INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Skelgas Propane, Inc.:
We have audited the consolidated balance sheets of Skelgas Propane, Inc. as
at December 31, 1995 and 1994 and the consolidated statements of income (loss)
and accumulated deficit and cash flows for the year ended December 31, 1995.
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 audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December 31,
1995 and 1994 the results of its operations and its cash flows for the year
ended December 31, 1995 in accordance with the accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE
Chartered Accountants
Markham, Canada
April 15, 1996
5
INDEPENDENT AUDITORS' REPORT
To the General Partner of
Ferrellgas Partners, L.P.
Liberty, Missouri
We have audited the accompanying consolidated statements of income (loss)
and accumulated deficit and cash flows of Skelgas Propane, Inc. and subsidiaries
for the year ended December 31, 1994. 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 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, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Skelgas
Propane, Inc. for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
June 7, 1996
6
SKELGAS PROPANE, INC.
CONSOLIDATED BALANCE SHEET
April 30, 1996 (Unaudited)
December 31, 1995 and 1994
(U.S. dollars)
April 30, December 31,
1996 1995 1994
ASSETS -------------- -------- ---------
(unaudited)
Current Assets:
Cash and cash equivalents................................... $ 9,335,000 $ 3,490,359 $ 3,132,411
Trade accounts receivable (net of allowance for doubtful
accounts at December 31,1995--$285,760;
1994--$267,800)........................................... 7,494,000 7,516,865 5,867,971
Other receivables........................................... -- 437,564 1,025,172
Current environmental costs recoverable (note 2)............ 319,000 319,138 181,669
Receivable from related companies (note 3).................. 1,679,000 1,559,619 3,497,933
Inventories (note 4)........................................ 4,648,000 8,630,846 6,937,849
Prepaid expenses............................................ 208,000 1,134,563 1,604,979
----------- ------------ ------------
Total Current Assets................................... 23,683,000 23,088,954 22,247,984
----------- ------------ ------------
Environmental costs recoverable (note 2)......................... 686,000 686,243 135,603
Appliances on rental, at cost less accumulated depreciation...... 546,000 574,128 623,834
Property, plant and equipment (note 5)........................... 49,645,000 51,816,208 53,419,549
Other assets (note 6)............................................ 9,201,000 9,733,804 61,689,733
----------- ------------ ------------
Total Assets........................................... $83,761,000 $85,899,337 $138,116,703
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current Liabilities:
Accounts payable............................................ $ 1,330,000 $ 3,001,730 $ 3,621,461
Accrued liabilities......................................... 3,818,000 6,638,518 4,556,075
Accrued environmental liability (note 2).................... 452,000 561,022 330,015
Income and other taxes payable.............................. 559,000 424,913 399,097
Current portion of long-term debt (note 7).................. 42,000 52,938 52,350
----------- ------------ ------------
Total Current Liabilities.............................. 6,201,000 10,679,121 8,958,998
----------- ------------ ------------
Long-term debt (note 7).......................................... 9,000 18,377 70,771
----------- ------------ ------------
Stockholder's Equity:
Preferred stock, $1 par value; 100,000 shares authorized,
none issued or outstanding............................... -- -- --
Common stock, $1,000 par value; 200,000 shares
authorized, 155,000 shares issued and outstanding 155,000,000 155,000,000 155,000,000
Accumulated deficit......................................... (77,449,000) (79,798,161) (25,913,066)
----------- ------------ ------------
Total Stockholder's Equity............................. 77,551,000 75,201,839 129,086,934
----------- ------------ ------------
Total Liabilities and Stockholder's Equity............. $83,761,000 $85,899,337 $138,116,703
----------- ------------ ------------
----------- ------------ ------------
See notes to consolidated financial statements.
