REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of
Directors of Vision Energy Resources, Inc.:
We have audited the accompanying consolidated balance sheet of Vision Energy
Resources, Inc. and Subsidiaries (the "Company"), as of December 31, 1993, and
the related consolidated statement of operations and accumulated deficit and
the consolidated statement of cash flows for the year then ended. These
financial statements are the responsibility of the management of the Company.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1993, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 5 to the financial statements, the Company changed its
method of accounting for income taxes in 1993.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 31, 1994
1
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
ASSETS
------
Current assets:
Accounts receivable, net of allowance for doubtful accounts of
$300,000...................................................... $ 7,853,000
Inventories.................................................... 7,255,000
Current deferred income taxes.................................. 654,000
Prepaid expenses and other current assets...................... 440,000
------------
Total current assets......................................... 16,202,000
Property, plant and equipment, net of accumulated depreciation... 29,099,000
Goodwill......................................................... 22,062,000
Other assets..................................................... 1,397,000
------------
Total assets................................................. $ 68,760,000
============
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities:
Cash overdraft................................................. $ 577,000
Accounts payable and accrued expenses.......................... 6,661,000
Accrued payroll and related expenses........................... 849,000
Deferred revenue............................................... 2,517,000
Income taxes currently payable................................. 913,000
Due to affiliate............................................... 4,711,000
Note payable................................................... 400,000
------------
Total current liabilities.................................... 16,628,000
Deferred income taxes............................................ 1,041,000
Other liabilities................................................ 3,740,000
------------
Total Liabilities............................................ 21,409,000
Commitments and contingent liabilities
Shareholder's equity:
Common Stock, $1 par value; 1,000 shares authorized, 100 shares
issued and outstanding and additional paid-in capital......... 67,092,000
Accumulated deficit............................................ (19,741,000)
------------
Total shareholder's equity................................... 47,351,000
------------
Total liabilities and shareholder's equity................... $ 68,760,000
============
The accompanying notes are an integral part
of these consolidated financial statements.
2
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1993
Product sales revenues............................................ $ 71,762,000
Cost and expenses:
Cost of product................................................. 46,766,000
Operating expenses.............................................. 16,402,000
General and administrative expenses............................. 5,829,000
Depreciation and amortization................................... 7,239,000
Provision for environmental remediation......................... 2,950,000
------------
79,186,000
------------
Operating loss................................................ (7,424,000)
------------
Other income (expense):
Interest and other income, net.................................. 637,000
Interest expense................................................ (199,000)
------------
Loss from operations before income taxes...................... (6,986,000)
Income tax benefit................................................ 2,256,000
------------
Net loss...................................................... (4,730,000)
Accumulated deficit, beginning of year............................ (15,011,000)
------------
Accumulated deficit, end of year.................................. $(19,741,000)
============
The accompanying notes are an integral part
of these consolidated financial statements.
3
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
Cash flows from operating activities:
Net loss........................................................ $(4,730,000)
Non-cash items included in loss from operations:
Depreciation and amortization................................. 7,239,000
Change in deferred taxes...................................... (2,130,000)
Provision for environmental clean-up.......................... 2,950,000
Provision for doubtful accounts............................... 263,000
Gain on sale of fixed assets.................................. (137,000)
Provision for inventory obsolescence.......................... 150,000
Changes in assets and liabilities:
Increase in accounts receivable............................... (557,000)
Increase in inventories....................................... (2,580,000)
Decrease in prepaid expenses and other current assets......... 9,000
Increase in accounts payable and accrued expenses............. 4,882,000
Decrease in accrued payroll and related expenses.............. (115,000)
Increase in deferred revenue.................................. 437,000
Increase in income taxes currently payable.................... 812,000
-----------
10,822,000
-----------
Net cash provided by operating activities................... 6,493,000
-----------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment......... 678,000
Payments for capital expenditures............................... (2,757,000)
-----------
Net cash used by investing activities....................... (2,079,000)
-----------
Cash flows from financing activities:
Repayment of borrowing from affiliate........................... (2,651,000)
Cash overdraft.................................................. (1,727,000)
Other........................................................... (36,000)
-----------
Net cash used by financing activities....................... (4,414,000)
-----------
Net decrease in cash and cash equivalents................... --
Cash and cash equivalents at beginning of year.................... --
-----------
Cash and cash equivalents at end of year.......................... --
===========
Supplement disclosure of cash flow information:
Cash paid (received) during the year for interest and income
taxes:
Interest...................................................... $ 17,000
Income taxes.................................................. (452,000)
The accompanying notes are an integral part
of these consolidated financial statements.
