UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------ TO ------------
Commission File Number: 1-9358
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PETROLEUM HEAT AND POWER CO., INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 06-1183025
- ----------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2187 Atlantic Street, Stamford, CT 06902
- ----------------------------------- -----------------------
(Address of principal executive Offices (Zip Code)
Registrant's telephone number, including area code: (203) 325-5400
--------------
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
As of June 30, 1997 there were 23,325,867 shares of the Registrant's Class A
Common Stock, 11,228 shares of the Registrant's Class B Common Stock and
2,597,519 shares of the Registrant's Class C Common Stock outstanding.
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
INDEX To Form 10-Q
PAGE
----
Part 1 Financial Information:
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996..................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended
June 30, 1997 and June 30, 1996
and the Six Months Ended
June 30, 1997 and June 30, 1996......................................... 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficiency) for the
Six Months Ended June 30, 1997.......................................... 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended
June 30, 1997 and June 30, 1996......................................... 6
Notes to Condensed Consolidated Financial Statements.................... 7
Item 2 -- Management's Discussion and Analysis of
Financial Conditions and Results of Operations.................. 8-15
Part 2 Other Information:
Item 4 -- Submission of Matters to a Vote of Security Holders............. 16
Item 6 -- Exhibits and reports on Form 8-K................................ 16
Signature................................................................. 17
2
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
Assets
Current assets:
Cash and cash equivalents............................................................ $ 28,172 $ 3,257
Restricted cash...................................................................... 1,500 3,000
Accounts receivable (net of allowance of $2,106 and $1,088).......................... 73,505 93,362
Inventories.......................................................................... 11,397 22,084
Prepaid expenses..................................................................... 7,992 7,008
Notes receivable and other current assets.......................................... 786 1,299
---------- ------------
Total current assets................................................................... 123,352 130,010
---------- ------------
Property, plant and equipment--net..................................................... 28,929 30,666
Intangible assets (net of accumulated amortization of $294,721 and $283,486)
Customer lists....................................................................... 72,234 77,778
Deferred charges and pension costs................................................... 26,461 25,718
---------- ------------
98,695 103,496
---------- ------------
Investment in and advances to the Star Gas Partnership................................. 27,702 29,907
Deferred gain on Star Gas Transaction................................................ (19,964) (19,964)
---------- ------------
7,738 9,943
---------- ------------
Other assets........................................................................... 1,047 910
---------- ------------
$ 259,761 $ 275,025
---------- ------------
---------- ------------
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Working capital borrowings........................................................... $ -- $ 22,000
Current debt......................................................................... 2,698 3,047
Current maturities of redeemable preferred stock..................................... 4,167 4,167
Accounts payable..................................................................... 8,094 18,988
Customer credit balances............................................................. 10,996 17,468
Unearned service contract revenue.................................................... 13,561 15,388
Accrued expenses and other liabilities............................................... 29,657 30,859
---------- ------------
Total current liabilities.......................................................... 69,173 111,917
---------- ------------
Supplemental benefits and other liabilities............................................ 1,573 1,584
Pension plan obligation................................................................ 7,574 7,587
Notes payable and other long-term debt................................................. 16,506 16,787
Senior notes payable................................................................... 63,100 34,150
Subordinated notes payable............................................................. 209,350 240,400
Redeemable preferred stock............................................................. 38,333 8,333
Common stock redeemable at option of stockholder (124 Class A and 31 Class C shares)... 984 984
Note receivable from stockholder....................................................... (984) (984)
Stockholders' equity (deficiency):
Class A common stock-par value $.10 per share; 40,000 shares authorized, 23,202 and
22,931 shares outstanding.......................................................... 2,322 2,294
Class B common stock-par value $.10 per share; 6,500 shares authorized, 11 shares
outstanding........................................................................ 1 1
Class C common stock-par value $.10 per share; 5,000 shares authorized, 2,567 shares
outstanding........................................................................ 257 257
Additional paid-in capital........................................................... 78,420 78,804
Deficit.............................................................................. (220,783) (221,024)
Minimum pension liability adjustment................................................. (6,065) (6,065)
---------- ------------
Total stockholders' equity (deficiency)............................................ (145,848) (145,733)
---------- ------------
$ 259,761 $ 275,025
---------- ------------
---------- ------------
See accompanying notes to consolidated financial statements.