7
SKELGAS PROPANE, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND
ACCUMULATED DEFICIT Four Months Ended April,
1996 and 1995 (unaudited)
Year Ended December 31, 1995 and 1994
(U.S. dollars)
Four Months Ended Year Ended
April 30, December 31,
1996 1995 1995 1994
-------- -------- -------- --------
(unaudited)
REVENUES.......................................... $ 44,451,000 $ 33,795,000 $ 75,230,313 $ 81,480,332
Cost of products sold (including depreciation
of $162,516 and $151,594 for the years
ended December 31, 1995 and 1994,
respectively) ................................. 26,911,000 17,111,000 39,897,582 41,856,645
------------- ------------- ------------- -------------
Gross Profit...................................... 17,540,000 16,684,000 35,332,731 39,623,687
EXPENSES:
Operating and overhead....................... 11,342,839 8,919,934 26,288,549 23,350,927
Selling...................................... 600,000 804,000 2,056,836 3,284,963
General and administrative................... 1,170,000 1,090,000 3,090,539 4,328,746
Restructuring charges........................ -- -- -- 475,367
Interest and foreign exchange adjustments.... 51,000 17,000 18,033 245,262
Depreciation and amortization (note 9)....... 1,937,000 3,405,000 57,472,523 8,844,137
------------- ------------- ------------- -------------
15,100,839 14,235,934 88,926,480 40,529,402
------------- ------------- ------------- -------------
Income (loss) before income taxes................. 2,439,161 2,448,066 (53,593,749) (905,715)
Income taxes (note 10)............................ 90,000 20,000 291,346 63,513
------------- ------------- ------------- -------------
Net income (loss)................................. 2,349,161 2,428,066 (53,885,095) (969,228)
Accumulated deficit, at beginning of period....... (79,798,161) (25,913,066) (25,913,066) (24,943,838)
------------- ------------- ------------- -------------
Accumulated deficit, at end of period............. $(77,449,000) $(23,485,000) $(79,798,161) $(25,913,066)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See notes to consolidated financial statements.
8
SKELGAS PROPANE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Four Months Ended April 30, 1996 and 1995 (Unaudited)
Year Ended December 31, 1995 and 1994
(U.S. dollars)
Four Months Ended Year Ended
April 30, December 31,
1996 1995 1995 1994
------- ------- -------- --------
(unaudited)
CASH PROVIDED BY (USED FOR):
OPERATIONS:
Net income (loss)...................................... $2,349,161 $2,428,066 $(53,885,095) $ ( 969,228)
Items not involving cash:
Depreciation and amortization..................... 1,964,000 3,442,000 57,635,039 8,995,641
Change in non-cash operating working capital...... 782,480 (3,651,477) 685,873 (6,320,069)
----------- ----------- ------------ ------------
Net cash provided by operating activities.............. 5,095,641 2,218,589 4,435,817 1,706,344
----------- ----------- ------------ ------------
FINANCING:
Repayment of long-term debt............................ (19,000) (18,000) (51,806) (51,806)
----------- ----------- ------------ ------------
Net Cash used for financing activities................. (19,000) (18,000) (51,806) (51,806)
INVESTMENTS: ----------- ----------- ------------ ------------
Proceeds from disposal of property, plant and
equipment........................................... 768,000 -- 384,615 277,618
Purchases of property, plant and equipment............. -- (1,639,000) (4,297,868) (2,599,507)
Purchases of appliance on rental.......................
-- -- (112,810) (247,587)
----------- ----------- ------------ ------------
Net cash provided by (used for) investing activities... 768,000 (1,639,000) (4,026,063) (2,569,476)
----------- ----------- ------------ ------------
Increase (decrease) in cash position................... 5,844,641 561,589 357,948 (914,938)
Cash at beginning of period............................ 3,490,359 3,132,411 3,132,411 4,047,349
----------- ----------- ------------ ------------
Cash at end of period ................................. $9,335,000 $3,694,000 $ 3,490,359 $3,132,411
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Supplemental disclosure of cash flow information:
Income taxes paid................................. $ 40,000 $ 56,000 $ 277,795 $ 100,265
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Interest paid..................................... $ 2,000 $ 6,600 $ 6,311 $ 262,407
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
See notes to consolidated financial statements.
9
SKELGAS PROPANE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Four Months Ended April 30, 1996 and 1995
(Unaudited)
Years Ended December 31, 1995 and 1994
Skelgas Propane, Inc. (the "Company"), incorporated under the laws of Delaware,
has as its principal business activity the marketing of propane. The Company
is a wholly-owned subsidiary of Superior Propane Inc., (the "Parent")
incorporated under the laws of Canada.
1. Summary of significant accounting policies:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The Company's significant accounting policies are as follows:
Basis of consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories:
Inventories of propane are valued at the lower of cost and market
determined on the basis of net realizable value. Inventories of appliances,
materials and supplies are stated at the lower of cost and market value
determined on the basis of replacement cost or net realizable value. Cost
is determined on the first-in, first-out (FIFO) method.
Appliances on rental:
Appliances on rental are stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis, generally over a period
of six years.
Property, plant and equipment:
Properties, plant and equipment are recorded at cost and depreciated over
the estimated useful life using the straight line method except for loaned
dispensers which use the declining balance method at a rate of 10%.
Property, plant and equipment are evaluated periodically, and if conditions
warrant, an impairment is recorded. The estimated useful life of major
asset classes are:
Buildings......................................... 20 years
Propane marketing equipment....................... 7-20 years
Goodwill:
Goodwill and non-compete agreements are recorded at cost less accumulated
amortization. Non-compete agreements are amortized on a straight line basis
over 10 years. Effective January 1, 1993, the Company revised the
amortization period for goodwill from 40 years to 20 years prospectively.
