FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number 1-6537-3
EMPIRE GAS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MISSOURI 43-1494323
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 303, 1700 S. Jefferson Street, Lebanon, Missouri 65536
(Address of Principal Executive Offices and Zip Code)
(417) 532-3103
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 _____
Number of Shares of outstanding common stock (one class only) as of April 30,
1996 was 1,579,225.
PART I - - FINANCIAL INFORMATION
Item 1. Financial Statements
EMPIRE GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Per Share Amounts)
March 31, 1996 June 30,
(Unaudited) 1995
-------------- --------
Assets
------
Current Assets
Cash $ 1,441 $ 821
Trade receivables - Net 11,269 4,571
Inventories 6,048 5,686
Prepaid Expense 732 521
Refundable Income Tax 1,567
Deferred Income Taxes 850 1,350
---------- -----------
Total Current Assets 20,340 14,516
---------- -----------
Property, Plant and Equipment 100,530 98,217
Less Accumulated Depreciation 29,383 27,111
---------- -----------
Fixed Assets - Net 71,147 71,106
---------- -----------
Other Assets
Debt Acquisition Costs - Net 4,385 4,856
Excess of Cost Over Fair Value
Assets Acquired - Net 12,110 12,992
Other 1,932 1,658
---------- -----------
Total Other Assets 18,427 19,506
---------- -----------
Total Assets $109,914 $105,128
========== ===========
EMPIRE GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Per Share Amount)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, 1996 June 30,
(Unaudited) 1995
-------------- -------
Current Liabilities
Current Maturities of Long-Term Debt $ 2,500 $ 504
Accounts Payable and Accrued Expenses 15,132 12,376
------------- ------------
Total Current Liabilities 17,632 12,880
Long-Term Debt (Note 3) 120,527 115,143
Deferred Income Taxes 10,540 13,140
Accrued Self Insurance Liability (Note 2) 516 911
------------- ------------
Total Liabilities 149,215 142,074
------------- ------------
Stockholders' Equity (Deficit)
Common; $.001 Par Value; Authorized
20,000,000 Shares, Issued March
31, 1996 and June 30, 1995 - -
14,291,020 Shares 14 14
Common Stock Purchase Warrants 1,227 1,227
Additional Paid-In Capital 27,279 27,279
Retained Earnings 20,154 22,509
------------- ------------
48,674 51,029
Treasury Stock at Cost
March 31, 1996 and June 30, 1995
12,711,795 Shares (87,975) (87,975)
------------- ------------
Total Stockholders' Equity (Deficit) (39,301) (36,946)
------------- ------------
Total Liabilities and Stockholders'
Equity (Deficit) $109,914 $105,128
============= ============
See Notes to Condensed Consolidated Financial Statements
EMPIRE GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Operating Revenue $ 34,214 $ 27,871 $ 70,137 $ 63,243
Cost of Product Sold 18,077 13,493 35,901 30,720
--------- ---------- ---------- ----------
Gross Profit 16,137 14,378 34,236 32,523
--------- ---------- ---------- ----------
Operating Costs and Expenses
General and 7,335 7,644 21,388 21,559
Administrative
Depreciation and 1,706 1,965 4,769 4,743
Amortization
--------- ---------- ---------- ----------
9,041 9,609 26,157 26,302
--------- ---------- ---------- ----------
Operating Income 7,096 4,769 8,079 6,221
--------- ---------- ---------- ----------
Other Income (Expense)
Interest Expense, Net (2,671) (2,676) (7,921) (7,960)
Amortization of Debt
Discount and Expense (1,488) (1,254) (4,149) (3,624)
Gain (Loss) on Sale of
Assets (119) 261 736 320
--------- ---------- ---------- ----------
(4,278) (3,669) (11,334) (11,264)
--------- ---------- ---------- ----------
Income (Loss) Before
Income Taxes 2,818 1,100 (3,255) (5,043)
Provision (Credit) for
Income Taxes 1,100 500 (900) (1,600)
--------- ---------- ---------- ----------
Net Income (Loss) $ 1,718 $ 600 $ (2,355) $ (3,443)
========= ========== ========== ==========
Income (Loss) Per Common
Share $ .88 $ .34 $ (1.49) $ (2.18)
========= ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements
EMPIRE GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(In Thousands)
1996 1995
------------ ------------
Cash Flows From Operating Activities
Net (Loss) $ (2,355) $ (3,443)
Items not requiring (providing) cash