3
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales......................................................... $ 87,972 $ 91,345 $ 336,067 $ 371,000
Cost of sales..................................................... 64,558 69,393 228,063 248,210
---------- ---------- ---------- ----------
Gross profit.................................................... 23,414 21,952 108,004 122,790
Selling, general and administrative expenses...................... 24,738 24,532 50,034 51,954
Direct delivery expense........................................... 5,621 5,663 17,768 20,149
Restructuring charges............................................. 1,300 1,150 1,300 1,150
Corporate identity expenses....................................... 2,110 792 2,110 792
Amortization of customer lists.................................... 4,431 4,740 8,931 9,529
Depreciation of plant and equipment............................... 1,830 1,732 3,551 3,389
Amortization of deferred charges.................................. 1,174 1,336 2,304 2,688
Provision for supplemental benefits............................... 142 245 283 437
---------- ---------- ---------- ----------
Operating income (loss)......................................... (17,932) (18,238) 21,723 32,702
Other income (expense):
Interest expense................................................ (8,344) (8,453) (17,149) (17,567)
Interest income................................................. 713 620 1,123 1,249
Other........................................................... 13 1,812 38 1,847
---------- ---------- ---------- ----------
Income (loss) before income taxes, equity interest and
extraordinary item.......................................... (25,550) (24,259) 5,735 18,231
Income taxes (benefit)............................................ (25) -- 350 400
---------- ---------- ---------- ----------
Income (loss) before equity interest and extraordinary item..... (25,525) (24,259) 5,385 17,831
Equity in earnings of Star Gas Partnership........................ (1,929) (1,893) 549 1,472
---------- ---------- ---------- ----------
Income (loss) before extraordinary item......................... (27,454) (26,152) 5,934 19,303
Extraordinary item-loss on early extinguishment of debt........... -- -- -- (6,414)
---------- ---------- ---------- ----------
Net income (loss)............................................... $ (27,454) $ (26,152) $ 5,934 $ 12,889
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Preferred Stock dividends......................................... (921) -- (1,817) $ (1,194)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stock.................... $ (28,375) $ (26,152) $ 4,117 $ 11,695
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) before extraordinary item per common share:
Class A Common Stock............................................ $ (1.09) $ (1.02) $ .16 $ .71
Class B Common Stock............................................ -- -- -- --
Class C Common Stock............................................ (1.09) (1.02) .16 .71
Extraordinary (loss) per common share:
Class A Common Stock............................................ $ -- $ -- $ -- $ (.25)
Class B Common Stock............................................ -- -- -- --
Class C Common Stock............................................ -- -- -- (.25)
Net income (loss) per common share:
Class A Common Stock............................................ $ (1.09) $ (1.02) $ .16 $ .46
Class B Common Stock............................................ -- -- -- --
Class C Common Stock............................................ (1.09) (1.02) .16 .46
Cash dividends declared per common share:
Class A Common Stock............................................ $ .075 $ .15 $ .15 $ .30
Class B Common Stock............................................ -- -- -- --
Class C Common Stock............................................ .075 .15 .15 .30
Weighted average number of common shares outstanding:
Class A Common Stock............................................ 23,326 22,933 23,238 22,897
Class B Common Stock............................................ 11 13 11 13
Class C Common Stock............................................ 2,598 2,598 2,598 2,598
See accompanying notes to consolidated financial statements.
4
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
(Unaudited)
Six Months Ended June 30, 1997 (In thousands)
(In thousands)
CLASS A CLASS B CLASS C
COMMON STOCK
-------------------- -------------------------- ------------------------
-------------------------------------------------------------------------- ADDITIONAL
NO. OF NO. OF NO. OF PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- --------- ----------- ------------- ----------- ----------- ----------- -----------
Balance at
December 31, 1996......... 22,931 $ 2,294 11 $ 1 2,567 $ 257 $ 78,804 $ (221,024)
Net income.................. 5,934
Cash dividends declared and
paid...................... (3,749)
Cash dividends payable...... (1,944)
Class A Common Stock issued
under the Dividend
Reinvestment Plan......... 266 27 1,145
Preferred stock offering
costs..................... (1,639)
Other....................... 5 1 110
--------- --------- -- -- ----- ----- ----------- -----------
Balance at June 30, 1997.... 23,202 $ 2,322 11 $ 1 2,567 $ 257 $ 78,420 $ (220,783)
--------- --------- -- -- ----- ----- ----------- -----------
--------- --------- -- -- ----- ----- ----------- -----------
MINIMUM
PENSION
LIABILITY
ADJ. TOTAL
--------- -----------
Balance at
December 31, 1996......... $ (6,065) $ (145,733)
Net income.................. 5,934
Cash dividends declared and
paid...................... (3,749)
Cash dividends payable...... (1,944)
Class A Common Stock issued
under the Dividend
Reinvestment Plan......... 1,172
Preferred stock offering
costs..................... (1,639)
Other....................... 111
--------- -----------
Balance at June 30, 1997.... $ (6,065) $ (145,848)
--------- -----------
--------- -----------
See accompanying notes to consolidated financial statements.
