ITEM 1. BUSINESS
Petroleum Heat and Power Co., Inc. (the "Company" or "Petro") is the largest retail distributor of home heating oil (#2 fuel oil) in the United States, with sales of $538.5 million for the year ended December 31, 1993. Petro served approximately 415,000 customers in 26 markets in the Northeast, as of December 31, 1993, including the metropolitan areas of Boston, New York City, Baltimore, Providence and Washington, D.C. Despite its leading market position, Petro estimates that its customer base represents approximately 5% of the residential home heating oil customers in the Northeast. For the year ended December 31, 1993, the Company sold approximately 443.5 million gallons of home heating oil and propane.
In addition to home heating oil and propane, the Company also installs and repairs heating equipment and markets to commercial customers, to a limited extent, other petroleum products, including #4 fuel oil, #6 fuel oil, diesel fuel, kerosene and gasoline.
Installation and repair of heating equipment is provided as a service by the Company to its heating oil customers, and has represented approximately 12% per year of the Company's net sales for the last three fiscal years. The Company considers the provision of service and installation services to be an integral part of its basic fuel oil business. Accordingly, the Company regularly provides various service incentives to obtain and retain fuel oil customers and such services are not designed to generate profits. Except in isolated instances, the Company does not provide service to any person who is not a heating oil customer.
For the years ended December 31, 1991, 1992 and 1993, sales of home heating oil and propane (not including related installation and service) constituted approximately 82%, of the Company's net sales.
The Company's volume, cash flow and operating profits before depreciation and amortization have increased significantly since 1980 primarily because of its acquisitions of other home heating oil businesses. Since September 1979, the Company has completed 146 acquisitions including nine in 1993 and one in 1994. Large volume
acquisitions are operated as separate branches while smaller volume acquisitions are integrated into existing branches of the Company.
Operating Strategy
The Company currently operates from 30 branch locations and a corporate office in Stamford, Connecticut. The accounting, data processing, purchasing and credit functions are centralized, while branch offices maintain autonomy over oil delivery, heating equipment service and customer relations. The Company obtains its fuel oil in either barge or truckload quantities. When purchasing in barge quantities, the Company hires independent barging companies on an as needed basis to transport the Company's oil from refineries and other bulk storage facilities to third-party storage terminals. The Company has contracted with 71 third party storage terminals for the right to temporarily store its fuel oil at their facilities. The fuel oil is then transported by the Company's fleet of approximately 725 delivery trucks to its customers.
Approximately 85% of the Company's customers receive their home heating oil pursuant to an automatic delivery system in which individual deliveries are scheduled by computer based upon each customer's historical consumption patterns and prevailing weather conditions. The Company delivers home heating oil approximately six times during the year to the average customer. The Company's practice is to bill customers promptly after delivery. In addition, approximately 30% of the Company's customers are on the Company's budget payment plan whereby their estimated annual oil purchases and service contract is paid for in a series of equal monthly payments over an eleven or twelve month period.
Suppliers
The Company obtains home heating oil from numerous sources, including integrated international oil companies, independent refiners and independent wholesalers, many of which have been suppliers to the Company for over 10 years. The Company's purchases are made pursuant to supply contracts or on the spot market. The Company has market price based contracts for substantially all its petroleum requirements with 14 different suppliers, all of which have significant domestic sources for their product. The Company's current suppliers are (in alphabetical order): Amerada Hess Corporation; Bayway Refining Co.; Citgo Petroleum Corp.; Coastal New England and New York; Crown Central Petroleum; Exxon Company USA; Global Petroleum Corp.; Kerr McGee Refining Corp.; MG Refining and Marketing Co.; Mobil Oil Corporation; Northeast Petroleum, a division of Cargill, Inc.; S & S Hartwell and Co., Inc. (a division of Sprague Energy Co.); Stuart Petroleum Company and Sun Oil Company. The Company's supply contracts each have terms of 12 months and typically expire in May or June of each year. All of the supply contracts provide for maximum quantities, but do not establish in advance the price at which fuel oil is sold, which, like the Company's price to its customers, is established from time to time. The Company believes that its policy of contracting for substantially all its supply needs with diverse and reliable sources will enable it to obtain sufficient product should unforeseen shortages develop in the worldwide supply of crude oil. The Company further believes that relations with its current suppliers are satisfactory.
Customers and Sales
As of December 31, 1993, the Company served approximately 415,000 customers in the following 26 markets through a sales force of approximately 139 individuals based primarily in the Company's branch offices:
New York Maryland/Virginia/D.C. Pennsylvania Bronx, Queens and Baltimore (Metropolitan) Allentown Kings Counties Washington, D.C. Berks County Eastern Long Island (Metropolitan) (Centered in Reading) Staten Island Lebanon County Western Long Island Massachusetts (Centered in Palmyra) Boston (Metropolitan) Connecticut Northeastern Massachusetts New Jersey Bridgeport--New Haven (Centered in Lawrence) Camden Hartford (Metropolitan) Springfield Neptune Litchfield County Worcester Newark (Metropolitan) Southern Fairfield County North Brunswick Rockaway Rhode Island Trenton Providence New Hampshire Milford Portsmouth
Approximately 85% of the Company's sales of #2 fuel oil are made to homeowners with the balance to industrial, commercial and institutional customers. Historically, the Company has lost a portion of its customer base each year for various reasons, including customer relocation, price competition and conversions to natural gas.
Conversions to Natural Gas
The rate of conversion from the use of home heating oil to natural gas is primarily affected by the relative prices of the two products and the cost of replacing an oil fired heating system with one that uses natural gas. The Company believes that approximately 1% of its customer base annually converts from home heating oil to natural gas. Even when natural gas had a significant price advantage over home heating oil, such as in 1980 and 1981 when there were government controls on natural gas prices or, for a short time in 1990 and 1991, during the Persian Gulf crisis, the Company's customers converted to natural gas at only a 2% annual rate. During the latter part of 1991 and through 1993, natural gas conversions have returned to their approximate 1% historical annual rate as the prices for the two products have been at parity.
Certain Industry Matters and Seasonality
The Company's business is directly related to the heating needs of its customers and the weather can have a material effect on the Company's sales in any particular year, such as in 1990 and 1991 which were the first and third warmest years in the century. However, the temperatures over the past 30 years have been relatively stable, and as a result have not had a significant impact on the Company's performance except on a short-term basis.
The Company's business is highly seasonal. Approximately 80% of its revenues are generated during the heating season from October 1 through March 31, the Company's fourth and first fiscal quarters.
Competition
The Company's business is highly competitive. The Company competes with fuel oil distributors offering a broad range of services and prices, from full service distributors, like the Company, to those offering delivery only. Competition with other companies in the fuel oil industry is based primarily on customer service and price. Long-standing customer relationships are typical in the retail home heating oil industry. Many companies in the industry, including Petro, deliver home heating oil to their customers based upon weather conditions and historical consumption patterns without the customer having to make an affirmative purchase decision each time oil is needed. In addition, most companies, including Petro, provide home heating equipment repair service on a 24-hour a day basis, which tends to build customer loyalty.
Employees
As of December 31, 1993, the Company had 2,385 employees, of whom 759 were office, clerical and customer service personnel, 720 were heating equipment repairmen, 572 were oil truck drivers and mechanics, 195 were management and staff and 139 were employed in sales. Approximately 355 of those employees were seasonal, and management expects to rehire the majority of them during the next heating season. Approximately 718 full time employees and 235 seasonal employees are represented by 17 different local chapters of labor unions. Management believes that its relations with both its union and non-union employees are satisfactory.
Investment in Star Gas Corporation
In December 1993, the Company acquired a 29.5% equity interest (42.8% voting interest) in Star Gas Corporation ("Star Gas"), the tenth largest propane distributorship in the United States, for $16.0 million in cash. Certain other investors invested a total of $49.0 million of additional equity in Star Gas, of which $11.0 million was in the form of cash and $38.0 million resulted from the conversion of long-term debt and preferred stock into equity. As a result of redemptions of a portion of the equity in Star Gas held by certain of the other investors that the Company expects will occur in connection with a Star Gas recapitalization, the Company expects that its direct and indirect equity
interest in Star Gas will increase to 36.7% without any additional investment by the Company.
Star Gas is the tenth largest distributor of propane in the United States, with sales of $154.2 million, representing over 169 million gallons of propane, for its fiscal year ended September 30, 1993. Star Gas served approximately 200,000 customers in the midwestern, northeastern and southeastern regions of the United States as of September 30, 1993.
The Company will manage Star Gas' business under a Management Services Agreement which provides for an annual cash fee of $500,000 and an annual bonus equal to 5% of the increase in Star Gas' operating income before depreciation and amortization over its fiscal year ended September 30, 1993, payable in common stock of Star Gas pursuant to a formula set forth in the Management Services Agreement. Star Gas also will reimburse the Company for its expenses and the cost of certain Company personnel.
After giving effect to the Star Gas recapitalization on a pro forma basis as of September 30, 1993, Star Gas would have had total long-term debt of $70.3 million and stockholder's equity of $51.1 million. The Company is not directly or contingently liable for any indebtedness of Star Gas.
Star Gas distributes propane primarily for home heating as well as for commercial uses from 89 locations employing a fleet of over 300 delivery trucks. Star Gas acquires propane from approximately 30 sources, including Ashland Petroleum Company, Amoco Canada Marathon Corp., Enron Gas Liquids, Inc. and Texaco Exploration and Production, Inc. Star Gas owns a storage facility in the Midwest in which it is able to store approximately 22 million gallons of propane in an underground cavern located approximately 400 feet below the surface.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently occupies 50 different facilities and distributes fuel oil and provides service to its customers through approximately 1,900 oil delivery tank trucks, service vans and other vehicles.
The following table presents additional information concerning the Company's facilities:
Owned/Lease Approx. Expiration Square Location Type of Facility Date Footage - -------- ---------------- ----------- -------
New York Astoria Office/Garage 12/31/95 25,600 Brooklyn Office Owned 6,500 Brooklyn Garage Owned 13,000 Brooklyn Office/Garage 10/31/00 25,500 Brooklyn Garage 10/31/05 33,500 Hicksville Office/Garage 7/14/01 16,000 Oyster Bay Office/Garage 8/31/96 22,800 Patchogue Office/Garage 10/03/96 26,500 Plainview Garage Owned 8,500 Plainview Office/Garage 10/31/00 23,800 Southampton Office/Storage 7/31/98 12,000 Staten Island Office/Garage 6/30/96 9,650 Westbury Office/Garage 10/31/95 17,400
New Jersey Camden Office/Garage Owned 9,800 Clark Office 4/30/99 15,000 Hanover Office/Garage 5/31/96 6,000 Lakewood Office/Garage 9/30/95 4,500 Linden Office/Warehouse 6/30/94 8,100 Princeton Office/Garage/Storage Owned 7,300
Connecticut Ansonia Office 11/20/94 800 Bristol Office 5/31/95 5,360 Canton Office/Garage/Storage Owned 4,900 East Hartford Office/Garage 2/01/00 18,000 East Hartford Office/Storage 3/31/94 4,070 Greenwich Storage 9/30/96 -- New Milford Office/Garage 8/31/98 5,800 North Haven Office/Garage 9/15/00 12,000 Norwalk Office 12/31/96 5,400 Norwalk Garage 12/31/96 2,400 Stamford Corporate Headquarters 8/31/03 19,000 Stamford Office/Garage 5/31/94 29,000 Waterbury Office 6/30/96 375
Owned/Lease Approx. Expiration Square Location Type of Facility Date Footage - -------- ---------------- ----------- -------
Massachusetts
Holden Office/Garage/Storage Owned 7,500 Lawrence Office/Garage Owned 8,500 Revere Office/Garage 8/31/96 12,800 Rochdale Office/Storage Owned 1,200 Springfield Office/Garage/Storage Owned 12,570 Westfield Office/Storage 12/22/94 500 Westwood Office 6/15/97 9,400
Pennsylvania Allentown Office/Garage 5/31/98 4,600 East Stroudsbourg Office/Garage/Warehouse 8/11/95 1,700 Palmyra Office/Garage/Storage Owned 5,500 Reading Office/Garage Owned 20,600
New Hampshire Amherst Storage Owned -- Milford Office/Garage 3/31/96 7,240 Portsmouth Office/Garage 9/01/95 6,100
Rhode Island Providence Office/Garage 5/31/98 7,600
Maryland Baltimore Office/Garage/Storage Owned 13,750 Forrestville Office/Garage 3/31/08 18,900
The Company believes its existing facilities are sufficient and that there are numerous comparable facilities available at similar rentals in each of its marketing areas should they be required.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceeding which could have a material adverse effect on the results of operations or the financial condition of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Class A Common Stock
The Company's Class A Common Stock is traded on the National Association of Securities Dealers Inc. NASDAQ National Market System under the symbol "HEAT". The high and low per share price of the Class A Common Stock and dividends declared on the Class A Common Stock since the initial public offering of the Class A Common Stock on July 29, 1992 were as follows:
1992 1993 ------------------------- -------------------------- High Low Dividend High Low Dividend ------- ------- -------- ------ ------- -------- Quarter 1st $10 3/4 $ 8 1/4 $.1125 2nd 11 1/4 8 1/4 .1375 3rd $12 3/4 $10 1/2 $.0703 9 7 3/4 .1375 4th 12 5/8 10 1/4 .1125 10 7 .1375
The last sale price of the Class A Common Stock on March 1, 1994 was $9.00 per share. As of March 1, the Company had 102 shareholders of record of its Class A Common Stock. In addition, the Company declared a dividend of $.1375 per share of Class A Common Stock which was paid on January 3, 1994 to holders of records as of December 15, 1993. The Company has declared a dividend of $.1375 per share of Class A Common Stock payable on April 1, 1994 to holders of record on March 15, 1994.
Class B Common Stock
The Class B Common Stock has been listed on the American Stock Exchange since December 1986 under the symbol "PHP". The high and low per share price of the Class B Common Stock and dividends declared on the Class B Common Stock in 1992 and 1993 were as follows:
1992 1993 ------------------------- -------------------------- High Low Dividend High Low Dividend ------- ------- -------- ------ ------- -------- Quarter 1st $12 1/4 $ 9 7/8 $.2858 $19 1/4 $15 3/4 $.4700 2nd 16 1/4 10 1/4 .2858 22 1/2 17 3/8 .4700 3rd 17 1/2 14 1/2 .2858 20 3/4 19 3/4 .4700 4th 17 1/4 15 1/8 .2858 20 1/2 19 1/2 .4700
The last sale price of the Class B Common Stock on March 1, 1994 was $23.50 per share. As of March 1, 1994, the Company had 60 shareholders of record of its Class B Common Stock. In addition, the Company declared a dividend of $.47 per share of Class B Common Stock which was paid on January 3, 1994 to holders of record as of December 15, 1993. The Company has declared a dividend of $.41 per share of Class B Common Stock payable on April 1, 1994 to holders of record on March 21, 1994.
Class C Common Stock
There is no established trading market for the Company's Class C Common Stock, $.10 par value. The number of record holders of the Company's Class C Common stock at March 1, 1994 was 29.
The Company declared cash dividends on its Class C Common Stock of $.1828 per share in 1992 and declared cash dividends of $.525 per share in 1993. In addition, the Company declared a dividend of $.1375 per share of Class C Common Stock which was paid on January 3, 1994 to holders of record as of December 15, 1993. The Company has declared a dividend of $.1375 per share of Class C Common stock payable on April 1, 1994 to holders of record on March 15, 1994.
