental Protection Agency (the "EPA"). The regulations cover the design,
construction and installation of new UST systems, and require that existing
systems meet certain EPA standards. The regulations require that owner/operators
of UST systems demonstrate financial responsibility for the cleanup of spills or
releases, and/or to compensate third parties for any resulting damages. The
Company has recently upgraded its HQ Terminal Facility and its other storage
facilities to conform with applicable law and the Company has an ongoing program
for maintenance, testing, retrofitting, or replacement of UST's. In addition,
the Company maintains Pollution Liability Coverage on 11 of the 22 Gasoline
Stations presently leased by the Company. (Three of the 25 stations operated by
the Company are Supply Contracts only, and therefore management does not believe
that the Company would be subject to any environmental exposures.) In addition,
8 stations are leased to a third party distributor to which, under the terms of
said lease, is responsible for any environmental liability as of January 1,
1997. The Alexander Street Terminal is also insured under a separate Pollution
Legal Liability Policy.
The Company believes that its operating divisions are in compliance with
all applicable regulatory requirements and have all governmental licenses and
permits (other than those described above in "BUSINESS - Certain Licenses
Relating to the Company's Business) required for their business operations,
except where the failure to be in compliance or maintain such licenses and
permits would not have a material adverse effect on the Company's business.
Management knows of no pending or threatened proceedings or investigations under
Federal or State Environmental Laws which would have a material adverse effect
on the Company's business. Management cannot predict the impact on the Company
and its operating divisions of new governmental regulations and requirements.
The Company will have to invest an estimated minimum of $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 January 19, 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.
ITEM 2. PROPERTIES
The Company's principal place of business is located at 33 Hubbells Drive,
Mount Kisco, New York, where HQ Propane owns a block and brick building of
approximately 6,000 square feet on 1.03 acres.
The Company also owns the following facilities:
1. The HQ Terminal facility located in Yonkers, New York, which facility
is situated on 5.95 acres of land, with approximately 2.44 acres above
water and 3.51 acres are underwater. Four block and brick buildings of
3,000 square feet, 234 square feet, 225 square feet and 450 square feet,
respectively are situated on the property. The terminal also has 11
storage tanks with capacities ranging from 140,000 to 1,000,000 gallons,
and an aggregate capacity of 5,083,000 gallons; a 300 foot dock; three
gasoline racks; five oil racks; and two diesel fuel racks.
2. A terminal facility located in Haverstraw, New York, which facility is
situated on 1.30 acres of land. The property houses one building of 2,432
square feet. The terminal also has 14 storage tanks with capacities
ranging from 15,652 gallons to 508,000 gallons, and an aggregate capacity
of 2,509,545 gallons; and one loading rack.
3. A gasoline station facility in Hartsdale, New York which facility is
situated on 16,700 square feet of land. The property houses a one story
concrete building of 1,827 square feet with three bays and office. The
station is also improved with two islands, each with two pumps.
As of August 31, 1997, HQ leased the following stations from ATI (See
"Certain Relationships and Related Transactions"):
Station Name and # Address
(1) Elmsford ATI #203 153-162 E. Main Street
Elmsford, New York 10523
(2) Wingdale ATI #405 Route 22 - Box 684
Wingdale, New York 12594
(3) Salt Point #414 Route 44 & 82
Salt Point, New York 12578
(4) Congers ATI #112 21 South Route 303
Congers, New York 10920
(5) Mt. Vernon Lincoln Ave. #205 25 W. Lincoln Avenue
Mt. Vernon, New York 10550
(6) Lakeside P.P. #219 6 N. Lakeside Blvd.
Mahopac, New York 10541
(7) Raceway ATI #221 535 Central Park Avenue
Yonkers, New York 10704
(8) West Hurley #315 1105 Route 28
Kingston, New York 12401
(9) Pine Plains #411 Route 199 - Box 421
Pine Plains, New York 12567
Five of the above leases expire on August 31, 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 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 $88,000 in the
fiscal year ending August 31, 2018.
ITEM 3. LEGAL PROCEEDINGS
In January 1994, HQ Propane was served with a complaint dated January 5,
1994 relating to an action entitled RAP Holding Corp. v. Halstead Quinn Fuel Co.