5
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------
(IN THOUSANDS) 1997 1996
--------- ---------
Cash flows from (used in) operating activities:
- -----------------------------------------------
Net income................................................................................... $ 5,934 $ 12,889
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of customer lists............................................................... 8,931 9,529
Depreciation of plant and equipment.......................................................... 3,551 3,389
Amortization of deferred charges............................................................. 2,304 2,688
Share of income of Star Gas.................................................................. (549) (1,472)
Provision for losses on accounts receivable.................................................. 953 865
Provision for supplemental benefits.......................................................... 283 437
Loss on early extinguishment of debt......................................................... -- 6,414
Gain on sale of business..................................................................... -- (1,801)
Other........................................................................................ (51) (59)
Change in Operating Assets and Liabilities, net of effects of
acquisitions and dispositions:
Decrease in accounts receivable............................................................ 18,904 7,291
Decrease in inventory...................................................................... 10,687 8,883
Increase in other current assets........................................................... (471) (48)
Decrease (increase) in other assets........................................................ (137) 52
Decrease in accounts payable............................................................... (10,894) (14,179)
Decrease in customer credit balances....................................................... (6,472) (9,975)
Decrease in unearned service contract revenue.............................................. (1,827) (2,414)
Increase (decrease) in accrued expenses.................................................... 711 (3,113)
--------- ---------
Net cash provided by operating activities................................................ 31,857 19,376
--------- ---------
Cash flows from (used in) investing activities:
- -----------------------------------------------
Minimum quarterly distributions from Star Gas Partnership...................................... 2,754 1,559
Acquisitions................................................................................... (5,625) (20,376)
Capital expenditures........................................................................... (1,195) (3,325)
Proceeds from sale of business................................................................. -- 4,073
Net proceeds from sales of fixed assets........................................................ 382 365
--------- ---------
Net cash used in investing activities........................................................ (3,684) (17,704)
--------- ---------
Cash flows from (used in) financing activities:
- -----------------------------------------------
Net proceeds from issuance of common stock..................................................... 1,172 832
Net proceeds from issuance of preferred stock.................................................. 28,362 --
Repayment of notes payable..................................................................... (1,050) (1,050)
Repurchase of common stock..................................................................... -- (24)
Repurchase of subordinated notes............................................................... (1,050) (49,612)
Credit facility borrowings..................................................................... 13,000 29,000
Credit facility repayments..................................................................... (35,000) (29,000)
Decrease in restricted cash.................................................................... 1,500 1,500
Cash dividends paid............................................................................ (7,606) (8,834)
Other.......................................................................................... (2,586) 1,635
--------- ---------
Net cash used in financing activities........................................................ (3,258) (55,553)
--------- ---------
Net increase (decrease) in cash................................................................ 24,915 (53,881)
Cash at beginning of year...................................................................... 3,257 78,285
--------- ---------
Cash at end of period........................................................................ $ 28,172 $ 24,404
--------- ---------
--------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest..................................................................................... $ 17,213 $ 19,901
Income taxes................................................................................. $ 135 $ 159
See accompanying notes to consolidated financial statements.
6
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for the fair
statement of results for the interim periods.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. Accounting Changes
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128--"Earnings Per
Share." SFAS No. 128 requires presentation of "basic" and "diluted" earnings
per share for periods ending after December 15, 1997. The impact of adopting
SFAS No. 128 will be immaterial.
3. Per Share Data
The Company computes net income per common share 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 net income for preferred
dividends declared aggregating $1,817,000 and $1,194,000 for the six months
ended June 30, 1997 and 1996 respectively, and $921,000 for the three months
ended June 30, 1997. Diluted net income per common shares are not presented
because the effect is not material.