Management periodically evaluates the Company's intangible assets,
including goodwill, for impairment by calculating the anticipated cash flow
attributable to the underlying operations over their expected remaining
lives. Such expected cash flows, on an undiscounted basis, are compared to
the carrying value of the tangible and intangible assets, and if impairment
is indicated, the carrying value of the intangible assets are adjusted.
10
Income taxes:
The Company follows Statement of Financial Accounting Standards (SFAS) No.
109--"Accounting for Income Taxes". This Statement requires the liability
method of accounting for income taxes. The Company has established
valuation reserves on the deferred tax asset related to the net operating
loss carryforwards.
Environmental Remediation:
The Company accrues environmental remediation costs for work at identified
sites where an assessment has indicated that cleanup costs are probable and
reasonably estimable. Such accruals are based on currently available facts,
estimated timing of remedial actions, existing technology and presently
enacted laws and regulations. The accruals are routinely reviewed as events
and developments warrant.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting of only normal recurring accruals, necessary for fair
representation of the balance sheet and results of operations and cash
flows as of April 30, 1996 and for the four months ended April 30, 1996 and
1995, as presented in the accompanying unaudited financial statements.
2. Accrued environmental liability and costs recoverable:
The Company is subject to federal, state and local laws regulating
environmental remediation. These laws result in loss contingencies for
remediation at some of the Company's current locations as well as third
party or formerly owned facilities. The estimated costs for restoration and
remediation of these locations was accrued separately in the amount of
$452,000 (unaudited) as of April 30, 1996, and $561,022 as of December 31,
1995 (1994--$330,015). Realization of claims from governmental authorities
for recovery of costs incurred in respect of environmental liabilities
totalling $1,005,000 (unaudited) as of April 30, 1996 and $1,005,381 as of
December 31, 1995 (1994--$317,272) will be recovered between 1996 and 1999.
3. Related party transactions:
The Company buys propane from an affiliate. During the year, such purchases
amounted to $7,696,773 (1994--$6,640,322).
The Company received administrative services which are provided by an
affiliate for which it pays a fee. The charge for these services is based
on a reasonable estimation of time and effort spent by the Parent's various
corporate office groups to provide services to the Company. For the year
ended December 31, 1995 the fees were $2,170,072 (1994--$2,356,725).
In addition, certain other transactions are entered into with affiliated
companies. The receivable from the affiliate was $1,559,619 as of December
31, 1995 (1994--$3,497,933).
4. Inventories:
December 31,
-----------------------
1995 1994
----------- -----------
Propane................................... $ 5,790,211 $4,215,443
Appliances................................ 1,777,809 1,842,690
Materials and supplies.................... 1,062,826 879,716
----------- ----------
$ 8,630,846 $6,937,849
----------- ----------
----------- ----------
11
5. Property, plant and equipment
December 31,1995 December 31, 1994
------------------------------------------------- ---------------------
Accumulated
Depreciation
and Net Book
Cost Amortization Value Net Book Value
------------- -------------- ------------ ----------------
Land............................. $ 3,605,798 $ -- $ 3,605,798 $ 3,611,415
Buildings........................ 6,958,062 2,715,773 4,242,289 4,322,885
Propane marketing equipment...... 84,154,952 40,186,831 43,968,121 45,485,249
------------- --------------- ------------ -----------------
$94,718,812 $ 42,902,604 $ 51,816,208 $ 53,419,549
------------- --------------- ------------ -----------------
------------- --------------- ------------ -----------------
Accumulated depreciation at December 31, 1994 was $37,827,206.
6. Other assets:
December 31,
-----------------
1995 1994
------- -------
Goodwill (net of accumulated amortization of $59,835,876; 1994--
$9,289,725)............................................................ $2,354,026 $52,900,177
Noncompete agreements (net of accumulated amortization of $8,834,052;
1994--$6,749,883)...................................................... 7,379,778 8,789,556
----------- ------------
$9,733,804 $61,689,733
----------- ------------
----------- ------------
In the last quarter of the year ended December 31, 1995, the Company
evaluated the carrying value of its intangible assets, including goodwill
considering the effects of the Parent's decision to divest its interest in
the Company. This necessitated a write down of the goodwill in the amount
of $47,612,072, which is included as part of the amortization of goodwill
in 1995 as set out in note 9.