4
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation:
The consolidated financial statements include the accounts of Vision Energy
Resources, Inc. and its wholly owned subsidiaries (the "Company"). The Company,
an indirectly wholly owned subsidiary of Bell Atlantic Corporation (Bell
Atlantic), maintains its accounts in accordance with generally accepted
accounting principles. All significant intercompany balances and transactions
have been eliminated.
Inventory:
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. The provision for
depreciation is based principally on the straight-line method by using the
following estimated remaining service lives: buildings and improvements, 20 to
40 years; petroleum gas equipment, 9 years; office equipment and furniture, 5
to 13 years; and transportation equipment, 4 to 6 years. Gain or loss on sale
of property, plant and equipment is reflected currently in operating results.
Goodwill:
Goodwill, which includes the excess of the purchase price over the value of
identifiable net assets of acquired companies at the date of their acquisition,
is being amortized on a straight-line basis over a forty-year period. Goodwill
amortization for the year ended December 31, 1993 was $630,000.
Other Assets:
Other assets consist primarily of covenants not to compete and deferred
organizational expenses, which are being amortized over 60 months. Amortization
of other assets for the year ended December 31, 1993 was $863,000.
Deferred Revenue:
The Company enters into arrangements to provide customers with specified
quantities of product at specified prices. Cash received in advance of product
delivery is recorded as deferred revenue and sales revenues are recorded as
product is delivered.
5
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes:
The Company is included in Bell Atlantic's consolidated federal income tax
return. The Company is allocated income tax assets, liabilities, expense,
benefits and credits resulting from the effects of its transactions in the
consolidated federal income tax provision determined in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for
Income Taxes" (Statement No. 109). As a result of this allocation method, the
Company recognizes benefits currently for net operating losses (NOLs) and NOL
carryforwards that would not have been recognizable on a separate tax return
basis. The federal portion of income taxes currently payable is due to Bell
Atlantic.
2. INVENTORIES:
Inventories consist of:
Liquified petroleum gas..................................... $5,732,000
Merchandise and appliances.................................. 930,000
Bulk fuels and oil.......................................... 353,000
Other....................................................... 240,000
----------
$7,255,000
==========
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
Land and buildings........................................ $ 6,866,000
Liquified petroleum gas equipment......................... 37,834,000
Furniture and fixtures.................................... 1,434,000
Transportation equipment.................................. 6,409,000
------------
52,543,000
Less, Accumulated depreciation.......................... (23,444,000)
------------
$ 29,099,000
============
Depreciation expense for the year ended December 31, 1993 was $5,746,000.
6
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LEASES AND RENTALS:
At December 31, 1993, the Company was committed under operating leases for
the rental of office space, operating equipment and operating sites. Rental
expense for operating leases amounted to $534,000 in 1993.
The following is a schedule of future minimum rental payments under operating
leases as of December 31, 1993:
1994............................................................. $307,000
1995............................................................. 94,000
1996............................................................. 11,000
1997............................................................. 8,000
1998............................................................. 6,000
--------
$426,000
========
5. INCOME TAXES:
During 1993, the Company adopted Statement No. 109 retroactively to January
1, 1992. Financial statements for periods commencing on or after that date have
been restated. Statement No. 109 requires the determination of deferred taxes
using the liability method. Under the liability method, deferred taxes are
provided on book and tax basis differences and deferred tax balances are
adjusted to reflect enacted changes in income tax rates. Prior to 1992, the
Company accounted for income taxes based on the provisions of Accounting
Principles Board Opinion No. 11.