4. Acquisitions / Sale
During the six month period ending June 30, 1997 the Company acquired the
customer lists and equipment of four unaffiliated fuel oil dealers. The
aggregate consideration for this acquisition, accounted for by the purchase
method, was approximately $5.4 million. Sales and net income of the acquired
companies are included in the consolidated statement of income from the
respective dates of acquisition.
Had these acquisitions occurred at the beginning of the period, the pro forma
unaudited results of operations for the six months ended June 30, 1997
would have been as follows:
(IN THOUSANDS, EXCEPT PER SHARE)
--------------------------------
Net sales............................................ $ 339,163
Net income........................................... 6,313
Net income per common share:
Class A Common Stock............................... $ 0.17
Class B Common Stock............................... --
Class C Common Stock............................... $ 0.17
5. Deferred Gain on Star Gas Transaction
In accordance with the Company's accounting policies, the Company deferred
the gain of approximately $20.0 million for this transaction because the
Company received subordinate units which do not readily have an ascertainable
market price creating an uncertainty regarding realization, and due to the
fact that Star Gas as general partner had a $6.0 million additional capital
contribution obligation to enhance the Partnership's ability to make
quarterly distributions on the common units (at June 30, 1997, $1.5 million
of these funds were restricted at the Star Gas level, with $4.5 million
having been released to Petro as certain quarterly guarantee provisions were
fulfilled). The Company will recognize the gain from this transaction when
the Company's subordinated units convert into common units in accordance with
the terms of the partnership agreement and when the funds from the Company's
capital contribution obligation have all been released. In general, full
conversion of subordinated units to common units will take place no earlier
than the first day of any quarter beginning on or after January 1, 2001,
based upon the satisfaction of certain performance criteria for a period of
at least three non-overlapping consecutive four-quarter periods immediately
preceding the conversion date.
7
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Six Months Ended June 30, 1997
Compared to Six Months Ended June 30, 1996
Volume: Home heating oil volume declined 13.6% to 254.3 million gallons for
the six months ended June 30, 1997, as compared to 294.3 million gallons for
the six months ended June 30, 1996. This decrease was largely due to 9.4%
warmer weather, as temperatures were significantly warmer than normal in the
first half of 1997, in contrast to the colder than normal weather experienced
during the first half of 1996. Partially offsetting the warm weather and net
account attrition was the acquisition by the Company of seventeen
individually insignificant heating oil companies since the beginning of last
year.
Net sales: Net sales decreased 9.4% to $336.1 million for the six months
ended June 30, 1997, as compared to $371.0 million for the six months ended
June 30, 1996. This decline was due to decreased volume, partially offset by
higher selling prices.
Gross profit: Gross profit decreased 12.0% to $108.0 million for the six
months ended June 30, 1997, as compared to $122.8 million for the six months
ended June 30, 1996 due to the decreased volume described above. Gross
profit did not decline to the same extent as volume due to an increase of
over 1.2 cents per gallon in home heating oil margins in 1997 as compared to
1996.
Selling, general and administrative expenses (SG&A): Selling, general and
administrative expenses decreased 3.7% to $50.0 million for the six months
ended June 30, 1997, as compared to $52.0 million for the six months ended
June 30, 1996. This decrease was due both to the Company's ability to reduce
certain overhead costs in response to the decline in volume and to reductions
in certain expenses resulting from the Company's operational efficiency
programs.
Direct delivery expenses: Direct delivery expenses decreased 11.8% to $17.8
million for the six months ended June 30, 1997, as compared to $20.1 million
for the six months ended June 30, 1996. This decrease was due to the
reduction in volume, as the Company's productivity programs enabled it to
respond to warmer weather by reducing its variable operating costs, and to
the presence in the first quarter of 1996 of severe winter storms which
increased the Company's delivery expenses.
Restructuring charges: Restructuring charges remained relatively unchanged at
$1.3 million for the six months ended June 30, 1997, as compared to $1.2
million for the six months ended June 30, 1996. These charges represent
costs associated with the Company's regionalization and consolidation program
in the New York/Long Island region.
Corporate identity expenses: Corporate identity expenses for the six months
ended June 30, 1997 were $2.1 million, as compared to $0.8 million for the
six months ended June 30, 1996. These expenses represent costs associated
with the Company's brand identity program implemented in Long Island during
1996 and in the Company's New York and the Mid Atlantic regions during 1997.
