SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 7, 1994
PETROLEUM HEAT AND POWER CO., INC.
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of Incorporation)
(Commission File No.) 2-88526
Clearwater House
2187 Atlantic Street
Stamford, Connecticut 06902
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 325-5400
Item 1. Change in Control of Registrant.
None
Item 2. Acquisition or Disposition of Assets.
On December 7, 1994, Petroleum Heat and Power Co., Inc. (the "Company")
completed the acquisition of Star Gas Corporation ("Star"). The transaction was
effected pursuant to an option granted to the Company in December 1993 when
Petro invested $16 million in Star.
To complete the transaction the Company paid $3.8 million in cash and
issued approximately 2.5 million shares of the Company's Class A Common Stock.
Pursuant to rights granted in December 1993, the recipients of the Class A
Common Stock will have certain "piggyback" and demand rights with respect to the
registration of the Class A Common Stock under the Securities Act of 1933.
In addition to the consideration described above, pursuant to the option,
the Company granted to First Reserve Corp., one of Star's investors, options to
purchase approximately 0.7 million shares of the Company's Class A Common Stock
exercisable through December 31, 1999, at $10.14 per share, in exchange for
certain options First Reserve Corp. held to acquire equity of Star.
In connection with the acquisiton, the Company and The Prudential Insurance
Company of America, entered into an Agreement (a copy of which is annexed hereto
as Exhibit I)wherein Prudential granted to the Company an option, exercisable
through May 31, 1995, to repurchase 1,521,316 shares, together with certain
notes of the Company in the aggregate principal amount of $63.7 million (the
"Prudential Notes") and 82,641 shares of Star's 12.625% Cumulative Redeemable
Preferred Stock, for an aggregate purchase price of $87.3 million less all
principal payments made with respect to the Prudential Notes after December 1,
1994 and plus (i) any accrued and unpaid dividends after December 1, 1994 on the
Cumulative Redeemable Preferred Stock and (ii) an amount as will provide
Prudential a yield of 12.625% per annum compounded semiannually from December 7,
1994, on the $13.5 million it exchanged for the Petro Shares but less any
dividends paid on the Petro Shares from the date hereof. Further, Prudential
has agreed that if the Company fails to exercise its right to purchase the Petro
Shares, the Petro Notes and the Redeemable Preferred Stock, the Company shall
have a right of first offer with respect to the Petro Shares.
Item 3. Bankruptcy or Receivership
None
Item 4. Changes in Registrant's Certifying Accountant.
None
Item 5. Other Events.
None
Item 6. Registration of Registrants Directors.
None
Item 7. Financial Statements and Exhibit
(a) Financial Statements of Star Gas Corporation and Subsidiaries
Page
----
Independent Auditor's Report.................................1
Consolidated Balance Sheets as of September 30,
1994 and 1993..........................................2
Consolidated Statements of Operations for the years ended
September 30, 1994, 1993 and 1992......................3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1994, 1993 and 1992..4
Consolidated Statements of Cash Flows for the years ended
September 30, 1994, 1993 and 1992....................5-6
Notes to Consolidated Financial Statements...................7
(b) Pro Forma Financial Statements:
Pro Forma Balance Sheet (Unaudited) as of September 30,
1994................................................. P-1
Pro Forma Condensed Statement of Operations (Unaudited)
for the year ended December 31, 1993................. P-2
Pro Forma Statement of Operations (Unaudited) for the
nine months ended September 30, 1994 ................ P-3
(c) The following document is filed herewith as an exhibit:
(1) Agreement entered into as of the 7th day of December 1994,
among the Company, Pru Supply, Inc. and The Prudential
Insurance Company of America.
Item 8 Changes in Fiscal Year.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PETROLEUM HEAT AND POWER CO., INC.
/s/ Irik P. Sevin
-------------------------------
Name: Irik P. Sevin
Title: President, Chairman of the Board
and Chief Financial and
Accounting Officer and Director
Date: December 22, 1994
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1992, 1993 and 1994
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors and Shareholders of
Star Gas Corporation:
We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1993 and 1994 and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated statements of operations, shareholders' equity and
cash flows for the year ended September 30, 1992 was audited by other auditors
whose report dated December 3, 1992, except for note 5(e) as to which the date
was April 1, 1993, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Star Gas Corporation
and subsidiaries at September 30, 1993 and 1994 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the Consolidated Financial Statements, Star Gas
Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1994.