The Omnibus Budget Reconciliation Act of 1993, which was enacted in August
1993, increased the federal corporate income tax rate from 34% to 35%,
effective January 1, 1993. In the third quarter of 1993, the Company recorded a
charge to the tax provision of $45,000 for the effect of the 1% rate increase
on the deferred tax balances as of January 1, 1993.
The components of income tax expense (benefit) at December 31, 1993, are as
follows:
Current:
Federal.................................................... $ (156,000)
State...................................................... 30,000
-----------
(126,000)
Deferred:
Federal.................................................... (1,956,000)
State...................................................... (174,000)
-----------
(2,130,000)
-----------
Total.................................................. $(2,256,000)
===========
7
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes varies from the amount computed by applying
the statutory federal income tax rate to income before provision for income
taxes. The difference is attributable to the following factors:
Statutory federal income tax rate................................. (35.0)%
State income taxes, net of federal income tax effect.............. (1.3)
Goodwill amortization............................................. 3.1
Effect of Omnibus Reconciliation Act of 1993...................... 0.6
Other............................................................. 0.3
-----
Effective income tax rate......................................... (32.3)%
=====
At December 31, 1993, the significant components of deferred tax assets and
liabilities were as follows:
Deferred tax assets:
Environmental reserves and other estimated liabilities...... $1,576,000
Net operating loss carryforwards............................ 4,658,000
Other....................................................... 253,000
----------
6,487,000
Valuation allowance......................................... (460,000)
----------
Net deferred tax assets................................. 6,027,000
----------
Deferred tax liabilities:
Depreciation and amortization............................... 5,941,000
Other....................................................... 473,000
----------
Gross deferred tax liabilities.......................... 6,414,000
----------
Net deferred tax liabilities............................ $ 387,000
==========
At December 31, 1993, net operating loss carryforwards for federal income tax
purposes (federal NOLs) were approximately $11,434,000. The federal NOLs arose
prior to the merger of the Company's parent, Metro Mobile CTS Inc. (MMCTS) with
Bell Atlantic and expire from 2001 to 2006.
8
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Federal tax law restricts the future utilization of the federal NOLs,
permitting them to offset only the future taxable income earned by the MMCTS
subconsolidated group. Future utilization of the federal NOLs could also be
restricted by virtue of the "change in ownership" rules contained in Section
382 of the Internal Revenue Code of 1986.
Based on projections of future taxable income of MMCTS and the Company's
existing deferred tax liabilities, the Company expects to realize the future
tax benefit of all federal NOL carryforwards.
Also, at December 31, 1992, net operating loss carryovers for state income
tax purposes (state NOLs) were approximately $8,938,000. The state NOLs expire
from 1996 to 2003. Utilization of the state NOLs are subject to restrictions
similar to the restrictions on the federal NOLs described above, applied in
each state jurisdiction. The valuation allowances relate to the state NOLs.
6. EMPLOYEE BENEFIT PLANS:
The Company participates in a Bell Atlantic Saving Plan which allows
employees to invest up to 16% of their salary through a payroll deduction. The
Company will contribute 50% of the employee's contribution, up to 6% of their
salary. In 1993, the Company contributed $114,000 to the Plan.
7. TRANSACTION WITH AFFILIATES:
The Company has entered into a short-term borrowing arrangement with an
affiliate which bears interest at a rate which approximates the affiliate's
average daily cost of funds (3.51% at December 31, 1993). The Company
recognized interest expense of $157,000 in 1993.
During 1993, the Company paid $1,000,000 in fees to Bell Atlantic in return
for various administrative, legal, cash management, tax and financial planning
services.
9
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS:
At December 31, 1993, the Company was committed to sell 5,337,000 gallons of
propane for $3,488,000 under fixed price sales agreements and owned sufficient
inventory to fulfill these sales commitments.
9. CONTINGENT LIABILITIES:
One of the Company's subsidiaries holds title to land that had been occupied
by a coal gasification plant. In 1992, the EPA performed a site inspection and
shallow soil and groundwater testing.