The Company intends to capitalize on its size by building significant brand
equity through one brand name, rather than the multiple names currently in
use.
8
Amortization of customer lists: Amortization of customer lists decreased
6.3% to $8.9 million for the six months ended June 30, 1997, as compared to
$9.5 million for the six months ended June 30, 1996, as the impact of certain
customer lists becoming fully amortized exceeded the impact of the Company's
recent acquisitions.
Depreciation and amortization of plant and equipment: Depreciation and
amortization of plant and equipment increased 4.8% to $3.6 million for the
six months ended June 30, 1997, as compared to $3.4 million for the six
months ended June 30, 1996, as the Company's recent acquisitions outpaced the
impact of certain assets which became fully depreciated.
Amortization of deferred charges: Amortization of deferred charges declined
14.3% to $2.3 million for the three months ended June 30, 1997, as compared
to $2.7 million for the six months ended June 30, 1996, as the impact of
certain deferred charges becoming fully amortized exceeded the impact of the
Company's recent acquisitions.
Provision for supplemental benefits: Provision for supplemental benefits
declined to $0.3 million for the six months ended June 30, 1997, as compared
to $0.4 million for the six months ended June 30, 1996. These supplemental
benefits reflect the extension of the exercise date of certain options
previously issued, and the change in provision is due to a reduction of the
accrual required under the vesting schedule of those options.
Operating income: Operating income decreased 33.6% to $21.7 million for the
six months ended June 30, 1997, as compared to $32.7 million for the six
months ended June 30, 1996. This decrease was largely a result of the
weather-related decline in volume and an increase in restructuring and
corporate identity expenses, partially offset by the Company's ability to
contain certain operating expenses in response to the warm weather and an
increase in the Company's heating oil margins.
Net interest expense: Net interest expense remained relatively unchanged at
$16.0 million for the six months ended June 30, 1997, as compared to $16.3
million for the six months ended June 30, 1996, as a small reduction in gross
interest expense resulting from both a slight decline in average borrowings
outstanding and average rate was partially offset by a $0.1 million decline
in interest income.
Other income: Other income for the six months ended June 30, 1996 was $1.8
million, reflecting the sale of the Company's sub-performing Springfield,
Massachusetts heating oil operations during the second quarter of 1996.
Equity in earnings of Star Gas Partnership: Equity in earnings of Star Gas
Partnership declined 62.7% to $0.5 million for the six months ended June 30,
1997, as compared to $1.5 million for the six months ended June 30, 1996.
This decline was due to the impact of warm weather on Star Gas' propane
volume and net income.
Extraordinary item - loss on early extinguishment of debt: In February 1996,
the Company recorded an extraordinary charge of $6.4 million in connection
with the retirement of $43.8 million of 12.25% debt due 2005. This amount
includes both a prepayment premium of $4.8 million and a write-off of
deferred charges of $1.6 million associated with the issuance of that debt.
9
Net income: Net income declined to $5.9 million for the six months ended
June 30, 1997, as compared to $12.9 million for the six months ended June 30,
1997. This decline was largely due to the impact of warm first quarter
weather on both the Company's and Star's volume, an increase in restructuring
and corporate identity expenses and the gain on the sale of the Company's
Springfield, Massachusetts business during the prior year, partially offset
by improved heating oil margins and the absence in 1997 of the extraordinary
item described above.
EBITDA* EBITDA decreased 24.5% to $36.8 million for the six months ended
June 30, 1997, as compared to $48.7 million for the six months ended June 30,
1996. This decline resulted primarily from reduced volume caused by warm
first quarter 1997 weather. Excluding restructuring and corporate identity
expenses related to the Company's operational restructuring program, and
taking into account distributions actually received from Star Gas, EBITDA
declined to $43.0 million from $52.2 million.
NIDA** NIDA declined 38.2% to $21.1 million for the six months ended June
30, 1997, as compared to $34.2 million for the six months ended June 30,
1996. This decrease was directly the result of the weather-related reduction
in EBITDA (described above). Excluding restructuring and corporate identity
expenses, NIDA declined to $24.6 million from $36.2 million.
* EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is
defined as operating income before depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the Company,
non-cash charges associated with deferred compensation plans and other
non-cash charges of a similar nature, if any. EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
availability to service debt obligations), but provides additional
significant information in that EBITDA is a principal basis upon which the
Company assesses its financial performance.