7. Long-term debt:
December 31,
-----------------
1995 1994
------- -------
Notes payable for noncompete agreement................................... $71,315 $123,121
Less: Current portion of long-term debt.................................. 52,938 52,350
------- ---------
$18,377 $ 70,771
------- ---------
------- ---------
12
8. Restructuring Charges
During the year ended December 31, 1994 the Company reorganized its field
operations which resulted in the consolidation and closure of certain field
offices and severance of employees. The costs attributable to such
reorganization aggregated $475,367 which has been reflected as
restructuring charges in the accompanying Statement of Income (Loss) for
the year ended December 31, 1994.
9. Depreciation and amortization expense:
Year Ended
-----------------
December 31,
-----------------
1995 1994
------- -------
Depreciation............................................................... $ 5,690,165 $4,741,112
Amortization of goodwill................................................... 50,546,151 2,752,680
Amortization of noncompete agreements...................................... 1,409,778 1,368,456
Gain on disposal of property, plant and equipment.......................... (173,571) (18,111)
------------- -----------
$57,472,523 $8,844,137
------------- -----------
------------- -----------
10. Income taxes:
The provision for income taxes includes the following:
Year Ended
-----------------
December 31,
-----------------
1995 1994
------- -------
Federal.................................................................. $ -- $ --
State.................................................................... 291,346 63,513
---------- -----------
Total current taxes................................................. 291,346 63,513
Deferred taxes................................................................ -- --
---------- -----------
Total income taxes.................................................. $ 291,346 $ 63,513
---------- -----------
---------- -----------
The provision for income taxes differs from applying the federal statutory
income tax rate of 34 percent to the loss before income taxes as follows:
Year Ended
------------
December 31,
--------------
1995 1994
-------- ---------
Statutory federal rate........................................................ (34.0)% (34.0)%
Goodwill...................................................................... 33.0% 34.0%
Other......................................................................... 1.5% 0.7%
-------- ---------
Effective income tax rate..................................................... 0.5% 0.7%
-------- ---------
-------- ---------
13
The types and tax effects of the temporary differences that cause
significant portions of deferred tax assets and liabilities are as follows:
Year Ended
------------
December 31,
--------------
1995 1994
-------- ---------
Deferred tax assets:
Net operating loss carryforwards........................................ $23,966,000 $23,812,000
Self insurance reserve.................................................. 670,000 --
Investment tax credits.................................................. 250,000 250,000
Inventory costs capitalized for tax purposes............................ 155,000 155,000
Non deductible allowance for doubtful accounts.......................... 114,000 107,000
Restructuring charge.................................................... -- 190,000
----------- ------------
Total deferred tax assets.......................................... 25,155,000 24,514,000
Deferred tax liabilities:
Fixed asset basis differences/depreciation.............................. 14,033,000 14,427,000
----------- ------------
Subtotal 11,122,000 10,087,000
Total valuation allowance.................................................... 11,122,000 10,087,000
----------- ------------
Net deferred tax asset $ -- $ --
----------- ------------
----------- ------------
As at December 31, 1995, the Company had net operating loss carryforwards
of approximately $60,000,000. These carryforwards expire between 1999 and
2008. Restrictions on the utilization of the net operating loss
carryforwards apply as a result of the change in the control that occurred
upon acquisition of the Company in 1990.
As of December 31, 1995, the Company has investment tax credit
carryforwards of $250,000. These carryforwards expire between 1999 and
2000.
11. Employee retirement plans:
Many of the Company's employees are eligible to participate in 401(k)
Savings Plans, some of which provide for company matching under various
formulas. The Company's matching expense for the plans was $235,051 for the
year ended December 31, 1995 (1994--$250,904).
12. Financial instruments:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer
base.
Financial instruments comprise cash, accounts receivable, accounts payable,
accrued liabilities, and long-term debt. The fair value of these financial
instruments approximates their carrying value.
14
13. Operating lease commitments:
The Company leases buildings and propane marketing equipment under
operating leases which expire in various years through 2000.
Future minimum lease payments by year under operating leases with initial
terms or remaining terms of one year or more consisted of the following at
December 31, 1995:
1996........................................................ $253,869
1997........................................................ 188,438
1998........................................................ 185,836
1999........................................................ 184,686
2000........................................................ 122,059
14. Contingencies:
At December 31, 1995 and April 30, 1996 (unaudited), there are a number of
lawsuits and claims pending against the Company, the ultimate results of
which have been estimated and included in accrued liabilities. Management
is of the opinion that these claims are adequately reflected in the
consolidated balance sheet of the Company as at December 31, 1995 and April
30, 1996 (unaudited), and that any additional amounts assessed against the
Company would not have a material adverse effect upon the consolidated
financial position of the Company or the results of its operations.
15. Subsequent event:
On March 23, 1996, an agreement to sell the shares of the Company was
signed with a prospective acquiror. The transaction was completed on April
30, 1996 pending closing adjustments as required by the Sales Agreement.
15