Inc., and A. Tarricone, Inc. in the Supreme Court of New York, County of
Westchester. The plaintiff is the owner of property in Westchester County, New
York which was leased by HQ Propane from June 1, 1979 to May 31, 1989. The
complaint alleges that, during the term of the lease, the Company discharged
petroleum products onto the property and seeks $106,173 damages for the costs of
clean up and removal of the contaminated soil and an additional $300,000 for
diminution of value. The Company has retained outside counsel and is vigorously
defending itself in this lawsuit. As of January 19, 1998, there has been no
further action in this case.
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of
the Company's operating subsidiaries and divisions(ATI is wholly-owned by Claire
E.Tarricone, Anthony J.Tarricone and Joseph A.Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referenced as "A. Tarricone, Inc., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. The Company is pursuing all appropriate avenues
to protect its interests in this regard. However, there can be no assurance that
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, 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'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 will
be able to continue operating the Company's terminal and diesel motor fuel
businesses. However, there can be no assurance that at the conclusion of such
proceeding, if the result were a liquidation of ATI (and therefore, a
termination of such licenses), that the Company would by that time have received
its own licenses or would have been able to contract with another entity to
operate such businesses. The occurrence of any of these circumstances could have
a material and adverse effect on these businesses and on the Company.
The Company is not a party to any other material litigation and is not
aware of any threatened litigation that would have a material adverse effect on
its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
On March 13, 1995, the Company's Common Stock became listed on the NASDAQ
Small Cap Stock Market under the symbol "HSNR". Prior to that date, the
Company's Common Stock was listed in the Nasdaq Bulletin Board under the symbol
"HSNR."
The following table sets forth the range of high and low closing bid
prices for the Company's Common Stock from March 13, 1995 through August 31,
1997, as reported by NASDAQ, which bid prices reflect inter-dealer prices,
without retail mark-ups, markdowns or commissions and many not represent actual
transactions.
Bid Prices
High Low
Fiscal 1995
Third Quarter (from March 13) 5 7/8 3 1/8
Fourth Quarter.................. 5 7/8 3 1/8
Fiscal 1996
First Quarter................... 6 19/32 5
Second Quarter................... 6 31/64 4 5/16
Third Quarter.................... 7 4 5/16
Fourth Quarter.................. 6 1 5/32
Fiscal 1997
First Quarter 1 5/16 3/64
Second Quarter 9/16 5/64
Third Quarter 1 5/64 9/32
Fourth Quarter 1 5/16
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 have not been broken down.
The Company does not pay dividends on its Common Stock. It is management's
intention not to declare or pay dividends on the Company's Commons Stock, but to
retain earnings, if any, for the operation and expansion of the Company's
business. In any event, until such time as all accrued dividends on the
Company's Series A Preferred Stock and Series B Preferred Stock have been paid,
the Company is restricted, pursuant to the instruments/documents authorizing the
issuance of such preferred stock, from paying any dividends on its Common Stock.
Any dividends that may be declared in the future will be determined by the Board
of Directors based on the Company's financial condition, results of operations,
market conditions and other factors that the Board deems relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results of Operations
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 yeard 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
thruput 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 atributable to the company reporting a net loss.
Liquidity and Capital Resources
Management believes that the Company's diversified business operations and
continued growth will result in increased sales revenues and gross profits
(subject, of course, to the effects of price increases which are not
sufficiently passed through to the customers as referenced below) and result in
greater amounts of working capital being generated from operations. However, the
Company's acquisition of the customer list and certain other assets of Dino Oil
has significantly increased the Company's working capital requirements due to
increased gasoline purchase requirements, increases in accounts receivable, and
increased operating expenses (including salary expense). Additionally, rises in
the cost of petroleum products by as much as 50%, as well as expenditures
relating to the rebuilding of certain of the Company's gasoline stations and
certain other capital expenditures, have further increased the Company's working
capital requirements and have adversely affected the Company's ability to meet
the same. Though management has recently seen the cost of petroleum products
declining, there can be no assurance as to the extent to which this will
continue. As a result, without additional financing, there can be no assurance
that the Company will be able to meet its cash requirements for the next twelve
months. If it cannot do so, the Company will be forced to scale back its
operations. The Company will continue to pursue additional financing from a
lending facility or an offering of its securities to enable the Company to meet
such cash requirements and to accomplish growth through acquisition which the
Company is actively pursuing. There can be no assurance that the financing will
occur or that the Company can find a suitable acquisition in the foreseeable
future.