** NIDA (Net Income (Loss) Before Extraordinary Item, Depreciation and
Amortization)is defined as net income (loss) before extraordinary item, plus
depreciation, amortization, non-cash charges relating to the grant of stock
options to executives of the Company, non-cash charges associated with
deferred compensation plans and other non-cash charges of a similar nature,
if any, less dividends accrued on preferred stock, excluding net income
(loss) derived from investments accounted for by the equity method, plus any
cash dividends received by the Company from these investments. NIDA should
not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations) but provides additional
information in that NIDA is a principal basis upon which the Company assesses
its financial performance.
10
Three Months Ending June 30, 1997
Compared to Three Months Ending June 30, 1996
Volume: Home heating oil volume remained relatively flat at 61.8 million
gallons for the three months ended June 30, 1997, as compared to 62.3 million
gallons for the three months ended June 30, 1996.
Net sales: Net sales decreased 3.7% to $88.0 million for the three months
ended June 30, 1997, as compared to $91.3 million for the three months ended
June 30, 1996. This decrease was due to slightly reduced volume and to lower
selling prices driven by lower cost of supply.
Gross profit: Home heating oil gross profit increased 6.7% to $23.4 million
for the three months ended June 30, 1997, as compared to $22.0 million for
the three months ended June 30, 1996. This improvement in gross profit
resulted from a 2.2 cent increase in home heating oil gross profit margins
over the prior year period, as well as a 4.8% reduction in service costs,
which is included in the calculation of the Company's gross profit.
Selling, general and administrative expenses (SG&A): Selling, general, and
administrative expenses remained relatively unchanged at $24.7 million for
the three months ended June 30, 1997, as compared to $24.5 million for the
three months ended June 30, 1996, as the impact of the Company's productivity
programs offset wage-related inflationary pressures.
Direct delivery: Direct delivery expenses decreased 0.7% to $5.6 million for
the three months ended June 30, 1997, as compared to $5.7 million for the
three months ended June 30, 1996. This decrease is largely related to the
decline in volume over the two periods.
Amortization of customer lists: Amortization of customer lists decreased
6.5% to $4.4 million for the three months ended June 30, 1997, as compared to
$4.7 million for the three months ended June 30, 1996, as the impact of
certain customer lists becoming fully amortized exceeded the impact of the
Company's recent acquisitions.
Depreciation and amortization of plant and equipment: Depreciation and
amortization of plant and equipment remained virtually unchanged at $1.8
million for the three months ended June 30, 1997, as compared to $1.7 million
for the three months ended June 30, 1996.
Amortization of deferred charges: Amortization of deferred charges remained
virtually unchanged at $1.2 million for the three months ended June 30, 1997,
as compared to $1.3 million for the three months ended June 30, 1996.
Provision for supplemental benefits: Provision for supplemental benefits
declined to $0.1 million for the three months ended June 30, 1997, as
compared to $0.2 million for the three months ended June 30, 1996. These
supplemental benefits reflect the extension of the exercise date of certain
options previously issued, and the change in provision is due to a reduction
of the accrual required under the vesting schedule of those options.
Operating loss: Operating loss decreased 1.7% to $17.9 million for the three
months ended June 30, 1997, as compared to $18.2 million for the three months
ended June 30, 1996. This decrease was despite a $1.5 million increase in
restructuring and corporate identity costs associated with the reorganization
of the Company's operations.
11
Net interest expense: Net interest expense declined 2.6% to $7.6 million for
the three months ended June 30, 1997, as compared to $7.8 million for the
three months ended June 30, 1996. This decline was primarily due to a
reduction in average debt outstanding over the two periods.
Other income: Other income was $1.8 million for the three months ended June
30, 1996, reflecting the sale of the Company's underperforming Springfield,
Massachusetts operations during the second quarter of 1996.
Equity in Loss of Star Gas Partnership: Equity in loss of Star Gas
Partnership was $1.9 million for both the three months ended June 30, 1997
and 1996.
Net income (loss): Net loss increased 5.0% to a loss of $27.5 million for
the three months ended June 30, 1997, as compared to a loss of $26.2 million
for the three months ended June 30, 1996. This increase was primarily due to
the $1.5 million increase in restructuring and corporate identity charges.