New York, New York
November 17, 1994
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
-------------------------
1993 1994
---- ----
Assets
- ------
Current assets:
Cash $ 730,256 $ 1,825,093
Receivables, net of allowance of $716,000
and $521,000 9,034,888 8,172,047
Inventories (note 3) 6,445,293 4,778,007
Prepaid expenses and other current assets 1,596,457 1,734,090
Assets held for sale (note 1) 7,378,126 -
------------- ---------------
Total current assets 25,185,020 16,509,237
------------ ------------
Property and equipment:
Customer equipment 128,056,431 132,329,606
Land and buildings 9,918,745 9,739,310
------------ ------------
137,975,176 142,068,916
Less accumulated depreciation 30,306,574 37,079,397
------------ -------------
107,668,602 104,989,519
------------ -------------
Intangibles, net of accumulated amortization
of $32,455,238 and $36,394,491, and other assets 19,529,973 15,644,682
------------- -------------
Total assets $152,383,595 $137,143,438
============ ============
Liabilities and Shareholders' Equity (Deficiency)
- -------------------------------------------------
Current liabilities:
Current debt (note 5) $ 8,197,953 $ 4,766,063
Accounts payable 9,433,402 2,875,975
Accrued interest 7,833,308 1,364,263
Other accrued expenses 2,888,373 3,039,216
Customer credit balances 2,733,000 3,286,425
------------- -------------
Total current liabilities 31,086,036 15,331,942
------------ ------------
Long-term debt 123,991,264 70,163,385
Deferred income taxes and other long-term liabilities 817,663 643,137
Cumulative redeemable preferred stock - 8,264,100
Shareholders' equity (deficiency): (notes 1,2 and 5)
Common stock 266 45
Preferred stock 41,729 500,111
Capital in excess of par value 58,471,501 108,336,313
Deficit (59,836,948) (66,095,595)
Treasury stock, at cost (2,187,916) -
-------------- -----------------
(3,511,368) 42,740,874
-------------- -------------
Total liabilities and shareholders' equity $152,383,595 $137,143,438
============ ============
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30,
-------------------------------------------
1992 1993 1994
---- ---- ----
Revenues:
Propane and related products $117,877,556 $132,194,740 $114,920,000
Hauling 16,225,561 16,220,657 11,129,869
Other, net 6,636,627 5,780,581 6,742,273
------------- ------------- --------------
140,739,744 154,195,978 132,792,142
------------ ------------ -------------
Costs and Expenses:
Propane and related products 57,641,607 69,447,511 55,045,905
Delivery and branch 57,855,438 62,332,227 53,714,862
Depreciation and amortization 14,128,104 16,092,452 11,781,088
General and administrative 3,002,555 3,772,546 4,001,577
------------ ------------ -------------
132,627,704 151,644,736 124,543,432
------------ ------------ -------------
Impairment of long-lived assets - 33,047,065 -
---------------- ------------ ----------------
Net loss on sales of businesses - - 739,789
---------------- ---------------- -------------
Income (loss) before interest expense and
income taxes 8,112,040 (30,495,823) 7,508,921
Interest expense 16,665,525 16,335,155 9,514,569
------------ ------------ -------------
Loss before income taxes (8,553,485) (46,830,978) (2,005,648)
Income tax expense (benefit) (1,294,003) 257,027 300,000
------------ --------------- -------------
Net loss $ (7,259,482) $ (47,088,005) $ (2,305,648)
============ ============= ============
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency)
Years Ended September 30, 1992, 1993 and 1994
8%
Cumulative
Convertible Capital in
Preferred Preferred Excess
Common Stock Stock Stock of Par
-------------- ----------------
Old New Series A Old New Value
----- ---- -------- ----- ----- -----------
Balance as of September 30, 1991 $ 256 - 40,309 - - 55,052,931
Issuance of common stock (old) 10 - - - - 1,999,990
Net loss - - - - - -
----- ---- -------- ----- ----- -----------
Balance as of September 30, 1992 266 - 40,309 - - 57,052,921
Conversion of $1,420,000 of junior
subordinated debt into 8%
preferred stock (old) - - - 1,420 - 1,418,580
Net loss - - - - - -
----- ---- -------- ----- ----- -----------
Balance as of September 30, 1993 266 - 40,309 1,420 - 58,471,501
Retirement of treasury stock (old), conversion
of $4,080,000 of notes plus accrued
interest, 1,420 shares of 8% preferred
stock (old), 40,309 shares of Series A
Preferred Stock (old) and 266 shares of
common stock (old) into 5,000 shares of
Series E preferred stock (new) and
480.695 shares of common stock (new) (266) 48 (40,309) (1,420) 5,000 2,220,547