HQ Gasoline will have to invest approximately $325,000 over the next
eleven months in order to meet Federal EPA and State Regulations for underground
storage tanks by December 1998. Through August 31, 1997, the mandatory
requirements for six locations of the Company's 25 locations have been
completed.
In addition the Company plans to rebuild 10 of 25 gasoline stations which
will generally require $20,000 to $550,000 per location for an aggregate of
$1,600,000 (inclusive of the environmental upgrades referenced above). The
rebuilds will be phased in over two years in order to minimize volume losses due
to "downtime" encountered while each station location is under construction.
Capital expenditures for the 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 an exchange of stock valued at $1,008,128. The stockholders
of White Plains Fuel, Inc. received 168,020 shares of newly created Series A -
7.5% Cumulative Convertible Redeemable preferred Stock of the Company (the
"Series A Preferred Stock"). On various dates throughout the 1997 and 1996
fiscal year, the Company declared dividends of the Series A Preferred for $.45
per share totaling $75,609 in each such year. The fuel oil business of White
Plains Fuel, Inc. is conducted by a third party operator under the terms of a
four (4) year lease under which HQ Propane receives annual rental income of
$288,000.
On September 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 a fair market value of $166,226. This amount was financed through
a capital lease.
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire
E.Tarricone, Anthony J.Tarricone and Joseph A.Tarricone, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referenced as "A. Tarricone, Inc., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. The Company is pursuing all appropriate avenues
to protect its interests in this regard. However, there can be no assurance that
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, 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.
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 $67,968 as deferred
income. Simultaneously, the Company terminated the previous third party
agreement for $192,907 which resulted in a note receivable and additional rental
income of approximately $70,400.
On May 16, 1997, the Company entered into an agreement for the sale of the
retail fuel oil customer list of Rockland to an independent third party
distributor. The terms of the sale were $200,000 at closing, $200,000 on the
first anniversary, and $127,000 on the second anniversary, with interest on
outstanding amounts at a rate of 6% per annum. The Company is recording this
sale on an installment basis and has recognized a gain of $175,667 in the year
ended August 31, 1997 financial statements.
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 (for the year ended August 31, 1997, 85,000 of these
warrants were exercised), 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 and until
June 1, 1998, at which time minimum will increase to 20% per annum. The credit
facility is secured by a security interest in all of the Company's accounts
receivables, general intangibles, contract rights and inventory, as well as by
the guarantees of Claire E. Tarricone, Joseph A. Tarricone and Anthony J.
Tarricone. As of August 31,1997, the outstanding principal balance was $715,000.
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 in 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 Shares. Under the
terms of the option, Mandel has the option to acquire all of the shares for a
price of $2.00 per share until the 18- month anniversary of the effective date
of the registration statement relating to the above-referenced registration (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.
The Company had 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.
There was no significant impact on the Company's operations as a result of
inflation during fiscal 1995, fiscal 1996, and fiscal 1997.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during fiscal 1996 and fiscal 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 think it means the year 1900 and the operation attempting to be
performed may fail or crash thus resulting in the potential interference in the
operations of the Company's business. The Company has formulated plans to
safeguard against the Year 2000 conversion problem. The cost of the
implementation of the Year 2000 safeguards will not be material to the Company.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
thereto, together with the independent auditors' report, are presented beginning
on page F-2.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this item was reported by the Company in its
Current Reports on Form 8-K filed with the SEC on December 1, 1997 and December
9, 1997.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
MANAGEMENT
The names and ages of the directors and executive officers of the Company are as
follows:
Name Age Position with the Company
- ---- --- -------------------------
Claire E. Tarricone 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
Claire E. Tarricone has been the President and a Director of
the Company since July 27, 1993. Ms. Tarricone has also served as
the President and a Director of HQ Propane and Rockland Fuel since
1992. In June 1995 Ms. Tarricone also became Director of White
Plains Fuel, Inc. From 1991 until 1992, Ms. Tarricone served as Vice
President/General Manager of HQ Propane in charge of its operating
divisions. Ms. Tarricone has been President and Director of ATI
since November 1992, and Vice President for at least three years
prior thereto.
Anthony J. Tarricone has been Vice President, Secretary and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,
Secretary and a Director of HQ Propane and Rockland Fuel since 1992. From 1991
until the present, Mr. Tarricone has served as ATI's gasoline division manager
and has served in similar capacity with HQ Gasoline since September 1993.