Under the terms of the Company's 11.85%, 12.17%, and 12.18% Subordinated Notes due 1998 and 14.10% Subordinated Notes due 2001 the Company may not pay any dividend nor make a distribution on its capital stock if the amount expended for such purposes after December 31, 1987 exceeds the sum of (a) 50% of the aggregate Cash Flow of the Company accrued on a cumulative basis for each of the fiscal years subsequent to December 31, 1986 and (b) the aggregate net proceeds, including the fair value and property other than cash, received by the Company from the issue or sale of capital stock of the Company after July 1, 1987. The terms of the Company's Credit Agreement, as restated and amended on December 31, 1992 (Credit Agreement), along with the terms of its 10 1/8% Subordinated Notes due 2003 and 9 3/8% Subordinated Debentures due 2006 include restrictions which limit the aggregate amount of dividends the Company may pay. Under the most restrictive dividend limitations, at December 31, 1993, $7.1 million was available for the payment of dividends on all classes of Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of the Company and should be read in conjunction with the more detailed financial statements included elsewhere in this Report. Although EBITDA and NIDA should not be considered as substitutes for net income (loss) as an indicator of the Company's operating performance and NIDA is not a measure of the Company's liquidity, they are included in the following table as they are the bases upon which the Company assesses its financial performance, compensates management and establishes dividends. See "Management's Discussion and Analysis of Results of Operations and Financial Condition."
(Footnotes on next page)
------------------------------------ (1) On July 29, 1992, the holders of Class A Common Stock exchanged 20% of their shares (2,545,139 shares) for an equal number of the newly created Class C Common Stock. All per share amounts for Class A and Class C Common Stock have been retroactively adjusted to reflect such exchange.
(2) EBITDA is defined as operating income before depreciation and amortization and non-cash expenses associated with key employees' deferred compensation plans.
(3) NIDA is defined as the sum of consolidated net income (loss), plus depreciation and amortization of plant and equipment and amortization of customer lists and deferred charges, plus non-cash expenses associated with key employees' deferred compensation plans, less dividends accrued on preferred stock, excluding net income (loss) derived from investments accounted for by the equity method, except to the extent of any cash dividends received by the Company.
(4) The Company has escrowed certain amounts to secure the repayment of certain long-term debt. The amounts on deposit at the dates indicated were as follows: $-0- at December 31, 1989, $-0- at December 31, 1990, $5,000,000 at December 31, 1991, $15,000,000 at December 31, 1992 and $20,000,000 at December 31, 1993.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview
In analyzing the Company's results, one should consider the Company's active acquisition program, the rapid rate of amortization of customer lists purchased in acquisitions, the seasonal nature of the heating oil business and the general ability of heating oil distributors to pass on variations in wholesale heating oil costs to their customers. Therefore, although a company's net income (loss) calculated in accordance with generally accepted accounting principles is generally considered by investors to be an indicator of a company's operating performance, management believes that in evaluating the Company's results, two additional measures should be considered to supplement the net income (loss) analysis. The first such measure is operating income before depreciation and amortization and non-cash expenses associated with key employees' Deferred Compensation Plans (referred to herein as EBITDA) and the second such measure is NIDA, defined as the sum of (i) consolidated net income (loss), plus (ii) depreciation and amortization of plant and equipment and amortization of customer lists and deferred charges, plus non-cash expenses associated with key employees' deferred compensation plans less dividends accrued on preferred stock excluding net income (loss) derived from investments accounted for by the equity method, except to the extent of any cash dividends received from the Company. Although EBITDA and NIDA should not be considered as substitutes for net income (loss) as an indicator of the Company's operating performance and NIDA should not be considered as a measure of the Company's liquidity, it is important for an investor to understand these concepts since management's strategy is to maximize EBITDA and NIDA, rather than net income. The computations of EBITDA and NIDA are derived from the Company's financial statements as a supplement to the Company's traditional financial statements. Because of management's acquisition and other strategies, it believes that EBITDA is an important indicator as a measure of earnings derived from operations before non-cash expenses and non-operating expenses, such as interest expense, other expenses and income taxes. The following expands on the above and enumerates other factors that one should consider.
First, the financial results of a given year do not reflect the full impact of that year's acquisitions. Most acquisitions are made during the non-heating season because many sellers desire to retain winter profits but avoid summer losses. Therefore, the effect of acquisitions made after the heating season are not fully reflected in the Company's sales volume and operating and financial results until the following calendar year.
Second, as stated above, the Company's objective is to maximize NIDA and EBITDA, rather than net income. The large disparity between NIDA and net income (loss) is primarily attributable to the substantial amortization of customer lists and other intangibles in connection with acquisitions. Customer lists and other intangibles acquired in connection with acquisitions represent the allocation of acquisition costs which are amortized over the future periods benefitted by such acquisitions. In general, costs are allocated to assets based upon the
fair market value of the assets purchased, as determined by arms' length negotiations between the Company and the seller. Substantially all purchased intangibles are comprised of customer lists and covenants not to compete. Amortization of customer lists is a non-cash expense which represents the write-off of the amount paid for customers acquired in connection with acquisitions who later terminate their relationship with the Company. Based on the Company's analysis of historical purchased customer attrition rates, these lists have been amortized 90% over a six year period (on average, 15% per annum) and the balance over a 25 year period. However, the Company's annual net loss of customers has only averaged approximately 3.5% over the past five years, as the loss of purchased accounts has been partially offset by new customers obtained through internal marketing. The covenants not to compete are amortized over the lives of the covenants, which generally range from five to seven years. The Company periodically reviews the appropriate allocation of purchase price among the intangible assets acquired and their amortization lives.
Third, the seasonal nature of the Company's business results in the sale by the Company of approximately 50% of its volume in the first quarter and 30% in the fourth quarter of each year. The Company generally realizes positive NIDA in both of these quarters and negative NIDA during the warmer quarters ending June and September. As a result, acquisitions made during the spring and summer months generally have a negative effect on earnings and a limited impact on NIDA in the calendar year in which they are made. Most of the costs associated with an acquired distributor are incurred evenly throughout the remainder of the year, whereas a smaller percentage of the purchased company's annual volume and gross profit is realized during the same period.
Finally, changes in total dollar sales do not necessarily affect the Company's gross profit, EBITDA, net income or NIDA. Since the Company adds a per gallon margin onto its wholesale costs, variability in wholesale oil prices will affect net sales but generally do not affect EBITDA, net income, NIDA or any other measure of earnings. As a result, the Company's margins are most meaningfully measured on a per gallon basis and not as a percentage of sales. While fluctuations in wholesale prices have not significantly affected demand to date, it is possible that significant wholesale price increases over an extended period of time could have the effect of encouraging conservation. If demand were reduced and the Company was unable to increase its gross profit margin or reduce its operating expenses, the effect of the decrease in volume would be to reduce EBITDA, net income, NIDA or any other measure of earnings.
Given the Company's operating strategy to maximize EBITDA and NIDA as described above, one should also be aware of certain risks that are inherent in such a strategy. Although an increased level of acquisitions (which in turn adds to the Company's plant and equipment and customer lists) is expected to have a positive impact on the long term viability of the business, the near term effect of acquisitions would be to increase EBITDA and NIDA by a significantly greater amount than would be the increase, if any, of net income because of the substantial impact of depreciation and amortization expense, items which generally do not impact EBITDA or NIDA, but which do materially impact net income. A reduced level of acquisitions, which would be expected to have an adverse impact on the long term growth of the business, could have the short term
effect of decreasing EBITDA and NIDA, while possibly increasing net income.
In the year of an acquisition, depending on the month it is consummated, it is possible that EBITDA and NIDA would not be affected, while net income could be negatively impacted.
To the extent future acquisitions are financed with debt, the interest expense associated with such debt would not impact EBITDA, but would reduce NIDA and net income. If the Company were to finance future acquisitions by issuing new preferred stock, the preferred stock dividends associated with the new preferred stock would not affect EBITDA or net income, but would reduce NIDA and increase the Company's stockholders' deficiency.
Since EBITDA and NIDA are not affected by depreciation and amortization, the Company's failure to replace long lived assets or its decision to delay needed capital expenditures, could have the short term effect of improving net income (by minimizing depreciation and amortization expense), but could have a negative impact on the long term viability of the business. Because management is concerned with the Company's long term viability, and measures its operating performance by EBITDA and NIDA, it intends to continue making capital improvements as required.
Factors that impact the Company's ability to continue following its current operating strategy in the foreseeable future include its ability to continue to grow through acquisitions, while continuing to replace lost customers through internal marketing.
Results of Operations and Other Data
1993 Compared to 1992
Net sales increased in 1993 to $538.5 million from $512.4 million in 1992. This $26.1 million increase was attributable to volume growth and related service revenues associated with acquisitions ($55.4 million or 10.8%), offset by attrition in the Company's customer base and slightly warmer weather (2.6% warmer than in the prior period).
In 1993 home heating oil volume, including propane increased to 443.5 million gallons, 4.8% greater than the 423.4 million gallons delivered in 1992 due to the impact of the nine acquisitions completed in 1992 whose annual volume was fully reflected for the first time in 1993, and to a lesser extent, the nine acquisitions completed in 1993. The positive impact of the acquisitions was offset by the slightly warmer weather and attrition in the Company's customer base.
Gross profit increased $10.2 million, (6.3%), from $161.5 million (38.1 cents per gallon) for 1992 to $171.7 million (38.7 cents per gallon) for 1993. Home heating oil margins increased 2.0 cents per gallon, which was partially offset by the higher cost of providing heating equipment repair and maintenance service to a larger customer base and the utilization of this service as part of the Company's internal marketing program.
Operating expenses increased $13.1 million (11.9%) from $110.2 million in 1992 to $123.2 million in 1993, primarily due to the acquisitions, the severe weather conditions experienced in March 1993 that temporarily increased delivery expenses during that month and the expansion of the Company's marketing program. On a per gallon basis these expenses increased 6.9% from 26.0 cents in 1992 to 27.8 cents in 1993. However, after adjustment for the warmer weather in 1993, the increase was only 4.2% per gallon which was attributable entirely to above mentioned severe March weather and the Company's marketing program.
The provision for supplemental benefits, representing the present value of such benefits, returned to the more normal level of $0.3 million compared to the accelerated accrual of $2.0 million in 1992.
Amortization of customer lists and deferred charges were $28.7 million approximately the same as in 1992. While volume increased 4.8% these non cash expenses remained equal as certain customer lists and capitalized expenses became fully amortized. Depreciation and amortization of plant and equipment increased 7.2%, or $0.4 million, to $5.9 million for 1993 due to the acquisitions.
Operating income was $13.5 million for 1993 compared to $15.0 million in 1992, as the 4.8% increase in volume and the increase in home heating oil margins were offset by higher residential service related costs, increased delivery and marketing expenses.
Net interest expense increased $1.9 million, 10.1%, to $20.5 million. A reduction in the average borrowing rate was offset by a $31.1 million increase in long-term borrowings from $148.5 million, at an average interest rate of 11.9%, to $179.6 million, at an average interest rate of 11.4%. This increase in long-term borrowings was due to the
conversion in March 1993 of $12.8 million of Redeemable Preferred Stock into Subordinated Notes due in 2000 and the issuance in April 1993 of $50.0 million of 10 1/8% Notes due in 2003. The proceeds of this public issue were used to repay $25.0 million of long-term obligations maturing in 1993 and 1995 with the balance being used to fund, in part, the Company's acquisition program. Offsetting the increase in long-term borrowings was a decline in short-term borrowings from $17.9 million, at an average interest rate of 5.9%, to $11.2 million, at an average interest rate of 5.4%. In addition, the Company reduced bank fees and generated interest income on higher cash balances in 1993 compared to 1992.
The loss before income taxes and extraordinary items was $7.2 million, $3.2 million (79%) greater than in 1993 due to the reduction in operating income and the increase in interest expense. Income taxes of $0.4 million were the same for both periods and represent certain state income taxes applicable to profitable subsidiaries that are not included in consolidated state returns. The Company had losses for federal income tax purposes in each of these periods.
In May 1993, the Company recorded an extraordinary charge against earnings of $0.9 million. This represented the cash premium paid of $0.4 million to retire $25.0 million of the Company's long-term obligations maturing in 1993 and 1995 and the write off of $0.5 million in debt discount and deferred charges associated with these obligations.
The net loss increased from $4.4 million in 1992 to $8.4 million in 1993 due to the decline in operating income, the increase in interest expense and the extraordinary charge. EBITDA was $48.4 million compared to $51.3 million in 1992 as the 4.8% increase in volume, the increase in home heating oil margins were offset by higher residential service related costs and increased marketing expenses.
1992 Compared to 1991
Net sales decreased in 1992 to $512.4 million from $523.2 million in 1991. This $10.8 million decrease was due to lower home heating oil prices ($37.9 million or 7.2%) as a result of lower per gallon wholesale costs, as well as to reductions in sales of products other than #2 fuel oil to commercial accounts ($17.0 million or 3.3%), which were partially offset by an increase in home heating oil volume ($41.0 million or 7.8%). The average price of home heating oil in 1992 was approximately 14.8% below the 1991 levels, when prices were affected by the Persian Gulf crisis.
In 1992, home heating oil volume increased to 423.1 million gallons, 9.7% greater than the 385.6 million gallons delivered in 1991 due to colder temperatures (45.3 million gallons) and the impact of the nine acquisitions completed in 1991 whose full annual volume was realized for the first time in 1992 and from a portion of the annual volume associated with the nine additional acquisitions completed in 1992 (19.2 million gallons). The impact of the acquisitions was offset in part by attrition in the Company's customer base, as well as the loss of certain of its high volume, low margin commercial accounts, as the Company continued to focus its marketing efforts on smaller, higher margin, more service sensitive residential customers.
Gross profit increased $17.0 million (11.8%), or 1.9% per gallon, from $144.5 million in 1991 (37.5 cents per gallon) to $161.5 million in 1992 (38.2 cents per gallon). This increase exceeded the percentage increase in home heating oil volume due to improved per gallon gross profit margins, attributable to the Company's ability to add an increasing gross margin onto its wholesale costs, designed to offset the impact of inflation, account attrition and weather.
Operating expenses increased 5.5% compared to the 9.7% increase in volume and declined 3.9% on a per gallon basis from 27.1 cents in 1991 to 26.1 cents in 1992. The per gallon reduction in operating expenses reflects the savings from the Company's cost reduction program which was begun in April 1991 and economies of scale realized from the Company's acquisition program.
Amortization of customer lists declined 5.4%, or $1.3 million, to $23.5 million in 1992 as certain customer lists became fully amortized and a greater portion of the purchase price in more recent acquisitions was allocated to restrictive covenants and included in deferred charges. As a result of this allocation, amortization of deferred charges increased 3.5% to $5.4 million in 1992. On a combined basis, amortization of customer lists and deferred charges declined 3.9% as the annual amortization associated with assets that became fully amortized was greater than the amount associated with the limited number of acquisitions in 1991 and the impact of the 1992 acquisitions was not fully realized in the current year.
Depreciation and amortization of plant and equipment was $5.5 million for 1992, approximately the same as in 1991, as reductions related to assets that became fully depreciated were offset by increases associated with assets purchased in 1991 and 1992.
Provision for supplemental benefit in 1992 represents the present value of a supplemental retirement benefit ($2.0 million) which is being paid over 10 years.
Operating income increased to $15.0 million, from $4.5 million in 1991. This improvement was due to an increase in home heating oil volume and an improvement in per gallon operating income associated with higher gross profit margins, lower per gallon operating expenses and the decline in the non-cash expenses, partially offset by the provision for the supplemental benefit in 1992.
Net interest expense in 1992 decreased $2.1 million, 10.2% below 1991, due to a decline in average outstanding borrowings from 1991 to 1992 of $15.6 million, which caused a reduction of $1.7 million in interest expense and to an increase in interest income ($0.4 million), generated primarily by a higher average balance in U.S. Treasury Notes held in the Cash Collateral Account. The Company's average borrowing rate increased from 11.2% in 1991 to 11.3% in 1992. Average working capital borrowings dropped from $35.0 million in 1991 at an average interest rate of 8.2% to $17.9 million in 1992, at an average interest rate of 5.9%. Average fixed rate borrowings increased from $147.0 million in 1991 to $148.5 million in 1992 with an average interest rate of 11.9% for both years.