Depreciation 4,034 3,866
Amortization 4,884 4,502
Gain on sale of assets (736) (320)
Deferred income taxes (2,100) (1,900)
Changes In:
Trade receivables (6,198) (3,214)
Inventories (582) (928)
Prepaid expense & other (396) (1,150)
Accounts payable & accrued expenses 3,519 1,650
Net cash provided by (used in) ------------ ------------
operating activities 70 (937)
------------ ------------
Cash Flows From Investing Activities
Purchase of property & equipment (4,302) (8,363)
Acquisitions and start-ups of
retail service centers (2,450) (1,431)
Proceeds from sales of property &
equipment 603 859
Disposal of retail service centers 4,273 ----
------------ ------------
Net cash used in investing
activities (1,876) (8,935)
------------ ------------
Cash Flows From Financing Activities
Increase in working capital financing 2,929 8,400
Principal payments on other
long-term debt (503) (177)
------------ ------------
Net cash provided by financing
activities 2,426 8,223
------------ ------------
INCREASE (DECREASE) IN CASH 620 (1,649)
CASH, BEGINNING OF PERIOD
82 2,927
------------ ------------
CASH, END OF PERIOD $ 1,441 $ 1,278
============ ============
See Notes to Condensed Consolidated Financial Statements
EMPIRE GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(1) In the opinion of Management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments
necessary to present fairly Empire Gas Corporation's condensed
consolidated financial position as of March 31, 1996, and the
condensed consolidated results of its operations and cash flows for
the periods ended March 31, 1996 and 1995. All such adjustments are
of a normal recurring nature.
The accounting policies followed by the Company are set forth in
Note 1 to the Company's consolidated financial statements in the 1995
Annual Report on Form 10-K.
On August 15, 1995, the Company entered into a joint venture with
Northwestern Growth Corporation, a subsidiary of Northwestern Public
Service Company, to acquire the assets of Synergy Group Incorporated,
the nation's fifth largest LP gas distributor. The Company has acquired
for $30,000, 30% of the common stock of SYN Inc., the acquisition
entity. The Company has entered into a Management Agreement pursuant to
which the Company provides all management of the retail facilities and
accounting services at the central office. In exchange for those
services, the Company receives a $500,000 annual management fee and a
$3.25 million annual overhead cost reimbursement both accrued on a pro
rata basis during the year and collected on a monthly basis.
On December 7, 1995, the Company entered into a joint venture with
Northwestern Growth Corporation, a subsidiary of Northwestern Public
Service Company to acquire the stock of Myers Propane Gas, a large Ohio
LP gas distributor. The Company has acquired 49% of the common stock of
Myers Propane Gas Company. The Company provides all management of retail
operations and administrative services at the central office. In
exchange for these services, the Company may receive a management fee
subject to attainment of performance goals.
The results of operations for the three-month and nine-month periods
ended March 31, 1996, are not necessarily indicative of the results to
be expected for the full year due to the seasonal nature of the
Company's business.
(2) The Company reports the following contingencies. Except as
noted, there have been no significant changes in these items since
reports in the Company's 1995 Annual Report on Form 10-K.
Under the Company's current insurance program, coverage for
comprehensive general liability, workers' compensation and vehicle
liability is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. The Company retains a
significant portion of certain expected losses related primarily to
comprehensive general and vehicle liability. Under the current general
liability insurance program, the Company self-insures the first
$500,000 of coverage up to $1 million in aggregate losses. In addition,
the Company has a $500,000 deductible for each and every general
liability incident. For the current vehicle liability program, the
Company self-insures the first $500,000 of coverage (per incident).