Joseph A. Tarricone has been Vice President,Treasurer and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,Treasurer
and a Director of HQ Propane and Rockland Fuel since November 1992. From 1990
until 1992, Mr. Tarricone was sales manager for HQ Propane and ATI, responsible
for the development of commercial gasoline and diesel fuel sales for HQ Terminal
and ATI. From 1988 to 1993, Mr. Tarricone served as President of Energy
Technology Services, Inc., an energy use and planning consulting firm.
Edwin Goldwasser has been a Director of the Company since July 27, 1993.
From April 1992 to the present, Mr. Goldwasser has served as a consultant to the
Company. For at least the five years prior to that, Mr. Goldwasser served as
Vice President of Administration and Finance in charge of all financial,
accounting and legal affairs for ATI.
Claire Tarricone, Anthony Tarricone and Joseph Tarricone are
siblings.
All Directors hold office until the next annual meeting of the
shareholders and the election and qualification of their successors. Directors
currently receive no compensation for serving on the Board of Directors. No
Director received any cash compensation for serving as a Director of the Company
during the past fiscal year. Officers of the Company are appointed annually by
the Board of Directors.
As permitted under Nevada law, the Company's Articles of Incorporation
eliminates the personal liability of the Directors to the Company or any of its
shareholders for damages for breaches of their fiduciary duty as Directors. As a
result of such provisions, shareholders may be unable to recover damages against
Directors for actions taken by them which constitute negligence or gross
negligence or that are in violation of their fiduciary duty. The inclusion of
this provision in the Company's Articles of Incorporation may reduce the
likelihood of derivative litigation against directors and other types of
shareholder litigation.
The directors and executive officers of the Company and the owners of more
than ten percent (10%) of the Company's outstanding Common Stock are required to
file reports with the Securities and Exchange Commission and with NASDAQ
reporting changes in the number of shares of the Company's Common Stock
beneficially owned by them. Such persons are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms
furnished to the Company and written representations from the executive officers
and directors, the Company believes that all Section 16(a) filing requirements
were met during fiscal 1996 and 1997, except that Claire Tarricone, Anthony
Tarricone and Joseph Tarricone filed one report after the applicable filing
deadline.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows, as to the Chief Executive Officer and each of
the other executive officers whose salary plus bonus exceeded $100,000,
information concerning compensation paid for service to the Company in all
capacities during the fiscal year ended August 31, 1997, as well as total
compensation paid to each such individual for the Company's two previous fiscal
years (to the extent that such person was the Chief Executive officers and/or an
executive officer, as the case may be, during any part of such fiscal year):
Summary Compensation Table
--------------------------
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Principal Fiscal Other Annual Restricted Options
Position (1) Year Salary/Bonus Compensation(2) Stock Awards SARs(#)
---- ------------ --------------- ----------- -------
Claire E. Tarricone 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 amount payable under Ms. Tarricone's employment agreement
with the Company for certain insurance premiums and for taxes resulting
from such additional compensation.
(3) Reflects the grant of options under the Company's 1996 Stock Incentive
Plan, which options are not intended to qualify as "incentive stock
options" under Section 422 of the United States Internal Revenue Code of
1986, as amended and which options are exercisable for a price of $4.50
per share of the company's common stock, par value $.001 per share. The
100,000 options were canceled on November 14, 1996 in favor of the grant
of 400,000 new options to Ms. Tarricone, which options (a) were not
granted under the aforesaid plan, (b) are not intended to qualify as
"incentive stock options" under Section 422 of the United States Internal
Revenue Code of 1986, as amended, and (c) are exercisable for a price of
$.3125 per share of the Company's common stock, par value $.001 per share.
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.
The Board of Directors of the Company voted to adopt the Company's 1996
Stock Incentive Plan (the "Plan") on January 10, 1996, subject to shareholder
approval. The shareholders of the Company approved of the Plan on April 22,
1996. The Plan was amended by the Board of Directors effective December 1,1996.
The Plan gives the Company the flexibility to enable it to obtain and retain the
continued services of the personnel necessary for its growth and development.
The Plan provides, among other things, for the granting of options to acquire up
to 650,000 shares of the Company's common stock, $.001 per value per share. Such
options may qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended, or as non-qualified options.
The Company does not presently maintain any other stock option or other
stock or long-term compensatory plan for its employees.