Pretax loss decreased $12.3 million in 1992 from 1991 due to the increase in operating income and the reduction in interest expense, partially offset by the increase in other expenses. Taxes increased from $0.3 million in 1991 to $0.4 million in 1992. Despite the pretax loss, the Company was required to pay certain state income taxes in 1992 and 1991 on profitable subsidiaries that are not included in consolidated state returns. The 1992 loss, while not providing any Federal tax benefits in 1992, will increase the Company's tax loss carryforwards to approximately $43.0 million as of December 31, 1992.
Net loss decreased to $4.4 million in 1992, a $12.2 million improvement over the $16.6 million net loss in 1991.
EBITDA increased 28.2% to $51.3 million in 1992 from $40.0 million in 1991. This improvement was primarily the result of the 9.7% home heating oil volume increase and a 1.7 cents per gallon EBITDA margin improvement.
Liquidity and Financial Condition
One of the Company's primary financial strategies has been to finance its growth through a combination of internally generated capital, the sale of Common Stock, and the issuance of Redeemable Preferred Stock and debt. As indicated in the table below, this strategy has been pursued by financing acquisitions and other asset requirements made in the last five years, 62.6% with internally generated cash and funds from the 1992 offering of 4.3 million shares of Class A Common Stock, 13.3% with Redeemable Preferred Stock and 24.1% with long-term debt and working capital. As a result of this strategy, for the year ended December 31, 1993, EBITDA was 2.4 times net interest expense.
Funding Sources --------------------------------------------------- Acquisitions Internally and Fixed Generated Funds Long-Term Debt Asset and Additional Redeemable and Net Working Year Purchases Equity(1) Preferred Stock Capital(2) - ---- ------------ ---------------- --------------- ---------------- (dollars in thousands)
1989 $ 42,900 $ 20,643 48.1% $ 9,140 21.3% $ 13,117 30.6% 1990 33,077 (544) (1.6) 15,000 45.3 18,621 56.3 1991 16,399 13,834 84.4 4,449 27.1 (1,884) (11.5) 1992 48,478 64,431 132.9 7,500 15.5 (23,453) (48.4) 1993 34,654 11,461 33.1 (12,764) (36.8) 35,957 103.7 -------- -------- -------- --------
Total $175,508 $109,825 62.6% $23,325 13.3% $ 42,358 24.1% ======== ======== ======= ========
(1) Internally generated funds consist of net income plus depreciation and amortization less dividends. Additional equity consisted of $42.7 million from the sale of Class A Common Stock in 1992.
(2) Net working capital was used for other than acquisition and fixed asset purchases. This column reflects only that portion of net working capital utilized for the purpose indicated.
Net cash provided by operating activities of $36.6 million for the year ended December 31, 1993, net of repayments of working capital borrowings of $4.0 million, along with the $48.1 million of net proceeds from the April 1993 public offering of the 10 1/8% Notes amounted to $80.7 million. These funds were utilized in investing activities for acquisitions, purchase of fixed assets and the investment in Star Gas all of which totalled $34.7 million and in financing activities to pay dividends of $14.6 million, to repurchase subordinated debt, including premium, of $25.4 million, to deposit $5.0 million into a cash collateral account to partially secure the Maxwhale Notes, and to make principal payments on other long-term obligations of $0.3 million.
In February 1994, the Company completed a public offering of $75.0 million of its 9 3/8% Debentures due in 2006 ("Debentures"). A portion of the net proceeds from the sale of the Debentures was used to repurchase $50.0 million of the Company's 9% Notes (Maxwhale Notes) due June 1, 1994 at a purchase price equal to 101.33% of the principal amount thereof. The Company will record an extraordinary loss of approximately $0.7 million as a result of the early payment of such debt in 1994. As a result of the repayment of the Maxwhale Notes, the $20.0 million cash collateral account which had partially secured these notes was released to the Company. Pending application for general corporate purposes including the Company's ongoing acquisition program, the balance of the proceeds from the offering and the proceeds from the release of the cash collateral account were applied to reduce working capital borrowings.
A consortium of banks has historically provided the Company with credit facilities, currently consisting of a $75 million credit line pursuant to an amended and restated credit agreement dated as of December 31, 1992 (the "Credit Agreement"). As of December 31, 1993, $28 million of borrowings were outstanding under the Credit Agreement, however; primarily due to the application of the proceeds from the February 1994 offering and to a lesser extent the cash provided from operations in January and February 1994, there were no borrowings outstanding at March 1, 1994.
For 1994, the Company's financing obligations include redeeming $4.2 million of Redeemable Preferred Stock, Redeemable Preferred Stock Dividends of approximately $3.6 million, principal payments on other long-term obligations of $0.3 million and paying Common Stock dividends, anticipated to be approximately $12.2 million. Based on the Company's current cash position, bank credit availability and expected net cash to be provided by operations during 1994, the Company expects to be able to meet all of the above mentioned obligations in 1994, as well as meet all of its other current obligations as they become due.
New Accounting Pronouncements
During the first quarter of 1993, the Company adopted Statement of Financial Accounting Standard No. 106 ("SFAS No. 106"), "Employer's Accounting for Post Retirement Benefits Other Than Pensions." This statement requires that the expected cost of post retirement benefits be fully accrued by the first date of full benefit eligibility, rather than expensing the benefit when payment is made. As the Company generally does not provide for post-retirement benefits, other than pensions, the adoption of the new statement did not have any material effect on the Company's financial condition or results of operations.
During the first quarter of 1993, the Company also adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This statement requires that deferred income taxes be recorded following the liability method of accounting and adjusted periodically when income tax rates change. Adoption of the new statement did not have any effect on the Company's financial condition or results of operations since the Company did not carry any deferred tax accounts on its balance sheet at December 31, 1992 and any net deferred tax asset set up as a result of applying SFAS No. 109 has been fully reserved.
Tax Matters
Federal tax legislation, passed on August 10, 1993, will affect for Federal income tax purposes the manner in which the Company amortizes intangible assets, primarily customer lists and restrictive covenants associated with acquisitions. For financial reporting purposes, the Company historically has amortized 90% of acquired customer lists over a six year period and the balance over a 25 year period, and has followed substantially the same policy for Federal income tax reporting purposes.
The new legislation will require amortization of all intangible assets on a straight line basis over 15 years for Federal income tax reporting purposes, beginning with acquisitions made after the date of enactment. The legislation has no effect on the Company's historic results for financial reporting nor does it affect the Company's Federal income tax reporting up through the date of enactment. For financial reporting purposes, the Company periodically reviews the appropriate allocation of purchase price among the assets acquired. No changes are currently contemplated in the various amortization lives for the intangible assets acquired; however the Company periodically reviews such periods from time to time. The legislation will reduce the Company's annual Federal income tax deduction attributable to future acquisitions by requiring the amortization of such intangibles for Federal income tax purposes over a longer period than the Company currently utilizes. This could cause the Company to pay income taxes in advance of recording financial statement income in the future after utilization of the Company's available net operating loss carryforwards.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
and Financial Statement Schedules
Consolidated Financial Statements of Petroleum Heat and Power Co., Inc. and Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1992 and 1993
Consolidated Statements of Operations, Years ended December 31, 1991, 1992 and 1993
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) Years ended December 31, 1991, 1992 and 1993
Consolidated Statements of Cash Flows, Years ended December 31, 1991, 1992 and 1993
Notes to Consolidated Financial Statements
Consolidated Financial Statements of Star Gas Corporation and Subsidiaries:
Independent Auditors' Reports
Consolidated Balance Sheets, September 30, 1992 and 1993
Consolidated Statements of Operations, years ended September 30, 1991, 1992 and 1993
Consolidated Statements of Shareholders' Equity (Deficiency), years ended September 30, 1991, 1992 and 1993
Consolidated Statements of Cash Flows, years ended September 30, 1991, 1992 and 1993
Notes to Consolidated Financial Statements
Schedules for the years ended December 31, 1991, 1992 and 1993
VIII - Valuation and Qualifying Accounts
IX - Short-term Borrowings
All other schedules are omitted because the required information is either inapplicable or included in the consolidated financial statements or the notes thereto.
Independent Auditors' Report
The Stockholders and Board of Directors of Petroleum Heat and Power Co., Inc.:
We have audited the accompanying consolidated balance sheets of Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1992 and 1993, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1992 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in the notes to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, in 1993.
KPMG Peat Marwick
New York, New York February 28, 1994
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Petroleum Heat and Power Co., Inc. (Petro) and its subsidiaries (the Company), each of which is wholly owned and, like Petro, is engaged in the retail distribution of home heating oil and propane in the Northeast. The Company currently operates in 26 major markets in the Northeast, including the metropolitan areas of Boston, New York City, Baltimore, Providence and Washington, D.C., serving approximately 415,000 customers in those areas. Credit is granted to substantially all of these customers with no individual account comprising a concentrated credit risk.
Investment in Star Gas Corporation
The Company's investment in Star Gas Corporation (see note 11) is accounted for following the equity method.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method. The components of inventories were as follows at the dates indicated:
December 31, ----------------------- 1992 1993 ---- ----
Fuel oil $ 8,151,053 $ 6,289,676 Parts 7,578,252 7,703,252 --------- ---------
$15,729,305 $13,992,928 ========== ==========
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Customer Lists and Deferred Charges
Customer lists are recorded at cost less accumulated amortization. Amortization is computed using the straight-line method with 90% of the cost amortized over six years and 10% of the cost amortized over 25 years.
Deferred charges include goodwill, acquisition costs and payments related to covenants not to compete. The covenants are amortized using the straight-line method over the terms of the related contracts; acquisition costs are amortized using the straight-line method over a six-year period; while goodwill is amortized using the straight-line method over a twenty-five year period. Also included as deferred charges are the costs associated with the issuance of the Company's subordinated notes. Such costs are being amortized using the interest method over the lives of the notes.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
The Company assesses the recoverability of intangible assets by comparing the carrying values of such intangibles to market values, where a market exists, supplemented by cash flow analyses to determine that the carrying values are recoverable over the remaining estimated lives of the intangibles through undiscounted future operating cash flows. When an intangible asset is deemed to be impaired, the amount of intangible impairment is measured based on market values, as available, or by projected operating cash flows, using a discount rate reflecting the Company's assumed average cost of funds.
Unearned Service Contract Revenue
Payments received from customers for burner service contracts are deferred and amortized into income over the terms of the respective service contracts, which generally do not exceed one year.
Customer Credit Balances
Customer credit balances represent payments received from customers pursuant to a budget payment plan (whereby customers pay their estimated annual fuel charges on a fixed monthly basis) in excess of actual deliveries billed.
Income Taxes
The Company files a consolidated Federal income tax return with its subsidiaries. When appropriate, deferred income taxes were provided to reflect the tax effects of timing differences between financial and tax reporting. Effective January 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) (see note 9).
Pensions
The Company funds accrued pension costs currently on its pension plans, all of which are noncontributory.
Common Stock
In July 1992, the holders of Class A Common Stock exchanged 2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C Common Stock (see note 6). All numbers of Class A and Class C Common Stock and related amounts have been retroactively adjusted in the accompanying consolidated financial statements to reflect such exchange.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
Earnings per Common Share
Earnings per common share are computed utilizing the three class method based upon the weighted average number of shares of Class A Common Stock, Class B Common Stock and Class C Common Stock outstanding, after adjusting the net loss for preferred dividends declared and the accretion of 1991 Redeemable Preferred Stock, aggregating $3,292,000, $4,452,000, and $3,367,000 for the years ended 1991, 1992 and 1993, respectively. Fully diluted earnings per common share are not presented because the effect is not material or is antidilutive.
(2) Property, Plant and Equipment
The components of property, plant and equipment and their estimated useful lives were as follows at the indicated dates:
December 31, ----------------- Estimated 1992 1993 useful lives ---- ---- ------------
Land $ 1,469,065 $ 1,519,065 Buildings 7,151,142 7,420,171 20-45 years Fleet and other equipment 38,507,056 38,412,619 3-17 years Furniture and fixtures 10,784,419 11,861,514 5-7 years Leasehold improvements 3,180,615 3,430,193 Terms of leases --------- ---------- 61,092,297 62,643,562 Less accumulated depreciation and amortization 28,342,302 31,103,032 ---------- ----------
$32,749,995 $31,540,530 ========== ==========
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Notes Payable, Other Long-Term Debt and Working Capital Borrowings
Notes payable and other long-term debt, including working capital borrowings and current maturities of long-term debt, consisted of the following at the indicated dates:
December 31, ----------------- 1992 1993 ---- ----
Notes payable to banks under working capital borrowing arrangements(a)(c). $32,000,000 $28,000,000 Notes payable in connection with the acquisition of Whale Oil Corp., refinanced on February 3, 1994 and paid on February 4, 1994, with interest at the rate of 9% per annum(b)(c) 50,000,000 50,000,000 Amounts payable in connection with the purchase of a fuel oil dealer, due in monthly installments with interest at 6% per annum, through June 1, 1996 (see note 10) 113,749 80,404 ---------- ---------- 82,113,749 78,080,404 Less current maturities, including working capital borrowings 32,033,345 28,033,345 ---------- ----------
$50,080,404 $50,047,059 ========== ========== ____________ (a) Pursuant to a Credit Agreement dated December 31, 1992, as restated and amended (Credit Agreement), the Company may borrow up to $75 million under a revolving credit facility with a sublimit under a borrowing base established each month. Amounts borrowed under the revolving credit facility are subject to a 45 day clean-up requirement prior to September 30 of each year and the facility terminates on June 30, 1996. As collateral for the financing arrangement, the Company granted to the lenders a security interest in the customer lists trademarks and trade names owned by the Company, including the proceeds therefrom. Under certain circumstances, the Company would have to further secure its obligations under the credit agreement with a lien on accounts receivable and material inventories.
Interest on borrowings is payable monthly and is based upon the floating rate selected at the option of the Company of either the Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined below), plus 125 to 175 basis points on Eurodollar Loans or 0 to 50 basis points on Alternative Base Rate Loans, based upon the ratio of Consolidated Operating Profit to Interest Expense (as defined in the Credit Agreement). The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted for reserve requirements. The Alternate Base Rate is the greater of (i) the prime rate or base rate of Chemical Bank in effect or (ii) the Federal Funds Rate in effect plus 1/2 of 1%. At December 31, 1993, the rate on the working capital borrowings was 4.9%. The Company pays a facility fee of 0.375% on the unused portion of the revolving credit facility. Compensating balances equal to 5.0% of the average amount outstanding during the relevant period are also required under the agreement.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3), Continued
(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly owned subsidiary of Petro, acquired certain assets of Whale Oil Corp. for $50.0 million. The purchase price was paid by the issuance of $50.0 million of 9% notes due June 1, 1994. The notes were nonrecourse to Petro, but were secured by letters of credit issued by certain banks pursuant to the Credit Agreement. Maxwhale paid a fee on these letters of credit, calculated at a range of 1.75% to 2.25% on $50.0 million less the balance maintained in a Cash Collateral Account, plus 0.25% on the Cash Collateral Account balance. Petro had fully guaranteed these letters of credit. The Maxwhale customer list was pledged pursuant to a security agreement in favor of the banks.
On February 4, 1994, the Company repaid the $50.0 million of Maxwhale notes at a purchase price of 101.33% of the principal amount thereof, with a portion of the proceeds of its $75.0 million 9-3/8% public subordinated debenture offering completed on February 3, 1994 (see note 5). The Company will record an extraordinary loss in 1994 of approximately $0.7 million as a result of the early payment on such debt. Since the Maxwhale notes were refinanced with the proceeds of new long term debt, such notes have been classified as long term at December 31, 1993.