Issuance of 179,750 shares of Series A and
90,000 shares of Series C preferred stock
(new), net of issuance costs - - - - 269,750 25,984,523
Total
Common Shareholders'
Treasury Equity
Deficit Stock (Old) (Deficiency)
------------ ------------ -------------
Balance as of September 30, 1991 (5,489,461) (2,187,916) $47,416,119
Issuance of common stock (old) - - 2,000,000
Net loss (7,259,482) - (7,259,482)
------------ ------------ -------------
Balance as of September 30, 1992 (12,748,943) (2,187,916) 42,156,637
Conversion of $1,420,000 of junior
subordinated debt into 8%
preferred stock (old) - - 1,420,000
Net loss (47,088,005) - (47,088,005)
------------ ------------ -------------
Balance as of September 30, 1993 (59,836,948) (2,187,916) (3,511,368)
Retirement of treasury stock (old), conversion
of $4,080,000 of notes plus accrued
interest, 1,420 shares of 8% preferred
stock (old), 40,309 shares of Series A
Preferred Stock (old) and 266 shares of
common stock (old) into 5,000 shares of
Series E preferred stock (new) and
480.695 shares of common stock (new) - 2,187,916 4,371,516
Issuance of 179,750 shares of Series A and
90,000 shares of Series C preferred stock
(new), net of issuance costs - - 26,254,273
(Continued)
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency)
Years Ended September 30, 1992, 1993 and 1994
8%
Cumulative
Convertible Capital in
Preferred Preferred Excess
Common Stock Stock Stock of Par
-------------- ----------------
Old New Series A Old New Value
----- ---- -------- ----- ----- -----------
Conversion of $25,000,000 of subordinated
debt, net of unamortized issuance costs,
into 150,000 shares of Series B and
100,000 shares of Series D preferred
stock (new) - - - - 250,000 24,207,642
Redemption of 56,311 shares of Series D
preferred stock (new) with the cash proceeds
from the sale of Federal Petroleum Company
and Highway Pipeline Trucking Company - - - - (56,311) (5,683,431)
Common stock contributed (27.877 shares) in
connection with the redemption of the Series
D preferred stock (new) - (3) - - - 3
Stock dividends declared (31,672 shares)
on Series A, B, C, D and E
preferred stock (new) - - - - 31,672 3,135,528
Cash dividends declared and paid on Series C
preferred stock (new) - - - - - -
Stock dividends declared (7,641 shares) on
Series A and B 12.625% Cumulative
Redeemable Preferred Stock - - - - - -
Net loss - - - - - -
----- ---- -------- ----- ------- -----------
Balance as of September 30, 1994 $ - 45 - - 500,111 108,336,313
===== ==== ======== ===== ======= ===========
See accompanying notes to consolidated financial statements.
Total
Common Shareholders'
Treasury Equity
Deficit Stock (Old) (Deficiency)
----------- ------------ -------------
Conversion of $25,000,000 of subordinated
debt, net of unamortized issuance costs,
into 150,000 shares of Series B and
100,000 shares of Series D preferred
stock (new) - - 24,457,642
Redemption of 56,311 shares of Series D
preferred stock (new) with the cash proceeds
from the sale of Federal Petroleum Company
and Highway Pipeline Trucking Company - - (5,739,742)
Common stock contributed (27.877 shares) in
connection with the redemption of the Series
D preferred stock (new) - - -
Stock dividends declared (31,672 shares)
on Series A, B, C, D and E
preferred stock (new) (3,167,200) - -
Cash dividends declared and paid on Series C
preferred stock (new) (21,699) - (21,699)
Stock dividends declared (7,641 shares) on
Series A and B 12.625% Cumulative
Redeemable Preferred Stock (764,100) - (764,100)
Net loss (2,305,648) - (2,305,648)
------------ ------------ -------------
Balance as of September 30, 1994 (66,095,595) - $42,740,874
============ ============ =============
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30,
--------------------------------------
1992 1993 1994
---- ---- ----
Operating activities:
Net loss $ (7,259,482) $ (47,088,005) $ (2,305,648)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Impairment of long-lived assets - 33,047,065 -
Depreciation and amortization 14,128,104 16,092,452 11,781,088
Deferred income taxes (1,497,840) (13,700) 15,300
Provision for losses on accounts receivable 731,781 1,368,742 588,657
Net loss on sales of businesses - - 739,789
Loss (gain) on sales of fixed assets and other items (234,824) 214,625 201,305
Changes in operating assets and liabilities:
Decrease (increase) in receivables 813,836 (381,760) 454,771
Decrease (increase) in inventories (770,937) 2,170,477 1,667,286
Decrease (increase) in other assets 453,934 5,865 (104,438)
Increase (decrease) in accounts payable (105,714) 131,132 (6,557,427)