Employee Agreements
The Company has entered into five year Employment Agreements with each of
Claire E. Tarricone, Anthony Tarricone and Joseph Tarricone. The Employment
Agreements automatically extend for an additional one year at the end of each
year of the term unless either party notifies the other of his, her or its
election not to so further extend the term. The employment contracts which
became effective on August 5, 1993, provide for annual salaries to such
individuals of (i) $100,000, $75,000 and $75,000 in years one and two,
respectively, (ii) $125,000, $100,000 and $100,000 in years three and four,
respectively, (iii) $150,000 , $125,000 and $125,000 in year five, respectively.
Each of the Tarricone's has waived her or his rights (as the case may be) to any
unpaid annual salary (in excess of $54,600, $60,000 and $60,000, respectively)
attributable to the fiscal years ending August 31, 1994, August 31, 1995, August
31, 1996, August 31, 1997 and August 31, 1998. After the fifth year the
Employment Agreements provide that the base salary of such individuals will
increase by an amount equal to the greater of 15% or the annual percentage
increase if any, in the Consumer Price Index distributed by the United States
Department of Labor. Under such Employment Agreements, each of the foregoing
persons must devote substantially all of his or her time to the Company;
provided, however, that such person is entitled to be engaged as an employee by
ATI. The Employment Agreements are terminated by the Company on 60 days notice
for "cause" or if any of the Tarricone's have become so incapacitated that they
are unable to resume,within the ensuing 540 days, their respective employment
with the Company by reasons of physical or mental illness or injury, or is any
shall not have substantially performed their duties for 540 consecutive days by
reason of any such physical or mental illness.
Each of the Tarricone's will be entitled to terminate his or her
employment and receive a severance payment equal to 2.99 times his or her base
salary at the time of termination upon (i) the acquisition of securities of the
Company representing 50% or more of the combined voting power of the Company's
then outstanding securities in a transaction to which any of the Tarricone's
does not consent. (ii) the future disposition by the Company of all or
substantially all of its business and/or assets in a transaction to which any of
the Tarricone's does not consent, (iii) the occurrence of any circumstance
which, in the reasonable judgment of any of the Tarricone's has the effect of
significantly reducing their duties or authority, (iv) the breach by the Company
of its material obligations under the Employment Agreement or (v) the
termination of the Employment Agreement by the Company for any reason other than
for cause or by mutual agreement of the Company and any of the Tarricone's.
Additionally, upon termination, each of the Tarricone's would receive (a) the
estimated amount which would have been payable to each pursuant to any bonus
pool established by the Company for the fiscal year during which such
termination occurred; (b) health, accident, life and disability insurance for
the longer of one (10) year or the balance of the Employment Agreement; and (c)
immediate rights to exercise any stock options granted, regardless of whether
such options were exercisable at the time of termination.
Each of the Employee Agreements contains a covenant not to compete with
the Company or solicit its customers or employees for a period of one (1) year
after the employment of any of the Tarricone's is terminated, provided that such
person is entitled to be engaged as an employee by ATI.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Principal Stockholders
The following table sets forth information regarding ownership of the
Company's voting securities as of October 5, 1997 by (a) each person known by
the Company to beneficially own more than five percent (5%0 of any class of the
Company's voting securities, (b) each Director of the Company and (c) all
Directors and Officers of the Company as a group. Except as otherwise indicated,
the named person has sole voting and investment power with respect to such
person's shares.
Name and Address of Title of No.of Shares Percentage of General
Beneficial Owner Class Owned Class Owned (1) Voting Power
- ------------------ -------- ------------ --------------- ------------
Claire E. Tarricone Common Stock 1,221,609(3) 23.85%(3) 23.09%(3)
33 Hubbells Drive
Mt. Kisco, NY 10549
Anthony J. Tarricone Common Stock 1,221,608(4) 24.33%(4) 23.54%(4)
33 Hubbells Drive
Mt. Kisco, NY 10549
Joseph A.Tarricone Common Stock 1,221,608(5) 24.33%(5) 23.54%(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 Troccolie 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% 40.33%(6)
42 Virginia Lane Cumulative
Thornwood, NY 10549 Convertible
Redeemable
Preferred Stock
Elizabeth R. Mandel Common Stock 2,170,488 32.42%(7) 31.63%(7)
885 Araphoe Avenue
Boulder, CO 80302
Laurence Hughes Common Stock 420,000 8.854%(8) 8.851%(8)
49 Mountain Road
Pleasantville, NY 10570
Edwin Goldwasser Common Stock -0- (9) (9)
7616 Mansfield Hollow Drive
Delray Beach, Florida 33446
All Executive Officers and
Directors as a group(4 persons) 3,308,275 57.42% 55.79%
(1) Based upon 4,523,601 shares of Common Stock outstanding as of December
29, 1997.