The Company obtains excess coverage from insurance carriers for these
programs on claims-made basis policies. Provisions for self-insured
losses are recorded based upon the Company's estimates of the
aggregate self-insured liability for claims incurred.
Prior to July 1, 1995, the Company self-insured $500,000 per incident
under its comprehensive general liability insurance program. Also, the
deductible for losses in excess of the $1 million aggregate was
previously $100,000 per incident. Under the Company's previous vehicle
liability insurance program, the self-insured retention was $250,000
per incident.
The Company and its subsidiaries are defendants in various lawsuits
related to the self-insurance program which are not expected to have a
material adverse effect on the Company's financial position or results
of operations.
Interim accruals for the cost of insurance expense, which includes both
self insurance and policy premium cost, are based on an estimate of
the related annual costs compared to the estimated total gallons of
propane to be sold during the same period.
The Company currently self insures health benefits provided to the
employees of the Company and its subsidiaries. Provisions for losses
expected under this program are recorded based upon the Company's
estimate of the aggregate liability for claims incurred.
The Company has received notification from the Internal Revenue Service
for a federal income tax audit for the year ending June 30, 1994. The
State of Missouri is presently auditing the Company for the years ended
June 30, 1992 and 1993. Missouri has assessed the Company for additional
state income taxes for which no accrual has been made for the proposed
deficiency. The Company believes that it has properly reported its
income and paid its taxes in accordance with applicable laws and intends
to contest the proposed adjustments vigorously.
The Company and its subsidiaries are presently involved in various state
tax audits and are also defendants in other business-related lawsuits
which are not expected to have a material adverse effect on the
Company's financial position or results of operations.
In conjunction with the restructuring transaction that occurred in June
1994 between the Company and Empire Energy Corporation, the two
companies have agreed to share on a percentage basis the self-insured
liabilities and amounts incurred related to federal and state tax audits
prior to and including the year ended June 30, 1994. Under the
agreement, the Company will assume 52.3% of the liability with Empire
Energy Corporation assuming the remaining 47.7%. These liabilities,
which are included in the Company's financial statements represent 52.3%
of the total liability as of the respective balance sheet dates.
(3) In June 1994, the Company repaid its existing term credit facility and
revolving credit facility with the proceeds from the issuance of
$127,200,000 face value 12 7/8% Senior Secured Notes, due 2004. These
debentures were issued at a discount and bear interest at 7% through
July 15, 1999, and at 12 7/8% thereafter.
The Company entered into a new revolving credit facility with a lender.
All of the Company's receivables and inventories are pledged under the
credit facility agreement, which contains working capital, capital
expenditure, debt and certain dividend restrictions. These dividend
restrictions prohibit the Company from paying common stock cash
dividends.
The facility provides for borrowings up to $15 million, subject to a
sufficient borrowing base. The borrowing base generally limits the
Company's total borrowings to 85% of eligible accounts receivable and
52% of eligible inventory. The facility bears interests at either 1%
over prime or 2.5% over the LIBOR rate. The agreement provides for a
commitment fee of .375% per annum of the unadvanced portion of the
commitment. At March 31, 1996, after considering $1,142,795 outstanding
net letters of credit and current outstanding borrowings, the Company's
available borrowings under the revolving credit line amount to
$2.0 million.
(4) Additional Cash Flow Information (In Thousands)
Additional Cash Payment Information 1996 1995
Interest Paid $ 9,908 $ 6,415
Income Taxes Paid (net of refunds) $ (1,649) $ (2,210)
Noncash Investing and Financing Activities
Mortgage obligations incurred on the
acquisition of retail service centers $ 992 $ 1,433
Capitalized lease on the acquisition of
computer equipment $ 283 $ ---
Net receivable generated by the disposal
of a retail service center $ 148 $ ---
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition and Liquidity
The following table is presented as a measure of the Company's liquidity and
financial condition.