EBITDA: EBITDA loss increased 1.7% to $10.4 million for the three months
ended June 30, 1997, as compared to $10.2 million for the three months ended
June 30, 1996. This increase in EBITDA loss was due to a $1.5 million
increase in restructuring and corporate identity charges related to the
operational restructuring. Excluding these charges, EBITDA loss would have
improved 15.8%, or $1.3 million, largely due to an increase in retail gross
profit margins.
NIDA: NIDA declined 16.3% to a loss of $17.7 million for the three months
ended June 30, 1997, as compared to a loss of $15.2 million for the three
months ended June 30, 1997. This decline was due to a $1.5 million increase
in costs related to the operational restructuring and to the absence of $1.8
million in other income. Excluding restructuring and corporate identity
expenses, NIDA loss increased to $14.3 million from $13.3 million.
12
LIQUIDITY AND FINANCIAL CONDITION
In February 1997 the Company entered into agreements ("Private Debt
Modifications") to among other things, exchange the remaining $30.0 million
of its $60.0 million 11.85%, 12.17%, and 12.18% notes ("11.96% Notes") ranked
as subordinated debt to senior debt, and to extend the maturity date of the
$60.0 million 11.96% Notes from October 1, 1998 to October 1, 2002 with $15.0
million sinking fund payments due on October 1, 2000 and October 1, 2001 and
the remaining $30.0 million balance due on October 1, 2002.
Also in February 1997 the Company issued $30.0 million of 12 7/8%
Exchangeable Preferred Stock due February 15, 2009. The intended use of this
offering's net proceeds of $28.4 million is for general corporate purposes,
as well as funding the Company's operational restructuring and acquisition
programs.
Net cash provided by operating activities of $31.9 million combined with the
$28.4 million net proceeds from the 12 7/8% Exchangeable Preferred Stock
offering described in the previous paragraph, amounted to $60.3 million.
These funds were utilized in investing activities for acquisitions and the
purchase of fixed assets of $6.8 million; and in financing activities to
repay notes payable of $1.1 million, repurchase subordinated notes of $1.1
million, repay net credit facility borrowings of $22.0 million, pay cash
dividends of $7.6 million, and other financing activities of $2.6 million,
which includes $1.2 million associated with the Private Debt Modification of
the 11.96% Notes. These financing activities were partially offset by cash
provided from the Star Gas minimum quarterly distribution of $2.8 million,
the release of $1.5 million in restricted cash as certain quarterly guarantee
provisions were fulfilled, the proceeds from the sale of fixed assets of $0.3
million, and proceeds from dividend reinvestments of $1.2 million. As a
result of the above activities, the Company's cash balance increased by $24.9
million.
The Company currently has available a $60.0 million working capital revolving
credit facility. No amount was outstanding under this credit facility at
June 30, 1997, and the Company had $54.2 million of working capital.
For the remainder of 1997, the Company anticipates paying dividends on its
Common Stock before dividend reinvestment of approximately $3.9 million,
redeeming $4.2 million of Redeemable Preferred Stock, and paying $3.1 million
in preferred stock dividends.
In addition, as a result of the December 1995 Star Gas Transaction, Star Gas
Corporation, a wholly-owned subsidiary of the Company, as general partner
remains contingently liable for the Partnership's obligations. These
contingent liabilities are limited to Star Gas Corporation. Furthermore, to
enhance the Partnership's ability to pay a minimum quarterly distribution on
its common units, Star Gas agreed, subject to certain limitations, to
contribute up to $6.0 million in additional capital to the Partnership if,
and to the extent that, the amount of available cash constituting operating
surplus with respect to any quarter is less than the amount necessary to
distribute the minimum quarterly distribution on all outstanding common units
for such quarter. At June 30, 1997 $1.5 million of these funds were
restricted at the Star Gas level, with $4.5 million having been released to
Petro as certain quarterly guarantee provisions were fulfilled.
Based on the Company's current cash and working capital position, and bank
credit facility, the Company expects to be able to meet all of the above
mentioned obligations, as well as meet all of its other current obligations
as they become due.
13
RESTRUCTURING CHARGES
Over the past two years Petro has dedicated a large amount of effort toward
defining the best possible organizational structure for the Company. The
objective has been to structure the Company to provide superior service to
its customers, build a brand image, and reduce operating costs.
As part of the initial implementation of this program, Petro undertook
certain business improvement strategies in its Long Island, New York region.