Under the Credit Agreement, the Company was required to make annual deposits into a Cash Collateral Account to secure the outstanding letters of credit. The first such deposit of $5 million was made on June 15, 1991 with additional deposits of $10 million occurring on April 1, 1992 and $5 million on May 15, 1993. As a result of the repayment of the Maxwhale notes, the $20 million in the cash collateral account was released for general corporate purposes on February 4, 1994.
(c) The customer lists, trademarks and trade names pledged to the banks under the Credit Agreement are carried on the December 31, 1993 balance sheet at $73,177,198. Under the terms of the Credit Agreement, the Company is required, among other things, to maintain certain minimum levels of cash flow, as well as certain ratios on consolidated debt. In the event of noncompliance with certain of the covenants, the banks have the right to declare all amounts outstanding under the loans to be due and payable immediately.
With the refinancing of the Maxwhale notes with a portion of the Company's 9-3/8% subordinated debentures, there are no other annual maturities of long-term debt for each of the next five years as of December 31, 1993, except for the required repayments of the acquisition related payable of approximately $80,000 due in equal monthly installments of approximately $3,300 through June 30, 1996.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Leases and Capital Lease Obligations
The Company is obligated under various capital leases entered into during 1988 and 1989 for service vans. The leases expired in 1993 and were renewed on a month to month basis thereafter. The gross amounts of fleet and other equipment and related accumulated amortization recorded under the capital leases were as follows at the dates indicated:
December 31, ------------------ 1992 1993 ---- ----
Fleet and other equipment $2,701,658 2,701,658 Less accumulated amortization 2,598,063 2,701,658 ---------- ---------
$ 103,595 -- ========== =========
Amortization of assets held under capital leases is included with depreciation expense.
The Company also leases real property and equipment under noncancelable operating leases which expire at various times through 2008. Certain of the real property leases contain renewal options and require the Company to pay property taxes.
Future minimum lease payments for all operating leases (with initial or remaining terms in excess of one year) are as follows:
Year ending Operating December 31, leases ------------ ------
1994 $ 3,260,000 1995 2,974,000 1996 2,128,000 1997 1,507,000 1998 1,392,000 Thereafter 5,046,000 ---------
Total minimum lease payments $16,307,000 ==========
Rental expense under operating leases for the years ended December 31, 1991, 1992 and 1993 was $4,916,000, $4,448,000, and $5,346,000, respectively.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Subordinated Notes Payable
Subordinated notes payable, net of unamortized original discounts, at the dates indicated, consisted of:
December 31, --------------------- 1992 1993 ---- ----
11.40% Subordinated Notes due July 1, 1993(a)(b) $12,400,373 $ -- 14.275% Subordinated Notes due October 1, 1995(b) 12,478,349 -- 11.85%, 12.17%, and 12.18% Subordinated Notes due October 1, 1998(c) 60,000,000 60,000,000 14.10% Subordinated Notes due January 15, 2001(d) 12,500,000 12,500,000 Subordinated Notes due March 1, 2000(e) -- 12,763,663 10-1/8% Subordinated Notes due April 1, 2003(f) -- 50,000,000 ---------- ----------- 97,378,722 135,263,663 Less current maturities 12,400,373 -- ---------- ----------
$84,978,349 $135,263,663 ========== ===========
(a) On July 2, 1984, the Company sold $20,000,000 of subordinated notes at an original discount of approximately $150,000. These notes (11.40% Notes) bore interest at 11.40% and were redeemable at the Company's option in whole, at any time, or in part, from time to time, at a redemption price of 101.5% of principal amount through June 30, 1993. Interest was payable quarterly.
(b) On October 8, 1985, the Company sold $25,000,000 of subordinated fixed rate notes at an original discount of approximately $330,000. These notes (14.275% Notes) bore interest at 14.275% and were redeemable at the option of the Company, in whole or in part, from time to time, upon payment of a premium rate of approximately 3.7%, which declined on October 1, 1992 to approximately 2.0% until October 1, 1993, when the 14.275% Notes were redeemable at par.
In April 1991, the Company purchased $5,519,000 and $376,000 face value of its 11.40% Notes and 14.275% Notes, respectively, for an aggregate of $5,617,000. Unamortized deferred charges and bond discounts of $218,000 associated with the issuances of the 11.40% Notes and the 14.275% Notes were written off upon the repurchase of the debt. The Company included a gain of $60,000 in 1991 on these repurchases and included such gain in other income. In March 1992, the Company purchased $2,445,000 of the 14.275% notes at par. Unamortized deferred charges and bond discounts of $62,000 associated with the issuance of these notes were written off on the repurchase of the debt in March 1992. On May 15, 1992, the Company purchased $4,355,000 of the 14.275% Notes at a premium of 3.7%.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(b), continued
Unamortized deferred charges and bond discounts of $106,000 associated with the issuance of these notes were written off on the repurchase of the debt in May 1992. The Company included a loss of $333,000 in 1992 on these repurchases and included such loss in other expenses. In May 1993, the Company repurchased the remaining outstanding amounts of its 11.40% Subordinated Notes due July 1, 1993 having a face amount of $12,430,000, at a redemption price of 101.5% of face value, for an aggregate of approximately $12.6 million and its outstanding 14.275% Subordinated Notes due October 1, 1995, having a face amount of $12,524,000, at a redemption price of 102.0% of face value, for an aggregate of approximately $12.8 million. Unamortized deferred charges and bond discounts of $447,000 associated with the issuance of these Notes were written off on the repurchase of the debt in May 1993. The Company recorded an extraordinary loss of $867,000 as a result of the early retirement of these notes.
(c) On September 1, 1988, the Company authorized the issuance of $60,000,000 of Subordinated Notes due October 1, 1998 bearing interest payable semiannually on the first day of April and October. The Company issued $40,000,000 of such notes on October 14, 1988 bearing interest at the rate of 11.85% per annum, $15,000,000 of such notes on March 31, 1989 bearing interest at the rate of 12.17% per annum and $5,000,000 of such notes on May 1, 1990 bearing interest at the rate of 12.18% per annum. All such notes are redeemable at the option of the Company, in whole or in part, from time to time, upon payment of a premium rate as defined.
(d) On January 15, 1991, the Company authorized the issuance of $12,500,000 of 14.10% Subordinated Notes due January 15, 2001 bearing interest payable quarterly on the fifteenth day of January, April, July and October. The Company issued $5,700,000 of such notes in April 1991 and $6,800,000 in March 1992. The notes are redeemable at the option of the Company, in whole or in part, from time to time, upon payment of a premium rate as defined. On each January 15, commencing in 1996 and ending on January 15, 2000, the Company is required to repay $2,100,000 of the Notes. The remaining principal of $2,000,000 is due on January 15, 2001. No premium is payable in connection with these required payments.
(e) In March 1993, the Company issued $12,764,000 of Subordinated Notes due March 1, 2000 in exchange for an equal amount of 1991 Redeemable Preferred Stock (see note 7). The Company issued the 1991 Redeemable Preferred Stock under an agreement which required the Company to redeem the 1991 Redeemable Preferred Stock as soon as, and to the extent that, it was permitted to incur Funded Debt. Under the applicable provisions of the Company's debt agreements, the Company was allowed to incur Funded Debt in the first quarter of 1993, and as such, was required to enter into the exchange. These notes call for interest payable monthly based on the sum of LIBOR plus 9.28%. At December 31, 1993, LIBOR was 3.25%.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(f) On April 6, 1993, the Company issued $50.0 million of 10-1/8% Subordinated Notes due April 1, 2003. These Notes are redeemable at the Company's option, in whole or in part, at any time on or after April 1, 1998 upon payment of a premium rate as defined. Interest is payable semiannually on the first day of April and October.
Expenses connected with the above six offerings, and amendments thereto, amounted to approximately $8,057,000. At December 31, 1992 and 1993, the unamortized balances relating to notes still outstanding amounted to approximately $1,675,000 and $2,762,000, respectively, and such balances are included in deferred charges.
Aggregate annual maturities for each of the next five years, are as follows as of December 31, 1993:
Year ended December 31, ------------
1994 $ -- 1995 -- 1996 2,100,000 1997 2,100,000 1998 62,100,000
On February 3, 1994, the Company issued $75.0 million of 9-3/8% public subordinated debentures due February 1, 2006. These debentures are redeemable at the Company's option, in whole or in part, at any time on or after February 1, 1997 upon payment of a premium rate as defined. Interest is payable semiannually on the first day of February and August.
In connection with the offering of its 9-3/8% subordinated debentures, the Company solicited and received consents of the holders of at least a majority in aggregate principal amount of each class of subordinated debt and redeemable preferred stock (see note 7) to certain amendments to the respective agreements under which the subordinated debt and the redeemable preferred stock were issued. In consideration for the consents, the Company paid to the holders of the subordinated debt due in 1998, 2000 and 2003 a cash payment aggregating $0.6 million and caused approximately $42.6 million of the aggregate principal amount of such subordinated debt to be ranked as senior debt. In addition, the Company has agreed to increase dividends on the redeemable preferred stock by $2.00 per share per annum. The Company also paid approximately $1.5 million in fees and expenses to obtain such consents (see Note 7).
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Common Stock and Common Stock Dividends
The Company's outstanding Common Stock consists of Class A Common Stock, Class B Common Stock and Class C Common Stock, each with various designations, rights and preferences. In 1992, the Company restated and amended its Articles of Incorporation increasing the authorized shares of Class A Common Stock to 40,000,000 and authorizing 5,000,000 shares of Class C Common Stock, $.10 par value. On July 29, 1992, the holders of Class A Common Stock exchanged, pro rata, 2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C Common Stock. The financial statements, as well as the table on the following page, give retroactive effect to this exchange.
Holders of Class A Common Stock and Class C Common Stock have identical rights, except that holders of Class A Common Stock are entitled to one vote per share and holders of Class C Common Stock are entitled to ten votes per share. Holders of Class B Common Stock do not have voting rights, except as required by law, or in certain limited circumstances.
Holders of Class B Common Stock are entitled to receive, as and when declared by the Board of Directors, Special Dividends equal to .000001666% per share per quarter of the Company's Cash Flow, as defined, for its prior fiscal year. For purposes of computing Special Dividends, Cash Flow represents the sum of (i) consolidated net income, plus (ii) depreciation and amortization of plant and equipment, and (iii) amortization of customer lists and restrictive covenants, (iv) excluding net income (loss) derived from investments accounted for by the equity method, except to the extent of any cash dividends received by the Company. Special Dividends are cumulative and are payable quarterly. If not paid, dividends on any other class of stock may not be paid until all Special Dividends in arrears are declared and paid.
The Company may, in its sole discretion, terminate the payment of the Special Dividends if all Special Dividends have then been paid or duly provided for. If the Company exercises its right to terminate the Special Dividends, it must give notice to the holders of Class B Common Stock not less than 30 days nor more than 60 days prior to the date fixed for termination. In such event, the Special Dividends will terminate on the date specified in the notice (the Parity Date). Each holder of Class B Common Stock will then have a period of 60 days from the date of the notice to elect to require the Company to purchase all or part of such holder's Class B Common Stock at a price of $17.50 per share, as adjusted for stock splits, reclassifications and the like, plus all accrued and unpaid Special Dividends to the date of purchase, or to elect to retain such holder's Class B Common Stock. After the Parity Date, no dividends will be paid to the holders of Class B Common Stock until the holders of Class A Common Stock and Class C Common Stock receive dividends equal to the Common Stock Allocation, as defined.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6), Continued
On July 29, 1992 and September 2, 1992, the Company sold an aggregate of 4,330,000 shares of its Class A Common Stock in a Public Offering (the "Offering") at an initial offering price of $11.00 per share.
On September 17, 1992 the Company commenced an Exchange Offer (Exchange Offer) for all of the outstanding shares of its Class B Common Stock pursuant to which each holder of Class B Common Stock who validly tendered a share of Class B Common Stock for exchange was entitled to receive 1.591 shares of Class A Common Stock. The Exchange Offer expired on October 16, 1992 and, as a result, 2,817,159 shares of Class B Common Stock (92.8% of the total then outstanding) were exchanged for 4,482,021 shares of Class A Common Stock.
The following table summarizes the cash dividends declared on Common Stock and the cash dividends declared per common share for the years indicated:
Year Ended December 31, ------------------------------ 1991 1992 1993 ---- ---- ----
Cash dividends declared Class A $ -- $ 3,157,000 $ 9,971,000 Class B 952,000 2,715,000 408,000 Class C -- 465,000 1,336,000
Cash dividends declared per share Class A $ -- $ 0.18 $ 0.525 Class B 0.31 1.14 1.88 Class C -- 0.18 0.525
Under the Company's most restrictive dividend limitation, $7.1 million was available at December 31, 1993 for the payment of dividends on all classes of Common Stock. The amount available for dividends is increased each quarter by 50% of the cash flow, as defined, for the previous fiscal quarter.
In the event of liquidation of the Company, each outstanding share of Class B Common Stock would be entitled to a distribution equal to its share of all accrued and unpaid Special Dividends, without interest, plus $5.70 per share, before any distribution is made with respect to the Class A or Class C Common Stock. Thereafter, each share of Class B Common Stock and each share of Class A and Class C Common Stock would participate equally in all liquidating distributions, subject to the rights of the holders of the Cumulative Redeemable Exchangeable Preferred Stock. The aggregate liquidation preference on the Class B Common Stock at December 31, 1993 amounted to an aggregate of $1,236,336.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Cumulative Redeemable Exchangeable Preferred Stock
The Company entered into agreements dated as of August 1, 1989 with John Hancock Mutual Life Insurance Company and Northwestern Mutual Life Insurance Company to sell up to 250,000 shares of its Redeemable Preferred Stock, par value $. 10 per share, at a price of $100 per share, which shares are exchangeable into Subordinated Notes due August 1, 1999 (1999 Notes). The Company sold 50,000 shares of the Redeemable Preferred Stock in August 1989, 50,000 shares in December 1989 and 150,000 shares in May 1990. The Redeemable Preferred Stock issued in August 1989 calls for dividends of $12 per share, while the stock issued in December 1989 and May 1990 calls for dividends of $11.84 and $12.61 per share, respectively. In connection with receiving the consents in 1994 to modify certain covenants under which the Redeemable Preferred Stock was issued, the Company has agreed to increase dividends on the Redeemable Preferred Stock by $2.00 per share per annum beginning February 1994. The shares of the Redeemable Preferred Stock are exchangeable in whole, or in part, at the option of the Company, for 1999 Notes of the Company.
On August 1, 1994, and on August 1 of each year thereafter, so long as any of the shares of Redeemable Preferred Stock remain outstanding, one-sixth of the number of originally issued shares of each series of Redeemable Preferred Stock outstanding less the number of shares of such series previously exchanged for 1999 Notes, are to be redeemed, with the final redemption of remaining outstanding shares occurring on August 1, 1999. The redemption price is $100 per share plus all accrued and unpaid dividends to such August 1.
The Company entered into an agreement dated September 1, 1991 with United States Leasing International Inc. to sell up to 159,722 shares of its 1991 Redeemable Preferred Stock, par value $.10 per share, at an initial price of $78.261 per share, which shares were exchangeable into Subordinated Notes due March 1, 2000 (2000 Notes). The Company sold 63,889 shares of the Redeemable Preferred Stock in September 1991 at $78.261 per share and 94,995 shares in March 1992 at $78.951 per share, the accreted value of the initial price. The holders of the shares of 1991 Preferred Stock were entitled to receive monthly dividends based on the annual rate of the sum of LIBOR plus 4.7%.
The Company issued the 1991 Redeemable Preferred Stock under an agreement which required the Company to redeem the 1991 Redeemable Preferred Stock as soon as, and to the extent that it was permitted to incur Funded Debt. Under the applicable provisions of the Company's debt agreements, the Company was allowed to incur Funded Debt in the first quarter of 1993 and as such, was required to enter into the exchange. In March 1993, the Company issued $12,763,663 of 2000 Notes in exchange for all of the 1991 Redeemable Preferred Stock (see note 5).