March 31 June 30,
1996 1995 1995 1994
Total long-term debt (including
current maturities) $123,027 $118,055 $115,647 $105,612
Working Capital $ 2,708 $ 3,753 $ 1,636 $ 6,313
Current Ratio 1.15 1.26 1.13 1.59
During the nine months ended March 31, 1996, the Company's working capital
increased by approximately $1.1 million. The increase was due primarily to
increases in inventories, accounts receivable, and prepaid expenses which were
financed by borrowing on the Company's revolving credit facility which is
classified as long-term debt in the amount of $4.9 million. This increase was
offset by approximately $3.8 million due to the impact of changes in current
portions of deferred tax assets, income taxes payable, and the
reclassification of additional long-term debt to current maturities.
The increase in long-term debt of approximately $7.4 million from June 30,
1995 to March 31, 1996, is due primarily to the increase in long-term debt of
$3.7 million due to the amortization of original issue discount on the
Company's Senior Secured Notes and the net acquisitions of retail service
centers and other properties which used cash and increased long-term debt by
$3.2 million. The remaining increase in long-term debt is due to the net effect
of cash flows from operations and changes in working capital.
Pursuant to the terms of the Indenture for the 12 7/8% Senior Secured Notes
due July 15, 2004, the Company is required to make a $4.5 million interest
payment on July 15, 1996. Historically, operating cash flows improve during
the fourth quarter as accounts receivable from winter sales are collected.
The Company intends to meet the interest payment requirement through
operating cash flows and available borrowings on its working capital
facility. Cash flow will be further increased by the proceeds from planned
sales of marginally profitable retail service centers and properties
pursuant to its long-range business plan.
Results Of Operations
Due to the seasonal nature of the Company's business, the Company usually
realizes a net operating loss the first quarter and net operating income for
the second and third quarters. Operating revenues for a particular quarter are
not necessarily indicative of a full fiscal year's operations because of the
seasonal element. Other expense items such as depreciation and general and
administrative expenses, however, generally continue on a more annualized
basis. Interest expense also continues on a more level basis although interest
expense is generally higher during the summer and fall months due to increased
working capital borrowings used to finance inventory purchases in preparation
for the Company's principal sales months.
During the first quarter of fiscal 1996, the Company completed the acquisition
of one retail service center located in Michigan. This service center was
purchased for $419,000 in cash and $400,000 in new mortgages.
During the third quarter of fiscal 1996, the Company completed the acquisition
of two retail service centers located in Arizona and one located in
California. These service centers were purchased for $550,000 in cash and
$592,000 in new mortgages.
During the first quarter of fiscal 1996, the Company divested of 12 retail
service centers primarily located in Iowa and Wisconsin for approximately $4.5
million in cash and $148,000 in promissory notes. The following table sets
forth, for the three months and nine months ending March 31, 1995, selected
aggregate operating data for the retail service centers that were divested.
3 Months Ended 9 Months Ended
(In Thousands) March 31, 1995 March 31, 1995
Operating Income $653 $701
Operating Revenue $2,436 $4,988
Gross Margin $1,180 $2,239
Retail Gallons Sold 2,432 5,751
Operating revenues for the nine months ended March 31, 1996, increased by $6.9
million as compared to the same period of the prior year. The increase is due
to an increase of approximately $7.7 million in propane sales, partially
offset by an approximate decrease of $800,000 in other sales. The increase in
propane revenues is due to approximate increases of $5.8 million in retail
propane sales and $1.9 in commercial propane sales. The increase in retail
propane sales is due to an increase of approximately 7% in the average net
sales price and an approximate increase of 3% in gallons sold. On a same store
basis, taking into consideration the acquired and divested companies, the
gallons sold would have increased by approximately 10% as compared to the same
pro forma period of the prior year. The decrease in other sales is due to
reduced sales of appliances and parts as a result of decreased sales emphasis
and sales promotions from suppliers.