Increase (decrease) in other current liabilities 3,074,016 3,977,004 (5,473,416)
Increase (decrease) in other long-term liabilities (1,330,070) 482,931 (189,826)
------------- ------------- -----------
Net cash provided by operating activities 8,002,804 10,006,828 817,441
------------- ------------ -----------
Investing activities:
Capital expenditures (6,730,179) (4,787,637) (5,418,690)
Purchases of companies, net of cash acquired (1,206,681) (61,109) (760,000)
Proceeds from sales of fixed assets 1,134,298 722,950 479,451
Proceeds from sales of businesses - - 6,392,214
----------------------------- -----------
Net cash provided by (used in) investing activities (6,802,562) (4,125,796) 692,975
------------ ------------ ------------
Financing activities:
Proceeds from issuance of debt 182,999 1,938,930 700,000
Repayment of debt (8,070,794) (9,972,296) (18,799,707)
Net proceeds (repayments) under revolving credit facility (5,472,004) 1,580,708 (2,808,704)
Proceeds from the issuance of common stock 6,873,900 - -
Net proceeds from the issuance of preferred stock 5,126,100 - 26,254,273
Redemption of preferred stock - - (5,739,742)
Cash dividends paid on preferred stock - - (21,699)
----------------------------- -----------
Net cash used in financing activities (1,359,799) (6,452,658) (415,579)
------------- ------------- ----------
Net increase (decrease) in cash (159,557) (571,626) 1,094,837
Cash at beginning of year 1,461,439 1,301,882 730,256
------------- ------------- -----------
Cash at end of year $ 1,301,882 $ 730,256 $1,825,093
============= ============= ==========
STAR GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30,
------------------------------------
1992 1993 1994
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 276,097 $ 296,372 $ 356,320
============ =========== =============
Interest $14,257,459 $15,145,124 $ 15,052,098
=========== =========== ============
Other non-cash transactions:
Conversion of subordinated debt
into preferred stock $ 1,420,000
===========
Reclassification to assets held for sale:
Property, plant and equipment, net $ 4,399,914
Net operating assets 2,978,212
-----------
$ 7,378,126
===========
Recapitalization:
Exchange of notes $ 4,080,000
Exchange of accrued interest 291,516
Exchange of 1,420 shares of preferred stock (old) 1,420
Exchange of Series A preferred stock (old) 40,309
Exchange of common stock (old) 266
Common stock contributed (new) 3
Retirement of treasury stock (old) (2,187,916)
Issuance of Series E convertible preferred stock (new) (5,000)
Issuance of common stock (new) (48)
Capital in excess of par value (2,220,550)
Exchange of subordinated debt (25,000,000)
Write-off of related unamortized issuance costs 542,358
Issuance of Series B convertible preferred stock (new) 150,000
Issuance of Series D convertible preferred stock (new) 100,000
Capital in excess of par value 24,207,642
Exchange of subordinated debt (7,500,000)
Issuance of 12.625% cumulative redeemable preferred stock 7,500,000
--------------
$ -
=================
Stock dividends:
Stock dividends declared on 12.625% cumulative redeemable
preferred stock $ 764,100
Stock dividends declared on convertible preferred stock (new) 31,672
Capital in excess of par value 3,135,528
Deficit (3,931,300)
--------------
$ -
================
Sale of assets:
Receipt of note receivable (500,000)
Reduction in assets held for sale 500,000
---------------
$ -
=================
See accompanying notes to consolidated financial statements.
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Business
Star Gas Corporation (the "Company"), a Delaware Corporation, sells and
distributes propane gas and related appliances to retail and wholesale
customers located principally in the Midwest, Northeast and Southeast (see
note 10) sections of the United States. As of September 30, 1994, on an
as-if-converted basis (see note 2), the Company was owned by Petroleum
Heat and Power Co., Inc. ("Petro") (33.3%), Star Gas Holdings ("Holdings")
(18.6%), the Prudential Insurance Company of America ("Prudential")
(33.4%) and a group of limited partnerships managed by First Reserve
Corporation (the partnerships are hereinafter collectively referred to as
"FRC") (14.7%). In December 1993, the Company was recapitalized (see note
2). Prior to the recapitalization, the Company was owned by Star Energy
Inc. (45%) and by FRC (55%), collectively hereinafter referred to as the
"Prior Shareholders". In connection with the recapitalization, all shares
held by Star Energy Inc. were acquired by FRC.