Preferred dividends of $3,269,000, $4,258,000 and $3,321,000 were declared on all classes of preferred stock in 1991, 1992 and 1993, respectively.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7), Continued
Aggregate annual maturities of Redeemable Preferred Stock are as follows as of December 31, 1993:
Year ended December 31, ------------
1994 $ 4,167,000 1995 4,166,000 1996 4,167,000 1997 4,167,000 1998 4,167,000 1999 4,166,000 ---------
$ 25,000,000 ==========
(8) Pension Plans
The Company has several noncontributory defined contribution and defined benefit pension plans covering substantially all of its nonunion employees. Benefits under the defined benefit plans are generally based on years of service and each employee's compensation, while benefits under the defined contribution plans are based solely on compensation. Pension expense under all plans for the years ended December 31, 1991, 1992 and 1993 was $2,774,000, $2,447,000 and $3,342,000, respectively, net of amortization of the pension obligation acquired.
The following table sets forth the defined benefit plans' funded status and amounts recognized in the Company's balance sheets at the indicated dates:
December 31, -------------------------- 1992 1993 ---- ----
Actuarial present value of benefit obligations: Accumulated benefit obligations including vested benefits of $18,409,871 and $23,566,465 $ 18,790,759 $ 23,848,149 ========== ==========
Projected benefit obligation $(21,715,790) $(26,458,728) Plan assets at fair value (primarily listed stocks and bonds) 16,581,099 17,252,490 ---------- ---------- Projected benefit obligation in excess of plan assets (5,134,691) (9,206,238) Unrecognized net loss from past experience different from the assumed and effects of changes in assumptions 3,645,967 7,538,164 Unrecognized net transitional obligation 606,394 546,784 Unrecognized prior service cost due to plan amendments 674,044 785,832 Additional liability (2,133,731) (6,260,201) ---------- ----------
Accrued pension cost for defined benefit plans $(2,342,017) $(6,595,659) ========== ==========
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8), Continued
Net pension cost for defined benefit plans for the periods indicated included the following components:
Year Ended December 31, -------------------------------------
1991 1992 1993 ---- ---- ---- Service cost-benefits earned during the period $ 1,154,607 $ 1,162,736 $1,391,564 Interest cost on projected benefit obligation 1,665,229 1,781,444 1,778,401 Actual return on assets (2,515,808) (1,248,604) (994,937) Net amortization and deferral of gains and losses 1,471,819 (71,885) 207,465 --------- --------- ---------
Net periodic pension cost for defined benefit plans $ 1,775,847 $ 1,623,691 $2,382,493 ========= ========= =========
Assumptions used in the above accounting were:
Discount rate 8.5% 8.5% 7.0% Rates of increase in compensation level 6.0% 6.0% 4.0% Expected long-term rate of return on assets 10.0% 10.0% 8.5%
In addition to the above, the Company made contributions to union-administered pension plans during the years ended December 31, 1991, 1992 and 1993 of $2,365,000, $2,442,000 and $2,867,000, respectively.
The Company has recorded an additional minimum pension liability for underfunded plans of $5,866,651 at December 31, 1993, representing the excess of unfunded accumulated benefit obligations over plan assets. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed the related unrecognized prior service costs and net transition obligation, in which case the increase in liabilities is charged as a reduction of stockholders' equity. The Company has recorded intangible assets of $1,332,616 and a reduction in stockholders' equity of $4,534,035 as of December 31, 1993.
In connection with the purchase of shares of a predecessor company as of January 1, 1979 by a majority of the Company's present holders of Class C Common Stock, the Company assumed a pension liability in the aggregate amount of $1,512,000, as adjusted, representing the excess of the actuarially computed present value of accumulated vested plan benefits over the net assets available for such benefits. Such liability, which amounted to $1,212,843 at December 31, 1993, is being amortized over 40 years.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's chairman and co-chief executive officer, was entitled to receive $25,000 per month for a period of 120 months following his retirement. In the event of his death, his designated beneficiary is entitled to receive such benefit. The expense related to this benefit was being accrued over the estimated remaining period of Mr. Sevin's employment. Mr. Sevin passed away in
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8), Continued
December 1992, prior to his retirement. The accrual for such benefit payable was accelerated at December 31, 1992 to $1,973,000, the present value (using a discount rate of 9%) of the payments now payable to his beneficiary, which payments commenced in January 1993.
During the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 106 (SFAS No. 106) "Employers' Accounting for Post Retirement Benefits Other Than Pensions." This Statement requires that the expected cost of postretirement benefits be fully accrued by the first date of full benefit eligibility, rather than expensing the benefit when payment is made. As the Company generally does not provide for postretirement benefits, other than pensions, the adoption of the new Statement did not have any material effect on the Company's consolidated financial condition or results of operations.
(9) Income Taxes
Income tax expense was comprised of the following for the indicated years: Year Ended December 31, ------------------------
1991 1992 1993 ---- ---- ---- Current:
Federal $ -- $ -- $ -- State 250,000 400,000 400,000 ------- ------- ------- $250,000 $400,000 $400,000 ======= ======= =======
Deferred income tax expense results from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of these differences and the tax effects of each were as follows:
Year Ended December 31, ---------------------------- 1991 1992 1993 ---- ---- ---- Excess of tax over book (book over tax) depreciation $(114,000) $ (11,000) $ 242,000 Excess of book over tax vacation expense (223,000) (3,000) (93,000) (Excess of book over tax) tax over book bad debt expense (74,000) (165,000) 92,000 (Excess of book over tax) tax over book supplemental benefit expense -- (671,000) 12,000 Deferred service contracts 66,000 66,000 18,000 Other, net 36,000 50,000 (60,000) Recognition of tax benefit of net operating loss to the extent of current and previously recognized temporary differences -- -- (211,000) Deferred tax assets not recognized 309,000 734,000 -- ------- ------- ------- $ -- $ -- $ -- ======= ======= =======
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9), Continued
As of December 31, 1993, the Company has for Federal tax reporting purposes, a net operating loss (NOL) carryforward of approximately $51.3 million. Total income tax expense amounted to $250,000 for 1991, $400,000 for 1992, and $400,000 for 1993. The following reconciles the effective tax rates to the "expected" statutory rates for the years indicated:
Year Ended December 31, ---------------------- 1991 1992 1993 ---- ---- ----
Computed "expected" tax (benefit) rate (34.0)% (34.0)% (34.0)% Reduction of income tax benefit resulting from: Net operating loss carryback limitation 34.0 34.0 34.0 State income taxes, net of Federal income tax benefit 1.5 10.0 5.6 ---- ---- ----
1.5% 10.0% 5.6% === ==== ====
During the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). 'This Statement requires that deferred income taxes be recorded following the liability method of accounting and adjusted periodically when income tax rates change. Adoption of the new Statement did not have any effect on the Company's consolidated financial condition or results of operations since the Company did not carry any deferred tax accounts on its balance sheet at December 31, 1992 and any net deferred assets set up as a result of applying SFAS 109 have been fully reserved.
Under SFAS No. 109, as of January 1, 1993, the Company had net deferred tax assets of approximately $14.1 million subject to a valuation allowance of approximately $14.1 million. The components of and changes in the net deferred tax assets and the changes in the related valuation allowance for 1993 using current rates were as follows (in thousands):
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9), Continued
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has determined, based on the Company's recent history of annual net losses, that a full valuation allowance is appropriate.
At December 31, 1993, the Company had the following income tax carryforwards for Federal income tax reporting purposes (in thousands):
Expiration Date Amount ---- ------ 2005 $26,651 2006 15,012 2007 1,367 2008 8,286 ------- $51,316 ======
(10) Related Party Transactions
In connection with the acquisition of customer lists, equipment and other assets of previously unaffiliated fuel oil businesses, the Company entered into lease agreements covering certain vehicles with individuals, including certain stockholders, directors and executive officers. These leases are currently on a month-to-month basis, on terms comparable with leases from unrelated parties. Annual rentals under these leases are approximately $150,000.
During 1981, the Company acquired the customer list, equipment and accounts receivable of a fuel oil business from two individuals, one of whom is, and the other of whom was, prior to his death, stockholders, directors and executive officers of the Company. The purchase price was approximately $1,233,000, of which $733,000 was paid at the closing and the balance was financed through the issuance of a $500,000, 6%, 15-year term note secured by property of the Company. The unpaid balance of this note at December 31, 1993 was $80,404 (see note 3).
On November 6, 1985, the Company sold a building to certain related parties for $660,000, the same price the Company originally paid for the property in June 1984 and which was also the facility's independently appraised fair market value. The parties then leased the facility back to the Company pursuant to a ten-year agreement providing for rentals of $90,000 per annum plus escalation and taxes.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10), Continued
Until 1985, the Company occupied a certain building under a lease agreement with an unaffiliated lessor. The lease was accounted for as a capital lease and, as such, the capitalized leased asset and obligation were included on the Company's balance sheet. In November 1985, pursuant to a competitive bidding process, the Company purchased the building from the landlord for $1,500,000. The building was resold for $1,500,000 in December 1985 to certain related parties, some of whom are stockholders, directors and executive officers of the Company. These related parties are leasing the building to the Company under a lease agreement which calls for rentals of $315,000 per annum (which was the independently appraised lease rental) plus escalations and which expires in 1995.
In October 1986, Irik P. Sevin purchased 161,313 shares of Class A Common Stock and 40,328 shares of Class C Common Stock (after giving retroactive effect to the exchange of Class C Common Stock for Class A Common Stock in July 1992) of the Company for $1,280,000 (which was the fair market value as established by the Pricing Committee pursuant to the Stockholders' Agreement described below). The purchase price was financed by a note originally due December 31, 1989, but which has been extended to December 31, 1994. The note was amended in 1991 to increase the principal amount by $152,841, the amount of interest due from October 22, 1990 through December 31, 1991 and to change the interest rate on the note effective January 1, 1992 from 10% per annum to the LIBOR rate in effect for each month plus 0.75%. The note was amended again in 1992 to increase the principal amount by $66,537, the amount of interest due from January 1, 1992 through December 31, 1992. The note was amended in 1993 to increase the principal amount by $60,449, the amount of interest due from January 1, 1993 through December 31, 1993. At any time prior to the due date of the note, Mr. Sevin has the right to require the Company to repurchase all or any of these shares (as adjusted for stock splits, dividends and the like) for $6.35 per share (the Put Price), provided, however, that Mr. Sevin retain all shares of Class B Common Stock issued as stock dividends on the shares without adjustments to the Put Price. In December 1986, 50,410 shares of Class B Common Stock were issued as a stock dividend with respect to these shares, which shares were exchanged in October 1992 for 80,202 Class A Common Shares pursuant to the Exchange Offer discussed in Note 6. Upon the repurchase of the shares, the Company has agreed to issue an eight-year option to Mr. Sevin to purchase a like number of shares at the Put Price. Mr. Sevin has entered into an agreement with the Company that he will not sell or otherwise transfer to a third party any of the shares of Class A Common Stock or Class C Common Stock received pursuant to this transaction until the note has been paid in full.
In November 1986, the Company issued stock options to purchase 30,000 shares and 20,000 shares, of the Class A Common Stock of the Company to Irik P. Sevin and Malvin P. Sevin, respectively, subject to adjustment for stock splits, stock dividends, and the like, upon the successful completion of a public offering of at least 10% of the common stock of the Company. Such a public offering was completed in December 1986. The option price for the shares of Class A Common Stock was $20 per share. The options, which expire on November 30, 1994, are nontransferable. As a result of stock dividends in the form of Class A Common Stock and Class B Common Stock declared by the Company in
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10), Continued
December 1986, the exchange of Class C Common Stock for Class A Common Stock in July 1992, and special antidilution adjustments, the options held by Irik P. Sevin now apply to 89,794 shares of Class A Common Stock and 22,448 shares of Class C Common Stock and the options held by Malvin P. Sevin now apply to 59,862 shares of Class A Common Stock and 14,966 shares of Class C Common Stock. The adjusted option price for each such share is $4.10.
On December 28, 1987, the Company issued stock options to purchase 24,000 shares of Class A Common Stock and 6,000 shares of Class C Common Stock (after giving retroactive effect to the exchange of' Class C Common Stock for Class A Common Stock in July, 1992) to Irik P. Sevin. The option price for each such share is $7.50. These options are not transferable and expire on January 1, 1996.
On March 3, 1989, the Company issued stock options to purchase 72,000 shares of Class A Common Stock and 18,000 shares of Class C Common Stock (after giving retroactive effect to the exchange of Class C Common Stock for Class A Common Stock in July 1992) to Irik P. Sevin and 48,000 shares of Class A Common Stock and 12,000 shares of Class C Common Stock (after giving retroactive effect to the exchange of Class C Common Stock for Class A Common Stock in July 1992) to Malvin P. Sevin. The option price for each such share is $11.25. These options are nontransferable, Malvin P. Sevin's option expired unexercised while Irik P. Sevin's options expire on March 3, 1999.
On November 1, 1992, the Company issued stock options to an officer of the Company to purchase 25,000 shares of Class A Common Stock and issued another 25,000 stock options to this officer in June 1993. The option price for each such share is $11.00. Twenty percent of the options become exercisable on each of the next five anniversary dates of the grants.
In December 1992, Malvin P. Sevin passed away. All options previously owned by him are exercisable by his estate up until the original expiration date of such options.
During the first quarter of 1991, the Company contemplated the acquisition of a business engaged in the distribution of packaged industrial gases for other than heating purposes ("Packaged Industrial Gas Business"). As the Company was prohibited from making this acquisition because of restrictions under the Credit Agreement from which the Company was unable to obtain a waiver, the acquisition was consummated by certain of the principal holders of the Class C Common Stock. The Company entered into an agreement with the Packaged Industrial Gas Business to provide management services on request for a fee equal to the allocable cost of Company personnel devoted to the business with a minimum fee of $50,000 per annum plus an incentive bonus equal to 10% of the cash flow above budget. The fee received under such management contract for the seven months ended December 31, 1991 was $29,000 and for the years ended December 31, 1992 and 1993 was $50,000 and $4,000, respectively. Simultaneously with this acquisition, the Company entered into an option agreement expiring May 31, 1996 pursuant to which the Company had the right, exercisable at any time, to acquire the Packaged Industrial Gas Business for its fair market value, as determined by an independent appraisal. In January 1993, the Packaged Industrial Gas Business was sold by its owners to an unrelated third party and the Company's option agreement and management services agreement were cancelled.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10), Continued
On August 1, 1991, the Company agreed to purchase certain assets of a fuel oil distributor for approximately $17 million, however, certain restrictions under the Company's lending arrangements made the cost of the acquisition unduly burdensome. Accordingly, in October 1991, certain shareholders of the Company, owning approximately 9% of the Class C Common Stock and certain unaffiliated investors, organized RAC Fuel Oil Corp. (RAC) to acquire such business, but gave Petro a five year option, which Petro was required to exercise when permitted by its lending arrangements, to purchase RAC for the same price, as adjusted for operations while the business was owned by RAC. Pending exercise of its option, the Company had been managing RAC's business at an annual fee of $161,000, which was designed to compensate the Company for its estimated costs and for supplying fuel oil to RAC at the Company's cost. In August 1992, the Company was able to and did exercise its option to buy RAC. The acquisition price was approximately $17 million.
The existing holders of Class C Common Stock of the Company have entered into a Shareholders' Agreement which provides that, in accordance with certain agreed-upon procedures, each will vote his shares to elect certain designated directors. The Shareholders' Agreement also provides for first refusal rights to the Company if a holder of Class C Common Stock receives a bona fide written offer from a third party to buy such holder's Class C Common Stock.