(2) Based on 4,523,601 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 Shares from Infinity
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
42.18% of the outstanding Common Stock) were owned of record by Cede & Co., a
nominee of the Depository Trust Company. The Company has been advised by each of
the firms which Cede & Co. indicates own more than 5% of the Common Stock that,
except as set forth above, as of the most recent practical date it did not hold
more than 5% of the Company's outstanding voting securities for any single
person or, to its knowledge, any group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 1992, ATI distributed all of the capital stock of HQ
Propane to its sole shareholders Claire E. Tarricone, Anthony Tarricone and
Joseph Tarricone. Simultaneously with the distribution, ATI transferred the
assets of the HQ Terminal division and all of the outstanding capital stock of
Rockland to HQ Propane in partial satisfaction of ATI's indebtedness to HQ
Propane of $4,200,000 previously incurred by ATI in order to provide certain
capital improvements and additional working capital. The appraised fair market
value of the assets transferred by ATI to HQ Propane was $2,200,000. However,
the transaction was recorded at ATI's book value.
ATI's indebtedness to the Company is evidenced by a 6% Promissory Note,
dated August 31, 1993, with accrued interest and principal due on August 31,
1998 (the "ATI Note"), the balance of which aggregated to $3,877,563 on August
31, 1997. On February 28, 1995 and July 31, 1995, ATI granted/transferred 8
station leaseholds and 1 fee property having an appraised fair market value of
$5,760,000 and 2 station leaseholds and 2 twenty year station leasehold
extensions for $985,000 respectively as partial satisfaction of the ATI note.
The fee property was granted/transferred to the company subject to two mortgages
payable in the amounts of $140,999 and $496,177. A former director of one of the
entities holding a mortgage, Don Guarnieri, was formerly a director of the
Company. On November 30, 1995 and March 22, 1996, ATI granted/transferred 2
station leaseholds having an appraised fair market value of $1,365,000 in
partial satisfaction of the ATI Note. On November 29, 1996 and February 28,
1997, ATI granted/transferred 4 additional leaseholds having an appraised fair
market value of $690,000 in partial satisfaction of the ATI Note.
See "Risk Factors -- 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, the Company's directors
and principal executive officers), filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referenced as "A. Tarricone, Inc., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. The Company is pursuing all appropriate avenues
to protect its interests in this regard. However, there can be no assurance that
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, 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.
In December 1992, HQ Propane entered into a management agreement with ATI
pursuant to which ATI furnishes clerical, administrative, accounting, payroll
and insurance services to HQ Propane. ATI receives a fee of $30,000 per month
for its services. The management agreement expires on August 31, 1998. Further
HQ Propane entered into agreements with ATI under which it leased the 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. 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. The average closing bid price is calculated based on the average of the
closing bid prices of the Company's Common Stock as reported by the NASDAQ Small
Cap stock market for the five trading days immediately preceding the date of the
exercise of the warrant. The warrants provide that 59,425 were immediately
vested on March 5, 1996, an additional 59,425 vested on March 5, 1997, and the
balance become vested in threee 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 $.01 per gallon for
gasoline station sales.
HQ Propane cannot operate its principal terminal facility until such time
as the pending applications for a terminal operator's license and diesel license
from the State of New York have been approved. Accordingly, ATI has continued to
operate the terminal facility on behalf of HQ Propane. Upon the issuance of such
licenses, HQ Propane will assume operations of its facilities directly. ATI also
supplies the Company's operating divisions with fuel oil and diesel fuel, and
previously supplied the Company with gasoline, at ATI's cost plus one quarter of
one cent ($.0025) per gallon purchased, which aggregated $51,112 during fiscal
year ended August 31, 1994; $42,494 during 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 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 shareholders are required to purchase the shares of
the Company owned by the deceased or disabled shareholder for a price equal to
the fair market value of such shares. Each of the Tarricone's holds a $3,000,000
insurance policy on the life of the others to partially fund the buyout of the
shares upon death. In addition, the Tarricone's have $1,000,000 of disability
buyout insurance which will fund the buyout of such shares in the event of
permanent disability. In the event that the proceeds of such insurance policies
are insufficient to pay the full price for such shares, the balance of the
purchase price for the shares will be paid over a ten year period.