In 1984, the Florida Department of Environmental Protection asked the Company
to submit a preliminary contamination assessment plan and to perform a
contamination assessment to confirm the EPA findings. Based on information
developed to date in connection with this assessment, the Company provided a
reserve in 1993 of $2,800,000 for the estimated remediation costs of this site.
On October 28, 1994, the Company transferred ownership of this property to
Bell Atlantic Ventures XXV, Inc. which is an indirect subsidiary of Bell
Atlantic.
10. SUBSEQUENT EVENTS (UNAUDITED):
Effective November 1, 1994, the Company expects to be sold by Bell Atlantic,
to Ferrellgas, Inc. for approximately $45 million.
10
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1994
(IN THOUSANDS)
(UNAUDITED)
ASSETS JULY 1994
------ ---------
Current assets:
Cash and cash equivalents.......................................... $ 28
Accounts and notes receivable...................................... 5,294
Inventories........................................................ 6,535
Prepaid or refundable income taxes................................. 1,449
Prepaid expenses and other current assets.......................... 462
--------
Total Current Assets............................................. 13,768
--------
Property, plant and equipment, net of accumulated depreciation....... $ 26,553
Intangible assets.................................................... 21,723
Other assets......................................................... 906
--------
Total assets..................................................... $ 62,950
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses.............................. $ 9,405
Interest payable................................................... 78
Due to affiliate................................................... 4,259
Note payable....................................................... 489
--------
Total current liabilities........................................ 14,231
--------
Other liabilities.................................................... 2,950
Shareholder's equity:
Common stock, $1 par value; 1,000 shares authorized, 100 shares
issued and outstanding and additional paid in capital............. 67,092
Accumulated Deficit................................................ (21,323)
--------
Total shareholders' equity....................................... 45,769
--------
Total liabilities and stockholders' equity....................... $ 62,950
========
11
VISION ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE SEVEN MONTHS ENDED JULY 31, 1994
(IN THOUSANDS)
(UNAUDITED)
Revenues:
Gas liquids and related product sales.............................. $ 30,167
Other.............................................................. 6,109
--------
Total revenues................................................... 36,276
Costs and expenses:
Cost of product sold............................................... 20,674
Operating.......................................................... 10,528
Depreciation and amortization...................................... 4,037
General and administrative......................................... 2,828
Governance fee..................................................... 467
--------
Total costs and expenses......................................... 38,534
--------
Operating loss....................................................... (2,258)
Interest income.................................................... 182
Interest expense................................................... (100)
--------
Loss before income taxes............................................. (2,176)
Income tax expense (benefit)......................................... (594)
--------
Net loss............................................................. (1,582)
Accumulated deficit--Beginning of year............................... (19,741)
--------
Accumulated deficit--End of year..................................... $(21,323)
========
12
VISION ENERGY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 1994
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net Loss............................................................ $(1,582)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 4,038
Provision for doubtful accounts................................... 165
Gain on sale of fixed assets...................................... (104)
Change in assets & liabilities:
Decrease in accounts receivable................................... 2,394
Decrease in inventory............................................. 719
Increase in prepaid expenses & other current assets............... (22)
Decrease in accounts payable & accrued liabilities................ (1,027)
Decrease in income taxes payable--current......................... (1,723)
Decrease in deferred taxes........................................ (1,059)
Increase in interest payable...................................... 23
-------
3,404
-------
Net cash provided by operating activities............................. $ 1,822
-------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment............. 368
Capital expenditures................................................ (943)
Other............................................................... 18
-------
Net cash (used) in investing activities............................... (557)
=======
Cash flows from financing activities:
Repayment of borrowing from affiliate............................... (452)
Repayment of long term debt......................................... (208)
Cash overdraft...................................................... (577)
-------
Net cash used by financing activities................................. (1,237)
=======
Net increase in cash and cash equivalents............................. 28
Cash and cash equivalents at beginning of period...................... --
-------
Cash and cash equivalents at end of period............................ $ 28
=======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest and income taxes:
Interest.......................................................... $ 77
Income taxes...................................................... 2,188
13