(11) Investment in Star Gas
In December 1993, the Company acquired an approximate 29.5% equity interest (42.8% voting interest) in Star Gas for $16.0 million in cash. Of such $16.0 million investment, $14.0 million was invested directly in Star Gas through the purchase of Series A 8% pay-in-kind Cumulative Convertible Preferred Stock of Star Gas, which is convertible into common stock of Star Gas, and $2.0 million was invested through Star Gas Holdings, Inc. ("Holdings"), a newly formed corporation. Certain other investors (including Holdings) invested a total of $49.0 million of additional equity in Star Gas, of which $11.0 million was in the form of cash and $38.0 million resulted from the conversion of long-term debt and preferred stock into equity. As a result of redemptions of a portion of the equity in Star Gas held by certain of the other investors that the Company expects will occur in connection with a Star Gas recapitalization, the Company expects that its direct and indirect equity interest in Star Gas will increase to 36.7% without any additional investment by the Company.
Star Gas has granted to the Company an option, exercisable through December 20, 1998, to purchase 500,000 shares of common stock of Star Gas for an aggregate purchase price of approximately $5.0 million. In addition, each of the other investors in Star Gas (including each such investor whose investment is held through Holdings) has granted to the Company an option, exercisable for the period beginning on the date that Star Gas' audited financial statements for its fiscal year ended September 30, 1994 are first delivered to such investors and ending on December 31, 1998, to purchase such investor's interest in Star Gas
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11), Continued
(or, in the case of Holdings, to purchase such investor's interest in Holdings). In addition, each such investor has an unconditional option, exercisable beginning January 1, 1999 and ending on December 31, 1999, to require the Company to purchase such investor's interest in Star Gas (or Holdings). The purchase prices upon exercise of any such options are calculated based upon specified multiples of Star Gas' earnings before interest, taxes, depreciation and amortization (EBITDA), subject to certain minimum prices, and are payable in cash or Class A common stock of the Company or, in the case of the Holdings' options, in cash, subordinated debt of the Company or, if the Company is not then permitted to issue such debt, preferred stock of the Company.
The investors in Star Gas have entered into a shareholders' agreement, which provides that the Company is entitled to nominate for election up to three persons to serve as directors of Star Gas, Holdings is entitled to nominate up to two persons, and the other investors (as a group) are entitled to nominate up to three persons. In addition, the shareholders' agreement provides that each investor in Star Gas, prior to selling any of its equity interests in Star Gas to any purchaser other than another investor in Star Gas, must first offer to sell such equity interests to Star Gas and then to the other investors.
The Company is managing Star Gas' business under a Management Services Agreement which provides for an annual cash fee of $500,000 and an annual bonus equal to 5% of the increase in Star Gas' EBITDA over the fiscal year ended September 30, 1993, payable in common stock of Star Gas pursuant to a formula set forth in the Management Services Agreement. Star Gas also reimburses the Company for its expenses and the cost of certain Company personnel.
(12) Acquisitions
During 1991, the Company acquired the customer lists and equipment of nine unaffiliated fuel oil dealers. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $12,500,000.
During 1992, the Company acquired the customer lists and equipment of nine unaffiliated fuel oil dealers. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $41,500,000.
During 1993, the Company acquired the customer lists and equipment of nine unaffiliated fuel oil dealers. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $13,600,000. In addition, during 1993, the Company acquired a 29.5% interest in Star Gas Corporation for $16,000,000.
Sales and net income of the acquired companies are included in the consolidated statements of operations from the respective dates of acquisition. Star Gas will be accounted for following the equity method of accounting beginning January 1994.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12), Continued
Unaudited pro forma data giving effect to the purchased businesses and to the Star Gas investment as if they had been acquired on January 1 of the year preceding the year of purchase, with adjustments, primarily for amortization of intangibles, are as follows:
Year Ended December 31, ----------------------- 1991 1992 1993 ---- ---- ---- (in thousands, except per share data)
Net sales $ 593,876 $604,491 $557,843 ========= ======== ========
Equity in (share of loss of) Star Gas Corporation -- 167 (11,923) ========= ======== ========
Net loss (15,547) (3,012) (19,570) ========= ======== ========
Earnings (loss) per common share: Class A Common Stock $ (1.62) $ (.81) $ (1.09) Class B Common Stock .57 1.77 2.47 Class C Common Stock (1.62) (.81) (1.09) ========= ======== ========
(13) Supplemental Disclosure of Cash Flow Information
Year Ended December 31, ---------------------- 1991 1992 1993 ---- ---- ----
Cash paid during the year for: Interest $ 21,928,724 $20,238,486 $21,705,736 Income taxes 202,650 319,487 495,739
Noncash financing activities: Redemption of preferred stock -- -- (12,763,663) Issuance of subordinated notes payable -- -- 12,763,663 Minimum pension liability -- -- 5,866,651 Deferred pension costs -- -- (1,332,616) Minimum pension liability adjustment -- -- (4,534,035)
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Disclosures About the Fair Value of Financial Instruments
Cash, Accounts Receivable, Notes Receivable and Other Current Assets, U.S. Treasury Notes held in a Cash Collateral Account, Working Capital Borrowings, Accounts Payable and Accrued Expenses
The carrying amount approximates fair value because of the short maturity of these instruments.
Long-Term Debt, Subordinated Notes Payable and Cumulative Redeemable Exchangeable Preferred Stock
The fair values of each of the Company's long-term financing instruments, including current maturities, are based on the amount of future cash flows associated with each instrument, discounted using the Company's current borrowing rate for similar instruments of comparable maturity.
The estimated fair value of the Company's financial instruments are summarized as follows:
At December 31, 1993 -------------------- Carrying Estimated Amount Fair Value ------ ---------- (amounts in thousands)
Long-term debt $ 50,080 $ 50,076 Subordinated notes payable 135,264 148,644 Cumulative Redeemable Exchangeable Preferred Stock 25,000 27,170
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(Continued)
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Selected Quarterly Financial Data (Unaudited) (in thousands, except per share data)
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of Star Gas Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Star Gas Corporation and subsidiaries as of September 30, 1993 and the related consolidated statements of operations, shareholders' equity (deficiency), 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 consolidated 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 present fairly, in all material respects, the financial position of Star Gas Corporation and subsidiaries at September 30, 1993 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick
New York, New York December 28, 1993
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Star Gas Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Star Gas Corporation and subsidiaries as of September 30, 1992 and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the two years in the period ended September 30, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Star Gas Corporation and subsidiaries at September 30, 1992, and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 30, 1992 in conformity with generally accepted accounting principles.
ERNST & YOUNG
New York, New York December 3, 1992, except for Notes 5 and 9, as to which the date is April 1, 1993
STAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Star Gas Corporation (the "Company") primarily sells and distributes propane gas and related appliances to retail and wholesale customers through its branch offices located principally in the Northeastern, Southeastern and Midwestern United States. The Company had been owned 45% by Star Energy Inc., ("SEI"), a wholly owned subsidiary of The Brooklyn Union Gas Company, and 55% by a group of limited partnerships--American Gas and Oil Investors, AmGO II, AmGO III, and First Reserve Secured Energy Assets Fund, L.P. These limited partnerships are managed by the First Reserve Corporation (and are collectively referred to herein as "FRC").
In September 1989, the Company purchased 15.12 shares of common stock owned by an officer for a 10% Junior Subordinated Promissory Note in the amount of $2,187,916 (see note 5). These shares were held in treasury at September 30, 1993 and 1992.
In June 1991, the Company converted $1,796,500 and $2,196,000 of Junior Subordinated Debt owed to SEI and FRC into 1,796.5 shares and 2,196 shares of Series A Preferred Stock, respectively. The conversion rate was one share of Series A Preferred Stock for every $1,000 of Junior Subordinated Debt.
In September 1991, the Company sold 13.77 shares of common stock to SEI and 16.83 shares of common stock to FRC for $2,193,300 and $2,680,600, respectively, and sold 2,306.7 shares of Series A Preferred Stock to SEI and 2,819.4 shares of Series A Preferred Stock to FRC for $2,306,700 and $2,819,400, respectively.
In August 1992, the Company sold 4.81 shares of common stock to SEI and 5.88 shares of common stock to FRC for $900,000 and $1,100,000, respectively.
In March 1993, the Company and the shareholders signed a Cancellation of Indebtedness and Deferral Agreement (the "Cancellation Agreement"). Under the terms of the Cancellation Agreement, SEI and FRC agreed to cancel $639,000 and $781,000, respectively, of long-term liabilities acquired from a third party (see note 9) in consideration of 639 and 781 shares, respectively, of newly issued 8% Cumulative Convertible Preferred Stock.
As a result of the above mentioned transactions, SEI and FRC continued to own 45% and 55%, respectively, of the common, Series A Preferred and 8% Cumulative Convertible Preferred Stock of the Company at September 30, 1993 and 1992.
On December 2, 1993, the Company sold the branches of its wholly owned subsidiary, Federal Petroleum Company ("Federal"), for $1,650,000 in cash and a note receivable of $500,000. At September 30, 1993, the Company adjusted the carrying value of the net assets sold to equal the sales price, $2,150,000. The Company is also negotiating to sell the branches of its wholly owned subsidiary, Highway Pipeline Trucking Co. ("Highway"), and has adjusted the carrying value of Highway's net assets to equal the value of a recent offer received, $5,228,126. The net assets of Federal and Highway have been reflected in the 1993 Consolidated Balance Sheet as assets held for sale in the aggregate amount of $7,378,126. (See note 10)
On December 23, 1993, the Company was recapitalized and, as a part of the recapitalization, issued 269,750 shares of 8% Cumulative Convertible Preferred Stock (see note 2) for $26,975,000 in the indicated amounts to the following investors: Petroleum Heat and Power Co., Inc. ("Petro") ($14,000,000), FRC ($1,975,000) and Star Gas Holdings Inc. ("Holdings") ($11, 000,000). Holdings is a corporation recently formed for the purpose of investing in the Company. Holdings was formed by a group of investors, including Petro who contributed $2,000,000 of the $11,000,000 invested by
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND BUSINESS--(CONTINUED)
Holdings. The cash proceeds received by the Company from the issuance of the preferred stock were used to repay $14,325,000 of its outstanding 11.56% Senior Notes, to repay $2,800,000 of its outstanding Term Loan, and to pay interest in arrears of $7,957,000. The Company estimates that the expenses relating to the recapitalization will approximate $1 million. Also on that date, the Company issued 250,000 shares of its 8% Cumulative Convertible Preferred Stock and 75,000 shares of its 12.625% Cumulative Redeemable Preferred Stock to The Prudential Insurance Company of America ("Prudential") in exchange for $32,500,000 of its 12.625% Senior Subordinated Participating Notes. (See note 5)
The Company simultaneously entered into a management services agreement with Petro under which Petro will provide executive, financial, and managerial oversight services to the Company. In full consideration and compensation for its services, Petro will receive $500,000 per year plus expenses, plus an annual bonus fee to be paid in the Company's Class A Common Stock equal in value to 5% of the increase in operating income before depreciation and amortization, as defined, over the amount generated for the year ended September 30, 1993.
Petro has an option to buy all of the shares of common stock and the 8% Cumulative Convertible Preferred Stock owned by FRC, Prudential, and Holdings. This option commences after the receipt of the audited financial statements for the year ended September 30, 1994 and ends on December 31, 1998. In addition, FRC, Prudential and Holdings have the option, beginning on January 1, 1999 and ending on December 31, 1999, to require Petro to purchase all of their shares of the Company's common stock and 8% Cumulative Convertible Preferred Stock. Under the terms of the put/call agreements with FRC and Prudential, Petro has the right to purchase these shares with either cash or shares of Petro's Class A Common Stock. Under the terms of the put/call agreement with Holdings, Petro has the right to purchase these shares for cash, notes or Petro preferred stock.
In addition, Petro and FRC have each been granted an option to purchase 500,000 shares of the Company's Class A Common Stock for $9.9031 and $14.8546 per share, respectively. These options expire on December 20, 1998.
(2) RECAPITALIZATION
On December 21, 1993, the Company amended its Articles of Incorporation and authorized the issuance of three new classes of common stock, Class A, Class B, and Class C, each with identical rights and preferences, except that Class A has one vote per share, Class B is nonvoting and Class C has 10 votes per share, and two new classes of preferred stock, a new 8% Cumulative Convertible Preferred Stock and a 12.625% Cumulative Redeemable Preferred Stock.
The Company is authorized to issue the indicated number of shares in the following classes of its common stock:
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The Company is authorized to issue the indicated number of shares in the following series of its 8% Cumulative Convertible Preferred Stock:
The Company is authorized to issue the indicated number of shares in the following series of its 12.625% Cumulative Redeemable Preferred Stock:
All dividends on the Series A, B, D and E 8% Cumulative Convertible Preferred Stock and on the Series A and B 12.625% Cumulative Redeemable Preferred Stock are to be paid in additional shares of the same preferred stock series. The holders of the Series C 8% Cumulative Convertible Preferred Stock have the option, upon delivering proper notice, to be paid in cash or in additional shares of Series C 8% Cumulative Convertible Preferred Stock.
Each share of Series A, C and E 8% Cumulative Convertible Preferred Stock is convertible into 9.2278 shares of Class A Common Stock and the shareholders are entitled to one vote for each as-if-converted common share. Each share of Series B 8% Cumulative Convertible Preferred Stock is convertible into 7.0746 shares of nonvoting Class B Common Stock and each share of Series D 8% Cumulative Convertible Preferred Stock is convertible into 9.2278 shares of nonvoting Class B Common Stock.
The holders of Series A, C and E 8% Cumulative Convertible Preferred Stock are entitled to vote together, with the holders of shares of common stock, as a single class, with each as-if-converted common share of such 8% Cumulative Convertible Preferred Stock entitled to one vote. The holders of shares of the Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B 12.625% Cumulative Redeemable Preferred Stock are not entitled to vote on any matters, except as required by law or as specified in the Company's Articles of Incorporation.
Upon the occurrence of any liquidating event, each holder of shares of Series A, B, C and D 8% Cumulative Convertible Preferred Stock and Series A 12.625% Cumulative Redeemable Preferred Stock is entitled, before any distribution or payment is made upon any shares of common stock or any other junior security, to a pro rata amount of each series' liquidation value per share. In the event of liquidation, the remaining order of liquidation is as follows: Series B 12.625% Cumulative Redeemable Preferred Stock, Series E 8% Cumulative Convertible Preferred Stock and finally, the common stock of the Company, with each share of Class A, B, and C Common Stock sharing ratably.
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
As part of the recapitalization, the Company issued the following shares of 8% Cumulative Convertible Preferred Stock for $100 per share, $26,975,000 in the aggregate:
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
In addition, the Company exchanged $32,500,000 of its 12.625% Senior Subordinated Participating Notes held by Prudential for the following shares of preferred stock at $100 per share:
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company, simultaneously with the issuance of the 8% Cumulative Convertible Preferred Stock and the 12.625% Cumulative Redeemable Preferred Stock, redeemed $4,080,000 plus accrued interest in certain notes held by FRC, $1,420,000 in previously outstanding 8% Cumulative Convertible Preferred Stock, the previously outstanding Series A Preferred Stock and all previously outstanding shares of common stock in exchange for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock and 480,695 shares of Class A Common Stock. In addition, prior to the recapitalization, all shares previously held by SEI were acquired by FRC.
Upon the sale of Highway and Federal, the Company is required to apply the net proceeds from the sales to repurchase, at $100 per share plus an additional amount sufficient to generate a yield equal to 12.625% compounded semiannually from December 21, 1993, the Series D 8% Cumulative Convertible Preferred Stock from Prudential. The Company also has an option, which expires on December 31, 1995, to repurchase the balance of the Series D shares at the same formula price. As the Company redeems shares of its Series D 8% Cumulative Convertible Preferred Stock, FRC has agreed to return, as a contribution to the capital of the Company, a number of shares of Class A Common Stock of the Company owned by FRC, determined by multiplying 48,569 by a fraction, the numerator of which is the face value of the Series D 8% Cumulative Convertible Preferred Stock redeemed and the denominator of which is $10 million. On December 2, 1993, the Company sold Federal for an aggregate price of $2.15 million, consisting of $1.65 million in cash and a $500,000 note. The cash from the sale was held in escrow until the recapitalization was completed. On December 23, 1993, such cash was used to repurchase a portion of the Series D 8% Cumulative Convertible Preferred Stock as described above. The Company is currently negotiating to sell Highway. (See note 1).