On August 30, 1996, Claire Tarricone loaned to the Company $80,000, with
interest at 8% per annum, payable demand at any time on or after September 1,
1998. At various times since then, certain related parties have loaned to the
Company an aggregate of $359,280 non interest bearing, payable on demand at
anytime on or after September 1, 1998.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Halstead Energy Corp. and Subsidiaries
Independent Auditors'Report...............................F-2 - F-3
Consolidated Financial Statements:
Consolidated Balance Sheet as of
August 31, 1997....................................F-4 - F-5
Consolidated Statements of Operations for
the years ended August 31, 1997 and
1996...............................................F-6
Consolidated Statements of Stockholders'
Equity for the years ended August 31,
1997 and 1996......................................F-7
Consolidated Statements of Cash Flows for
the years ended August 31, 1997 and
1996...............................................F-8
Notes to the Consolidated Financial
Statements.........................................F-9 - F-18
F-1
<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-2
<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-3
<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-4
<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
($1,008,120 aggregate liquidation preference)(Note 12) 168
Paid-In Capital:Preferred Stock ..................... 1,064,001
-----------
1,064,169
===========
COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 11)
STOCKHOLDERS' EQUITY
Prefeferred Stock,$.001 Par Value,
580,646 Shares Authorized Series B
8.0% Cumulative Convertible 567,085
Shares Issued and Outstanding
($4,394,909 aggregate iquidation
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-5
<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-6
<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
Issuane 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
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-7
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YearEnded
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 Curent 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)
Repaymet 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'sLoan................ (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
Equivilents................................. (1,998,179) 2,061,474
Cash and Cash Equivelents at Beginning of Year 2,061,474 0
Cash and Cash Equivelents 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
---------- -----------
</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-8
<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-9
(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 sttement 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 receivables are collectible over extended periods of time and
collectibility is uncertain, profit is recognized under the installment
method as receivables are 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-10
2. Major Vendors
The Company purchases a majority of its gasoline and oil for its
operations from five vendors (including 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 companies maintain their 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-11
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 Laws.Such advances are
secured by a first lien of 50% of all of the ATI's post-petition assets and
a second lien on the balance of ATI's post petition assets.In addition, the
Company reimburses ATI, under a management agreement 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-12
(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, 1997.
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-14
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 fairvalue 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-15
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 their respective diesel motor fuel licenses.
Management believes the Company has substantially completed all steps
necessary to receive such licenses. However, these licenses have not yet
been granted. Management is awaiting approval of these licenses, although
there can be no assurances in this regard.
(C) Litigation
The Company has pending certain legal actions and claims incurred in the
normal course of business and is actively pursuing the defense thereof. In
the opinion of management these actions and claims are either without merit
or are covered by insurance and will not have a material adverse effect on
the Company's financial position.
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 Preferred Stock bears a cumulative cash dividend rate of $0.45 per
annum, payable quarterly, when, and if declared by the Board of
Directors of the Company. The Preferred Stock becomes convertible
after June 8, 1998 into shares of Common Stock at a conversion rate of
one share of Common Stock for each share of Preferred Stock subject to
adjustment in certain events.
The Preferred Stock is redeemable at the option of the Company, in
whole or in part, at any time at a redemption price of $6.00 per
share, plus accrued and unpaid dividends.
Holders of Preferred Stock may request to have their shares redeemed
by the Company at $6.00 per share at any time commencing on June 8,
2000 and ending June 7, 2004.
The Company shall not be required to redeem from any holder during any
twelve (12) month period a number of shares of Preferred Stock greater
than twenty percent (20%) of the shares of Preferred Stock then held
by the applicable holder and the Company shall not be required to
redeem shares of Preferred Stock from any holder more than once during
any twelve (12) month period.
Each share of Preferred Stock shall entitle its holder to a number of
votes equal to the number of shares of Common Stock (including
fractional shares) that such share would be converted into,if it were
so converted, as of the close of business on the day immediately prior
to the date of such vote, and with respect to such votes, a holder of
shares of Preferred Stock shall have full voting rights and powers
equal to the voting rights and powers of a holder of shares of Common
Stock, and shall be entitled to a notice of any stockholders' meeting
in accordance with the Bylaws of the Company and shall be entitled to
vote with holders of Common Stock together as a single class.