These steps included the consolidation of the region's five home heating oil
branches into one central customer service center and three depots. The
regional customer service center consolidated accounting, credit, customer
service and the sales function into a single new facility in Port Washington,
Long Island. All external communications and marketing previously undertaken
in the five branches were centralized into this one location freeing the
three newly configured depots to focus on oil delivery and heating equipment
repair, maintenance and installation, in mutually exclusive operating
territories. The Company incurred $1.2 million in restructuring expenses in
the second quarter of 1996, for costs associated with the initial
implementation of the restructuring program.
In April 1997, the Company informed its New York City employees of the
intentions to continue the restructuring activity. Such activity includes
combining the Company's three New York City branches into one new central
depot specializing in delivery, installation, maintenance, and service
functions only, and like the Long Island depots, support it with the Port
Washington facility. The Company recorded a restructuring charge of $1.3
million in the second quarter of 1997 for restructuring costs of $0.4 million
for termination benefit arrangements with employees and $0.9 million for
continuing lease obligations for unused non-cancelable non-strategic
facilities.
CORPORATE IDENTITY EXPENSES
Concurrently with the Company's initial restructuring efforts to increase
productivity and customer responsiveness, it implemented a corporate identity
program to increase the brand awareness of the "Petro" name among heating oil
customers. The implementation of this program began in April 1996 with its
Long Island region, where the new "Petro" identity and image was established
while the region was being restructured. Under this program, the Company
began servicing its approximate 100,000 Long Island customers using the
"Petro" brand name, rather than the twelve previously in use. At December
31, 1996, the Company expended $2.7 million for corporate identity expenses,
which represented costs associated with repainting the fleet, issuing new
uniforms and advertising the new "Petro" brand name.
For the six months ended June 30, 1997 the Company incurred $2.1 million
corporate identity expenses for costs associated with implementing its
corporate identity program throughout the metropolitan New York City area and
its Mid-Atlantic region. The Company anticipates corporate identity expenses
for the year-ended 1997 to be between $4.0 million and $4.5 million.
14
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
represent the Company's expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect
of weather conditions on the company's financial performance, the price and
supply of home heating oil, the ability of the Company to obtain new accounts
and retain existing accounts and the ability of the Company to realize cost
reductions from its operational restructuring program. All statements other
than statements of historical facts included in this Report including,
without limitation, the statements under "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and elsewhere
herein, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct.
15
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Shareholders June 5, 1997.
(c) Proposals
1. ELECTION
OF DIRECTORS FOR AGAINST WITHHELD ABSTAIN
------------ --- ------- -------- -------
Irik P. Sevin........ 38,502,585 * 442,009 *
Audrey L. Sevin...... 38,502,585 * 442,009 *
Phillip Ean Cohen.... 38,502,585 * 442,009 *
Thomas J. Edelman.... 38,502,585 * 442,009 *
Richard O'Connell.... 38,502,585 * 442,009 *
Wolfgang Traber...... 38,502,585 * 442,009 *
Paul Biddelman....... 38,491,991 * 452,603 *
Stephen Russell...... 38,502,585 * 442,009 *
2. A proposal to amend Article III of the Company's Restated and Amended
Articles of Incorporation (the "Articles") to increase the authorized
(i) Class A Common Stock from 40 million to 60 million shares and (ii)
preferred stock from 5 million to 10 million shares.
FOR AGAINST ABSTAIN
---------- ------- -------
29,684,587 4,834,362 15,700
3. A proposal to amend Article III of the Articles so as to conform the
voting rights, rights upon a Change of Ownership and definition of
"Change of Ownership" of the Company's 1989 Cumulative Redeemable
Preferred Stock to the corresponding terms of the Company's 12 7/8%
Exchangeable Preferred Stock due 2009.
FOR AGAINST ABSTAIN
---------- ------- -------
30,174,125 480,679 3,879,765
4. Ratification of Appointment of KPMG Peat Marwick LLP as the Company's
Independent Auditors
FOR AGAINST ABSTAIN
---------- ------- -------
38,924,116 12,428 8,049
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Included Within: (27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Signature Title Date
- --------- ----- ----
Irik P. Sevin Chairman of the Board, Chief August 7, 1997
- ------------- Executive Officer, and
Irik P. Sevin Chief Financial and Accounting
Officer and Director
17