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The 12.625% Cumulative Redeemable Preferred Stock must be exchanged into subordinated notes once the Company meets certain financial ratios; to the extent not previously exchanged, the Company is required to apply up to $2 million on January 10, 2000 to redeem 12.625% Cumulative Redeemable Preferred Stock plus an amount sufficient to redeem any 12.625% Cumulative Redeemable Preferred Stock received as dividends thereon, and to the extent shares still remain outstanding, the Company is required to redeem the remaining shares on January 10, 2001.
As of December 23, 1993, after giving effect to the recapitalization of the Company, assuming conversion of all of the 8% Cumulative Convertible Preferred Stock into common stock and assuming no issuance of any option shares, the investors would have the following equity interests and voting percentages on most matters, except for certain voting rights for the Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B 12.625% Cumulative Redeemable Preferred Stock designated by law or as specified in the Company's Articles of Incorporation:
Combining Petro's interest with its ownership interest in Holdings, Petro's equity interest would increase to 29.5%, but its voting interest would remain at 42.8%.
Assuming further that the Series D 8% Cumulative Convertible Preferred Stock is repurchased from Prudential and FRC contributes the full 48,569 common shares back to the Company, the investors would then have the following interests:
Combining Petro's interest with its ownership interest in Holdings, Petro's equity interest would increase to 36.7%, but its voting interest would remain at 43.5%.
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The following represents the capitalization of the Company as of September 30, 1993 and as adjusted to give effect to the recapitalization as discussed above, as if such recapitalization had occurred on September 30, 1993:
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market following the moving weighted average method, which approximates first-in, first-out cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the depreciable assets (generally thirty years for buildings and seven to thirty years for equipment) using the straight-line method. Gain or loss on property retired, sold or otherwise disposed
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of is included in operations. Expenditures for renewals and improvements are capitalized, while maintenance and repairs are expensed.
Intangible Assets
Beginning on October 1, 1992, the excess of cost over the fair value of net assets acquired is being amortized using the straight-line method over 10 years. Prior to October 1, 1992, such assets were being amortized over 40 years. The effect of the change in 1993 was to increase amortization expense by $1,160,000. Other intangible assets, principally covenants not to compete, capitalized consulting costs and customer contracts and lists are being amortized over their estimated useful lives, ranging from one to ten years. Deferred charges, representing costs associated with the issuance of the Company's debt, are being amortized over the lives of the related debt.
The Company assesses the recoverability of intangible assets by comparing the carrying values of such intangibles to market values, where a market exists, supplemented by cash flow analyses to determine that the carrying values are recoverable over the remaining estimated lives of the intangibles through undiscounted future operating cash flows. Where an intangible asset is deemed to be impaired, the amount of intangible impairment, is measured based on market values, as available, or by projected cash flows.
Customer Credit Balances
Customer credit balances represent payments received from customers pursuant to a budget payment plan (whereby customers pay their estimated annual propane gas charges on a fixed monthly basis) in excess of actual deliveries billed.
Cash Equivalents
For the purpose of determining cash equivalents used in the preparation of the Statements of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased, to be cash equivalents.
Basis of Presentation
Certain reclassifications have been made to the 1992 and 1991 financial statements to conform to the 1993 presentation.
(4) ACQUISITIONS
The Company expanded its operations in the retail and wholesale propane gas businesses by making several acquisitions during the fiscal years ended September 30, 1991, 1992 and 1993 as described below. The acquisitions were accounted for under the purchase method of accounting and, therefore, the purchase prices have been allocated to the assets and liabilities acquired based on their respective fair market values at the dates of acquisition. The purchase prices in excess of the fair values of net assets acquired were classified as excess of cost over net assets acquired in the Consolidated Balance Sheets. The results of operations of the respective acquired companies have been included in the Consolidated Statements of Operations from the dates of acquisition.
During fiscal 1991, the Company acquired certain assets of six unaffiliated liquified petroleum gas businesses. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $1,420,000.
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACQUISITIONS--(CONTINUED)
During fiscal 1991, the Company also entered into an operating lease for certain assets of a water treatment company. Annual payments on the lease are $47,760 per year for three years. The Company has an irrevocable option at the end of the lease to purchase these assets for $60,000.
During fiscal 1992, the Company acquired certain assets of five unaffiliated liquified petroleum gas businesses. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $1,047,000.
During fiscal 1993, the Company acquired certain assets of one unaffiliated liquified petroleum gas business. The aggregate consideration for this acquisition, accounted for by the purchase method, was approximately $60,000.
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases consist of the following:
- ---------------
* As adjusted gives effect to the recapitalization discussed in notes 1 and 2 and in (b) and (d) below, as if such recapitalization had occurred on September 30, 1993.
(a) On July 2, 1993, the Company entered into a $20,000,000 Amended and Restated Revolving Credit Agreement (the "Credit Agreement") with The First National Bank of Boston. The Credit Agreement matured on October 15, 1993, was renewed to December 22, 1993, and bore interest at the higher of the annual rate of interest announced as the base rate of the bank making the loan plus 2% or 2.5% above the overnight federal funds rate.
(Footnotes continued on following page)
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
As of September 30, 1993 and 1992, outstanding revolving loans and letters of credit aggregated $9,457,520 (including $2,648,816 for letters of credit), and $9,257,522 (including $4,029,526 for letters of credit), respectively.
The Credit Agreement was again restated and amended as of December 21, 1993. Under the terms of the restated and amended Credit Agreement, the Company may borrow up to $25 million to finance working capital needs under a revolving credit facility which expires on June 30, 1996. Amounts borrowed under the revolving credit facility are subject to a 30 day clean up requirement each year. Interest on borrowings is payable monthly and is based upon either the Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined below), plus 2 1/4% on Eurodollar loans or 1/4% on Alternative Base Rate Loans, at the Company's option. The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted for reserve requirements, if any. The Alternate Base Rate is the higher of (i) the prime rate or base rate of The First National Bank of Boston in effect or (ii) the Federal Funds Rate in effect plus 1/2%.
The Credit Agreement also provides for a revolving credit acquisition facility under which the Company may borrow up to $20 million to fund acquisitions of propane companies. This acquisition facility expires on June 30, 1996 and the Company has the option to convert this facility into a term loan, payable in 36 consecutive monthly installments commencing on July 1, 1996. Interest on the borrowings is payable monthly and is based upon either the Eurodollar Rate plus 2 1/2% on loans made before the acquisition loan conversion date and 3% after the acquisition loan conversion date or the Alternate Base Rate plus 1/2% on loans made before the acquisition loan conversion date and 1% on loans made after the acquisition loan conversion date, at the Company's option.
The Company pays a commitment fee equal to 1/2% of the unused portion of the bank facilities with a reduction, through June 30, 1994, on the Acquisition Facility to 1/4% annually if it is not used through that date.
Under the terms of the Credit Agreement, as amended, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts borrowed under the Credit Agreement are secured by substantially all of the Company's assets.
(b) On January 10, 1989, the Company issued $85,000,000 of notes (the "Note Agreements") to Prudential for cash. The Note Agreements consisted of $45,000,000 of 11.56% Senior Notes due in six consecutive annual installments of $7,500,000 commencing January 10, 1994; $30,000,000 of 12.625% Senior Subordinated Participating Notes, Series A, due in six consecutive annual installments of $4,250,000 commencing January 10, 1995, with a final installment of $4,500,000 due on January 10, 2001; and $10,000,000 of 12.625% Senior Subordinated Participating Notes, Series B, due in six consecutive annual installments of $1,500,000 commencing January 10, 1995, with a final installment of $1,000,000 due on January 10, 2001.
The Series A and Series B Senior Subordinated Participating Notes bore additional interest aggregating to the greater of (a) $487,500 or 2.5% of the first $33,500,000 of the Company's operating profit (as defined) for each of the fiscal years ended September 30, 1991 through 1999 and (b) $622,400 or 3.19% of the first $33,500,000 of the Company's operating profit (as defined) for the fiscal year ended September 30, 2000.
(Footnotes continued on following page)
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
As part of the recapitalization (see notes 1 and 2), the Company exchanged in direct order of maturity, $15,000,000 of Series A 12.625% Senior Subordinated Participating Notes for 150,000 shares of Series B 8% Cumulative Convertible Preferred Stock, the entire $10,000,000 of Series B 12.625% Senior Subordinated Participating Notes for 100,000 shares of Series D 8% Cumulative Convertible Preferred Stock, and in inverse order of maturity, $1,500,000 of Series A 12.625% Senior Subordinated Participating Notes for 15,000 shares of Series A 12.625% Cumulative Redeemable Preferred Stock and $6,000,000 of Series A 12.625% Senior Subordinated Participating Notes for 60,000 shares of Series B 12.625% Cumulative Redeemable Preferred Stock. In addition, the participating interest feature on the Series A and B 12.625% Senior Subordinated Participating Notes was eliminated.
Additionally, the Company was also allowed to prepay $14,325,000 of the 11.56% Senior Notes in direct order of their maturity. The remaining 1995 payment of $675,000 and part of the 1996 payment of $1,325,000 were deferred such that the 1997, 1998 and 1999 payments were increased from $7,500,000 per year to $8,166,667 per year.
Under the terms of the Note Agreements, as amended at various dates through December 23, 1993, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts borrowed under the 11.56% Senior Notes and the 12.625% Senior Subordinated Participating Notes are secured by substantially all of the Company's assets.
(c) On February 28, 1991, the Company issued $20,000,000 in Senior Reset Term Notes (the "Notes") to Prudential for cash. The Notes were due in consecutive semi-annual installments of $2,500,000 commencing August 28, 1994. The Notes bore interest at 10.72% until February 28, 1994. Thereafter, until maturity, the Notes would have borne interest at the 2.25 year Treasury Rate on February 28, 1994 plus 3.75%.
The Company amended the Notes at various dates through November 30, 1993. The required prepayments under the amended terms of the Notes are $2,500,000 on August 28, 1999, $5,000,000 on each of February 28, 2000, August 28, 2000 and February 28, 2001 and $2,500,000 on August 28, 2001. As part of the recapitalization, the Notes were amended such that the interest rate on the Notes became the 6.5 year Treasury Rate plus 3.3%.
Under the terms of the Notes, as amended, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts outstanding under the Notes are secured by substantially all of the Company's assets.
(d) On March 7, 1991, the Company entered into a Term Loan Agreement (the "Term Loan") with PruSupply, Inc. which provided a $20,000,000 facility. The Company amended the Term Loan at various dates through November 30, 1993. The Term Loan was to be repaid in nineteen consecutive quarterly installments of $875,000, which commenced in May 1991, with a final payment of $3,375,000 due at maturity in February 1996. The Term Loan bears interest at the one month London Interbank Offered Rate ("LIBOR") plus 2.7%.
As part of the recapitalization, the Term Loan was amended to allow for the prepayment of $1,925,000 on December 23, 1993. In addition, the Company paid $875,000 that had been deferred. This agreement was further amended such that the required payments on these notes will be $4,325,000 in 1996 and $5,000,000 in 1997.
Under the terms of the Term Loan, as amended, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts outstanding under the Term Loan are secured by substantially all of the Company's assets.
(Footnotes continued on following page)
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
(e) On March 30, 1993, the Company and a former shareholder reached an agreement whereby the former shareholder received payments in settlement of all amounts owed under a 10% Junior Subordinated Promissory Note and a Consulting Agreement. The Company recognized a gain of $178,415 on the settlement. (See note 9)
As of September 30, 1993, the Company was not in compliance with certain financial covenants contained in the Credit Agreement, the Note Agreements, the Notes and the Term Loan. All appropriate covenants have been amended or waivers have been obtained, where necessary.
As of September 30, 1993, annual maturities of long-term debt and obligations under capital leases, after giving effect to the recapitalization, are set forth in the following table:
(6) INCOME TAXES
The income tax provision (benefit) shown in the accompanying Consolidated Statements of Operations consists of the components set forth below:
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES--(CONTINUED)
The following is a reconciliation between reported income tax (benefit) expense and tax (benefit) expense computed at the statutory rate:
The (benefit) provision for income taxes is based upon pretax book income. Deferred income taxes result primarily from the difference in depreciation expense as a result of the use of accelerated methods in determining depreciation for income tax purposes in excess of the straight-line basis used for financial statement purposes.
At September 30, 1993, the Company had approximately $84,000,000 of Federal and state net operating loss (NOL) carryforwards available to offset future taxable income. Such NOLs expire in the years 2004 through 2008.
Effective with the recapitalization on December 23, 1993 (see note 2), the Company's NOL's were substantially limited for purposes of general carryforward availability and otherwise limited for specified carryforward purposes since the recapitalization constitutes a change in control for income tax reporting purposes.
In February 1992, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FASB 109"). The Company is not required to adopt the new method of accounting for income taxes until fiscal 1994. Because the Company was not carrying substantial deferred taxes on its Consolidated Balance Sheet, management believes that the adoption of FASB 109 will not have a material effect on financial position or results of operations. However, as a result of the recapitalization and change in control, the Company is in the process of determining what effect, if any, the limitation on the use of the NOLs will have on financial position and results of operations, and what tax planning strategies are available to retain the maximum benefit thereof.
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan which provides benefits for all eligible employees except those covered by union plans and employees of Highway. Subject to IRS limitations, the 401(k) plan provides for employees to contribute from 1% to 15% of compensation with the Company contributing a matching amount of the employees' contribution up to a maximum of 3% of compensation. The Company may also contribute an additional amount on behalf of each employee in an amount equal to
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE BENEFIT PLANS--(CONTINUED)
3% of each employee's compensation. Effective, March 1, 1992, an amendment to the plan eliminated the ability to make this additional contribution.
Aggregate Company contributions made to the 401(k) plan during 1993, 1992 and 1991 were $313,652, $537,703 and $627,447, respectively.
The Company makes monthly contributions to a union defined benefit pension plan for all union employees. The amount charged to expense was $198,206, $202,545 and $186,871 in fiscal 1993, 1992 and 1991, respectively.
(8) LEASE COMMITMENTS
The Company has entered into noncancellable capital lease agreements with former owners of acquired businesses for certain premises and related equipment. All leases contain bargain purchase options, exercisable on the lease termination dates.
The premises and equipment under capital leases are carried at $828,725 and $2,023,660 on the Consolidated Balance Sheets with accumulated depreciation of $79,234 and $141,426 at September 30, 1993 and 1992, respectively. Depreciation of premises and equipment under capital leases is included in depreciation expense.
The Company has entered into operating leases for office space, trucks and other equipment. The future minimum rental commitments at September 30, 1993 under leases having an initial or remaining noncancellable term of one year or more are as follows:
The Company incurred rent expense of $4,150,765, $3,586,450 and $3,437,423 in 1993, 1992 and 1991, respectively.
(9) OTHER CURRENT AND LONG-TERM LIABILITIES
As a result of various acquisition agreements, the Company was required to pay an aggregate of $6,278,259 and $9,268,487 (net of discounts of $406,596 and $1,155,492), as of September 30, 1993 and 1992, respectively, pursuant to certain consulting and covenant not-to-compete agreements. These obligations are included in other current liabilities and long-term liabilities in the amounts of $712,179 and $3,812,670 and $5,566,080 and $5,455,817 as of September 30, 1993 and 1992, respectively.