F-16
C) The Company has issued Series B, 8.0% cumulative, convertible, 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 Preferred Stock bears a cumulative cash dividend rate of $0.62 per
annum, payable quarterly, when, as and if declared by the
Board of Directors of the Company. The 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 of
warrants to a related party to purchase common stock at the lesser of $4.30
or 60% discount off the market price on the exercise date. The fair market
value of the underlying common shares 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 15A. 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-17
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 (the "Restructuring Agreement"). Under the
terms of the Restructuring Agreement, the Preferred Series B Stockholders
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 balance of the shares of 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. The Company also agreed to register the shares of Common Stock of
the Company to which this Restructuring Agreement relates.
(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-18
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series A 7.5%
Cumulative Convertible Redeemable Preferred Stock.**
3.4 Certificate of Amendment and Restatement to Certificate to Set Forth
Designations, Voting Powers, Preferences, Limitations, Restrictions and
Relative Rights of Series B 8% Cumulative Convertible Redeemable Preferred
Stock, $.001 Par Value.*****
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate.**
4.3 Specimen Series B Preferred Stock Certificate.***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock Option Plan. ****
10.1 Agreement and Plan of Reorganization dated as of July 5, 1993 between
Halstead Quinn Propane, Inc. and the Company.*
10.2 Lease Agreement between HQ Propane and ATI.*
10.3 Management Agreement by and between HQ Propane and ATI.*
10.4 Form of Employment Agreement by and between the Company and Claire E.
Tarricone.*
10.5 Form of Employment Agreement by and between the Company and Anthony
Tarricone.*
10.6 Form of Employment Agreement by and between the Company and Joseph
Tarricone.*
10.7 Promissory Note, dated August 31, 1993, of ATI in favor of HQ Propane.*
10.8 ATI Purchase Agreements.**
10.9 Agreement and Plan of Reorganization by and among Halstead Energy
Corp., Allan Cianflone and Jack Troccoli.**
10.10 Consulting and Warrant Compensation Agreement between the Company
and Boulder Financial Group. ****
10.11 Restructuring Agreement, dated September 24, 1997, by and among the
Company, Infinity Investors Limited, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A.Tarricone. *****
10.12 12% Subordinated Promissory Note of the Company dated September 24,
1997.*****
21.1 Subsidiaries of the Small Business Issuer.**
---------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed with the SEC on November 19, 1993.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the SEC on December 14, 1996.
*** Incorporated by reference to the Company Quarterly Report on Form 10-QSB
filed with the SEC on July 15, 1996.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the SEC on September 10, 1997.
***** Incorporated by reference to the Company's Registration on Form SB-21/A
filed with the SEC on December 1, 1997.
(b) Reports on Form8-K - None
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: January, Halstead Energy Corp.
By: s/s Claire E. Tarricone
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
PRINCIPAL EXECUTIVE
OFFICER:
/s/ Claire E. Tarricone President February 2, 1998
Claire E. Tarricone
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER:
/s/ Joseph A. Tarricone Vice President February 2, 1998
Joseph A. Tarricone and Treasurer
DIRECTORS:
/s/ Claire E. Tarricone Director February 2, 1998
Claire E. Tarricone
/s/ Anthony J. Tarricone Director February 2, 1998
Anthony J. Tarricone
/s/ Joseph A. Tarricone Director February 2, 1998
Joseph A. Tarricone
Edwin Goldwasser Director February 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-1-1996
<PERIOD-END> AUG-31-1996
<CASH> 63,295
<SECURITIES> 0
<RECEIVABLES> 1,018,164
<ALLOWANCES> 110,000
<INVENTORY> 168,930
<CURRENT-ASSETS> 2,750,360
<PP&E> 12,173,547
<DEPRECIATION> 1,207,674
<TOTAL-ASSETS> 17,081,310
<CURRENT-LIABILITIES> 3,001,377
<BONDS> 3,561,858
1,064,069
3,770,750
<COMMON> 5,777,134
<OTHER-SE> (973,978)
<TOTAL-LIABILITY-AND-EQUITY> 17,081,310
<SALES> 18,667,132
<TOTAL-REVENUES> 19,465,110
<CGS> 14,677,380
<TOTAL-COSTS> 25,174,672
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 407,969
<INCOME-PRETAX> (6,117,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,829,356)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,117,531)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