Gross profit for the nine months ended March 31, 1996, increased by
approximately $1.7 million due to the increased propane sales. The increase in
margin from propane sales is due to an approximate $.01 per gallon increase in
the average net margin per gallon and the approximate 3% increase in gallons
sold.
Operating revenues for the third quarter ended March 31, 1996, increased
approximately $6.3 million as compared to the same period of the prior year.
The increase is due to an increase of approximately $6.5 million in propane
sales partially offset by a decrease of approximately $200,000 in other sales.
The increase in propane sales is due to an approximate 10% increase in the
average net sales price and an approximate 10% increase in gallons sold as
compared to the same period of the prior year. The increase in the sales price
is the result of rising commodity prices resulting from colder weather as
compared to the same period of the prior year. The colder weather also
increased the volume of gallons sold in addition to the impact of the mix of
stores disposed, acquired, and start-ups discussed above. The decrease in
other sales is consistent with the decreased sales emphasis and sales
promotions from suppliers.
Gross profit for the three months ended March 31, 1996, increased
approximately $1.7 million as compared to the same period of the prior year.
The increase is due to the increases of approximately $1.6 million from
propane sales and $100,000 from other sales. The increase in propane sales
gross profit is due primarily to the 10% increase in volume of gas sold.
The gross profit per gallon sold was virtually unchanged.
General and administrative expenses decreased $200,000 for the nine months
ended March 31, 1996, as compared to the same period of the prior year.
The decrease was due to reduced general corporate overhead of $400,000
and a decrease in the provision for doubtful accounts of $100,000 due
to strengthened credit policies and collection efforts. These decreases
were partially offset by an increase of $300,000 in insurance expense
due to increased policy premiums.
General and administrative expenses decreased $300,000 for the three months
ended March 31, 1996, as compared to the same period of the prior year. The
decrease was due to reduced general corporate overhead of $200,000 and a
decrease in the provision for doubtful accounts of $200,000 due to
strengthened credit policies and collection efforts. These decreases were
partially offset by an increase of $100,000 in insurance expense due to
increased policy premiums.
Interest expense was similar when compared to the same nine month and three
month periods of the prior year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 2 of the Condensed Consolidated Financial
Statements.
ITEM 2, 3, 4 AND 5.
No information is reportable under these sections.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
-------
Exhibit No. Description
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
REVIEWED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The March 31, 1996 financial statements included in this filing on Form 10-Q
have been reviewed by Baird, Kurtz & Dobson, Independent Certified Public
Accountants, in accordance with established professional standards and
procedures for such a review. The report of Baird, Kurtz & Dobson commenting
upon their review is appended hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMPIRE GAS CORPORATION
Registrant
/s/Mark Castaneda
____________________________
MARK CASTANEDA
VICE PRESIDENT - FINANCE
DATE: May 15, 1996
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Empire Gas Corporation
Lebanon, Missouri
We have reviewed the accompanying condensed consolidated balance sheet
of EMPIRE GAS CORPORATION AND SUBSIDIARIES as of March 31, 1996, and the
related condensed consolidated statements of operations and cash flows for
the three-month and nine-month periods ended March 31, 1996 and 1995. These
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the condensed
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of June 30, 1995, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended (not presented herein); and
in our report dated August 25, 1995, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of June 30,
1995, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
April 25, 1996
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<PERIOD-END> MAR-31-1996
<CASH> 1,441
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<RECEIVABLES> 12,398
<ALLOWANCES> 1,129
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<PP&E> 100,530
<DEPRECIATION> 29,383
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0
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<TOTAL-LIABILITY-AND-EQUITY> 109,914
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<TOTAL-REVENUES> 70,137
<CGS> 35,901
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<INCOME-PRETAX> (3,255)
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