On December 4, 1992, the Company and its shareholders entered into a Purchase Agreement with a third party for the shareholders to purchase from the third party $5,500,000 of consulting and non-competition payments (the "Purchased Payments") owed to the third party by the Company. This
STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) OTHER CURRENT AND LONG-TERM LIABILITIES--(CONTINUED)
amount due was $2,750,000 on November 17, 1992 and $2,750,000 on November 17, 1993. The shareholders deferred the $2,750,000 installment payment (the "Deferred Amount") due on November 17, 1992 under the original agreement to June 1, 1993. This Deferred Amount bore interest at 13.76% per annum.
On March 30, 1993, the Company and its shareholders signed a Cancellation of Indebtedness and Deferral Agreement (the "Cancellation Agreement"). Under the terms of the Cancellation Agreement, the shareholders agreed to cancel $1,420,000 of the Deferred Amount in consideration of 1,420 of newly issued shares of 8% Cumulative Convertible Preferred Shares of the Company. The balance of the Deferred Amount, after giving effect to such cancellation, plus interest accrued through March 30, 1993, aggregated $1,470,848 (the "New Deferred Amount"). The shareholders agreed to the deferral of the New Deferred Amount to December 31, 1994 and to the deferral of the remainder of the Purchased Payments from November 17, 1993 to December 31, 1994. The New Deferred Amount bore interest at the rate of 13.75% per annum from March 30, 1993. The remainder of the Purchased Payments bore interest at the rate of 13.76% per annum from November 17, 1993 (See note 1).
On December 23, 1993, as part of the recapitalization (see note 2), the Company exchanged the 1,420 8% Cumulative Convertible Preferred Shares plus the New Deferred Amount and the balance of the Purchased Payments plus accrued interest for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock and 230,695 shares of Class A Common Stock.
On March 30, 1993, the Company and a former shareholder reached an agreement whereby the former shareholder received payments in settlement of all amounts owed to him under a 10% Junior Subordinated Promissory Note and a Consulting Agreement. The Company recognized a gain of $178,415 on the settlement (See note 5).
At September 30, 1993, annual maturities of amounts payable in connection with certain covenants not to compete and consulting agreements, after giving effect to the recapitalization, are as follows:
1994................................................. $ 712,179 1995................................................. 637,346 1996................................................. 412,994 1997................................................. 379,504 1998................................................. 90,299
(10) IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1993, in connection with the recapitalization (see note 2) and the sale of certain of the Company's branches (see note 1), the Company reviewed the carrying values of its long-lived assets and identifiable intangible assets for possible impairment. The Company determined, based on expected future cash flows and the estimated fair values of certain branches, that it would not be able to recover the carrying values of some of these assets. Accordingly, as of September 30, 1993 the Company recorded a write-off of approximately $33 million representing the estimated impairment to its long lived assets.
SCHEDULE VIII
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1991, 1992 and 1993
_______________ (1) Recoveries (2) Bad debts written off
SCHEDULE IX
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
Years Ended December 31, 1991, 1992 and 1993
Weighted Maximum Average Average Weighted Amount Amount Interest Average Outstanding Outstanding Rate Balance at Interest During the During the During End of Year Rate Year Year the Year ----------- -------- ----------- ----------- --------
1991 $ 39,750,000 6.2% $ 73,000,000 $34,944,000 8.2% ============ ==== ============ =========== ====
1992 $ 32,000,000 5.4% $ 42,750,000 $17,906,000 5.9% ============ ==== ============ =========== ====
1993 $ 28,000,000 4.9% $ 37,000,000 $11,233,000 5.4% ============ ==== ============ =========== ====
The short-term borrowings represent obligations payable under credit agreements to various banks.
The average amount outstanding during the year represents the average daily principal balances outstanding during the year.
The weighted average interest rates during the year were computed by dividing the actual interest incurred on short-term borrowings by the weighted average short-term borrowings.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------
The information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS and under the caption EXECUTIVE OFFICERS, is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - -------- ----------------------
The information appearing in the Proxy Statement under the caption EXECUTIVE COMPENSATION, is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- --------------------------------------------------------------
The information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS -- Ownership of Equity Securities in the Company, is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- ----------------------------------------------
The information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS -- Certain Transactions, is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements are included in Part II, Item 8:
Consolidated Financial Statements of Petroleum Heat and Power Co., Inc. and Subsidiaries:
Independent Auditors' Reports
Consolidated Balance Sheets, December 31, 1992 and 1993
Consolidated Statements of Operations, years ended December 31, 1991, 1992 and 1993
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) years ended December 31, 1991, 1992 and 1993
Consolidated Statements of Cash Flows, years ended December 31, 1991, 1992 and 1993
Notes to Consolidated Financial Statements
Consolidated Financial Statements of Star Gas Corporation and Subsidiaries:
Independent Auditors' Reports
Consolidated Balance Sheets, September 30, 1992 and 1993
Consolidated Statements of Operations, years ended September 30, 1991, 1992 and 1993
Consolidated Statements of Shareholders' Equity (Deficiency), years ended September 30, 1991, 1992 and 1993
Consolidated Statements of Cash Flows, years ended September 30, 1991, 1992 and 1993
Notes to Consolidated Financial Statements
2. The following financial schedules are submitted herewith:
Schedule VIII - Valuation and Qualifying Accounts - Years Ended December 31, 1991, 1992 and 1993
Schedule IX - Short-term Borrowings - December 31, 1992 and 1993
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. (a) Exhibits
The Exhibits, which are listed on the Exhibit Index attached hereto.
(b) Reports on Form 8-K
Registrant filed a report on Form 8-K on January 4, 1994 to report under item 2, "Acquisition or Disposition of Assets", the investment made by the Company in Star Gas Corporation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 9, 1994
PETROLEUM HEAT AND POWER CO., INC. (Registrant)
By: /s/ Irik P. Sevin -------------------------------- Irik P. Sevin President, Chairman of the Board, Chief Executive Officer and Chief Financial and Accounting Officer
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.
/s/ Irik P. Sevin President, Chairman of the March 9, 1994 - ------------------------ Board, Chief Executive Officer, Irik P. Sevin and Chief Financial and Accounting Officer and Director
/s/ Audrey L. Sevin Secretary and Director March 9, 1994 - ------------------------ Audrey L. Sevin
/s/ Phillip E. Cohen Director March 9, 1994 - ------------------------ Phillip E. Cohen
/s/ Thomas J. Edelman Director March 9, 1994 - ------------------------ Thomas J. Edelman
List of Exhibits
Exhibit No. Description of Exhibit - ------- ----------------------
3.1 -- Restated and Amended Articles of Incorporation, as amended, and Articles of Amendment thereto.(2)
3.2 -- Restated By-Laws of the Registrant.(2)
4.1 -- Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as trustee, including Form of Notes.(1)
4.2 -- Form of Indenture, dated as of October 1, 1985 between the Company and Manufacturers Hanover Trust Company, as trustee, including Form of Notes.(3)
4.3 -- Restated and Amended Articles of Incorporation and Articles of Amendment thereto.(3)
4.4 -- Certificate of Designation creating a series of preferred stock designated as Cumulative Redeemable Exchangeable 1991 Preferred Stock and Certificate of Amendment relating thereto.(6)
4.5 -- Certificate of Designation creating a series of preferred stock designated as Cumulative Redeemable 1991 Preferred Stock.(3)
4.6 -- Form of Indenture between the Company and Chemical Bank, as trustee, including Form of Debentures.(8)
4.7 -- Certificate of Designation creating a series of Preferred Stock designated as Cumulative Redeemable Exchangeable 1993 Preferred stock.(8)
9.1 -- Shareholders' Agreement dated as of July 1992, among the Company and certain of its stockholders.(2)
10.1 -- Amended and Restated Credit Agreement dated as of December 31, 1992 among the Company, Maxwhale Corp., certain banks party thereto and Chemical Bank. (1)
10.2 -- Pension Plan, as amended, of Petroleum Heat and Power Co., Inc. (2)
10.3 -- Savings Plan, as amended of Petroleum Heat and Power Co., Inc.(2)
10.4 -- Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc.(2)
10.5 -- Lease dated July 15, 1981 with respect to offices and garage located at 477 West John Street and 5 Alpha Plaza, Hicksville, New York.(4)
10.6 -- Lease dated February 15, 1982,(5) First Amendment dated February 14, 1986, and Second Amendment dated July 1, 1989,
with respect to offices, garage and terminal located at 818 Michigan Avenue, N.E., Washington, D.C.(2)
10.7 -- Lease dated June 26, 1989 with respect to offices and garage located at 40 Lee Burbank Highway, Revere, Massachusetts.(2)
10.8 -- Lease dated December 1, 1985 with respect to office and garage located at 3600-3620 19th Avenue, Astoria, New York.(3)
10.9 -- Lease dated November 1, 1985 with respect to office and garage located at 522 Grand Blvd., Westbury, New York.(5)
10.10 -- Lease dated June 5, 1986 with respect to office and garage located at 2541 Richmond Terrace Co., Staten Island, New York.(5)
10.11 -- Lease dated July 31, 1986 with respect to office and garage located at 71 Day Street, Norwalk, Connecticut.(5)
10.12 -- Lease dated July 9, 1984 with respect to office located at 1245 Westfield Avenue, Clark, New Jersey.(5)
10.13 -- Lease dated April 5, 1991 with respect to office and garage located at 10 Spring Street, New Milford, Connecticut.(2)
10.14 -- Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey Street, Brooklyn, New York.(2)
10.15 -- Lease dated February 6, 1990 with respect to office and garage located at 62 Oakland Avenue and 64 Oakland Avenue, East Hartford, Connecticut.(2)
10.16 -- Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988 with respect to office, garage and terminal located at 224 North Main Street, Southampton, New York.(2)
10.17 -- Lease dated April 1, 1988 with respect to office and garage located at 171 Ames Court, Plainview, New York.(2)
10.18 -- Lease dated August 12, 1988 with respect to office and garage located at 326 South Second Street, Emmaus, Pennsylvania.(2)
10.19 -- Lease dated July 15, 1990, Addendum to lease dated July 27, 1990 and Second Addendum to lease dated November 30, 1990, with respect to office and garage located at 212 Elm Street, North Haven, Connecticut.(2)
10.20 -- Lease dated August 14, 1989 with respect to office and garage located at foot of South Street, Oyster Bay, New York.(2)
10.21 -- Lease and Addendum to lease dated September 26, 1990 with respect to office and garage located at 930 Park Avenue, Lakewood, New Jersey.(2)
10.22 -- Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street, Brooklyn, New York.(2)
10.23 -- Lease dated May 9, 1991 with respect to office and garage located at 260 Route 10 East, Whippany, New Jersey.(2)
10.24 -- Lease dated June 1, 1987 with respect to garage located at 817 Pennsylvania Avenue, Linden, New Jersey.(2)
10.25 -- Lease dated June 1, 1989 with respect to office and garage located at 2 Selleck Street, Stamford, Connecticut.(2)
10.26 -- Lease dated April 28, 1992 with respect to office and garage located at 8087-8107 Parston Drive, Forestville, Maryland.(1)
10.27 -- Demand Promissory Notes of Thomas J. Edelman in favor of Petro, Inc. in the amounts of $500,000 and $100,000 dated April 15, 1985 and May 17, 1985, respectively, and Pledge and Security Agreement, as amended, made by Thomas J. Edelman in favor of Petro, Inc. dated April 15, 1986.(5)
10.28 -- Letter dated June 5, 1985 with respect to redemption of 55,250 shares of common stock of Petroleum Heat and Power Co., Inc. from Thomas J. Edelman and promissory note of Petroleum Heat and Power Co., Inc. in the amount of $884,000 in favor of Thomas J. Edelman, dated June 6, 1985.(3)
10.29 -- Option dated October 18, 1984 granted to Irik P. Sevin to purchase 64,000 shares of common stock of Petroleum Heat and Power Co., Inc.(3)
10.30 -- Form of Equipment Lease and related documentation dated as of October 21, 1983 relating to vehicle leasing transaction between Atlas Oil Corporation and various equipment lessors.(3)
10.31 -- Form of Equipment Lease and related documentation dated as of March 2, 1985 relating to vehicle leasing transaction between Petro, Inc. and various equipment lessors.(3)
10.32 -- Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A Common Stock by Irik P. Sevin.(5)
10.33 -- Agreement dated December 2, 1986 relating to stock options granted to Malvin P. Sevin.(5)
10.34 -- Agreement dated December 2, 1986 relating to stock options granted to Irik P. Sevin.(5)
10.35 -- Agreements dated December 28, 1987 and March 6, 1989 relating to stock options granted to Irik P. Sevin and Malvin P. Sevin.(2)
10.36 -- Form of Note dated December 31, 1992, in the amount of $1,499,378, due December 31, 1993, from Irik P. Sevin to the Company.(1)
10.37 -- Subordinated Note Agreement relating to $60 million Subordinated Notes due October 1, 1998 issued to John Hancock Mutual Life Insurance Company and other Investors.(2)
10.38 -- Note Agreement, dated as of January 15, 1991, relating to $12.5 million Subordinated Notes due January 15, 2001, between the Company and Connecticut General Life Insurance Company.(2)
10.39 -- Purchase Agreement, dated as of September 1, 1991, between the Company and United States Leasing International, relating to purchase of 159,722 shares of the 1991 Preferred Stock.(2)
10.40 -- Purchase Agreement, dated as of August 1, 1989, between the Company and John Hancock Mutual Life Insurance Company and The Northwestern Mutual Life Insurance Company, relating to the purchase of the 1989 Preferred Stock.(2)
10.41 -- Agreement dated as of November 1, 1992 relating to stock options granted to George Leibowitz.(1)
10.42 -- Letter Agreement dated March 15, 1993 relating to the Credit Agreement.(1)
10.43 -- Lease dated June 17, 1993 with respect to office facilities located at 2187 Atlantic Street in Stamford, Connecticut. (8)
10.44 -- Form of Note dated December 31, 1993, in the amount of $1,559,827, due December 31, 1994, from Irik P. Sevin to the Company.(8)
10.45 -- Agreement dated December 1993 relating to stock options granted to Malvin P. Sevin.(8)
10.46 -- Purchase Agreement, dated as of December 21, 1993, among Star Gas Holdings, Inc., First Reserve Secured Energy Assets Fund, L.P., American Gas & Oil Investors, AmGo II, AmGo III, FRC Star Gas, Inc., Star Gas and the Company.(9)
10.47 -- Option from Star Gas to the Company, dated as of December 21, 1993.(9)
10.48 -- Shareholder Put/Call Agreement, dated as of December 21, 1993, among the Company, the Other Investors and Prudential.(9)
10.49 -- Shareholders' Agreement, dated as of December 21, 1993, among the Company, the Other Investors and Prudential.(9)
10.50 -- Management Services Agreement, dated as of December 21, 1993, between the Company and Star Gas.(9)
10.51 -- First Amendment to the Company's 10 1/8% Subordinated Notes Indenture dated as of January 12, 1994.(8)
10.52 -- Form of First Amendment to the US Leasing Purchase Agreement.(8)
10.53 -- Form of Third Amendment to the Connecticut General Note Agreement.(8)
10.54 -- Form of Second Amendment to the Hancock Note Agreement.(8)
10.55 -- Form of First Amendment to the Hancock/Northwestern Purchase Agreement.(8) 10.56 -- Form of Fourth Amendment dated January 21, 1994 to the Second Amended and Restated Credit Agreement(8)
11.0 -- Computation of Per Share Earnings.(10)
21.0 -- Subsidiaries of Registrant.(10)
27.0 -- Financial Data Schedule.(10)
(1) Filed as Exhibits to Registration Statement on Form S-2, File No. 33-58034.
(2) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-48051, and incorporated herein by reference.
(3) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794, and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526, and incorporated herein by reference.
(5) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088, and incorporated herein by reference.
(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 2-88526, and incorporated herein by reference.
(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 2-88526, and incorporated herein by reference.
(8) Filed as Exhibits to the Registration Statement on Form S-2, File No. 33-72354, and incorporated herein by reference.
(9) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on January 4, 1994, File No. 2-88526 and incorporated herein by reference.
(10) Filed herein.