In December 1993, the Company entered into, and is currently being managed
under, a Management Services Agreement with Petro which provides for an
annual cash fee to Petro of $500,000 and an annual bonus equal to 5% of
the increase in the Company's cash flow, as defined, over the fiscal year
ended September 30, 1993. The bonus is payable in Class A Common Stock of
the Company pursuant to a formula set forth in the Management Services
Agreement. For the year ended September 30, 1994, the value of this bonus
approximated $69,000. The Company also reimburses Petro for expenses and
costs associated with certain Petro personnel. In November 1994, Petro
announced its intention to exercise its options to purchase certain shares
of Common Stock and Cumulative Convertible Preferred Stock owned by FRC
and Prudential. If these options are exercised, Petro's ownership of Star
will increase to approximately 80%.
In December 1993, the Company, in an effort to improve profitability and
to concentrate on its core business, sold one of its wholly owned
subsidiaries, Federal Petroleum Company ("Federal") and initiated
discussions to sell another wholly owned subsidiary, Highway Pipeline
Trucking Company ("Highway"). For the sale of Federal, the Company
received $1,650,000 in cash and an 8% interest bearing note in the amount
of $500,000. The note is due in 48 monthly installments commencing on
November 1, 1994 and ending on October 1, 1998. At September 30, 1993,
the Company adjusted the carrying value and the net assets of Federal to
equal the then expected sale price of $2,150,000. In July 1994, the
Company sold Highway for $4.1 million in cash. At September 30, 1993, the
Company had adjusted the carrying value of the net assets of Highway to be
sold to $5,228,128, its estimated value at that date. In September 1994,
the Company sold one of its retail propane operations for approximately
$650,000, net of expenses.
Prior to the recapitalization (see note 2), the Company purchased, in
September 1989, 15.12 shares of common stock owned by a former officer
for a 10% Junior Subordinated
(Continued)
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
Promissory Note in the amount of $2,187,916 (see note 5). These shares
were held in treasury at September 30, 1993, and were retired as part of
the recapitalization. In September 1991, the Company sold 30.60 shares of
Common Stock and 5,126.10 shares of Series A Preferred Stock to the prior
Shareholders for $4,873,900 and $5,126,100 respectively, the proceeds of
which were received in fiscal 1992. In August 1992, the Company sold
10.69 shares of common stock to the Prior Shareholders for $2,000,000. In
March 1993, the Prior Shareholders agreed to exchange $1,420,000 of long-
term liabilities acquired from a third party (see note 5) in consideration
of 1,420 shares of newly issued 8% Cumulative Convertible Preferred Stock.
(2) Recapitalization
During September 1994, the Company effected a reverse stock split of its
newly authorized and issued common stock wherein each share became .001
share. All newly authorized and issued shares of common stock presented
in the financial statements and notes, give effect to the reverse stock
split.
In December 1993, the Company amended its Articles of Incorporation and
authorized three new classes of common Stock, par value $.10 - Class A
(30,000 shares), Class B (5,000 shares) and Class C (3,000 shares), each
with identical rights and preferences, except that Class A has one vote
per share, Class B is nonvoting and Class C has 10 votes per share. The
Company also authorized 3,000,000 shares of new $1.00 par value preferred
stock to be issued in one or more series as the Board of Directors may
determine. The Board is also authorized to fix and determine the
designation and relative rights and preferences of each such series. Two
new classes of preferred stock were then created by the Board - an 8%
Cumulative Convertible Preferred Stock [Series A (530,000 shares), Series
B (300,000 shares), Series C (160,000 shares), Series D (500,000 shares)
and Series E (10,000 shares)] and a 12.625% Cumulative Redeemable
Preferred Stock [Series A (30,000 shares) and Series B (120,000 shares)].
All dividends on the Series A, B, D and E 8% Cumulative Convertible
Preferred Stock and on the Series A and B 12.625% Cumulative Redeemable
Preferred Stock are payable in additional shares of the same preferred
stock series. The holders of the Series C 8% Cumulative Convertible
Preferred Stock have the option, upon delivering proper notice, to be paid
in cash or in additional shares of Series C 8% Cumulative Convertible
Preferred Stock.
(Continued)
2
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2), Continued
In December 1993, as part of the recapitalization, the Company sold
269,750 shares of 8% Cumulative Convertible Preferred Stock for
$26,975,000 to the following investors in the indicated amounts: Petro
($14,000,000), Holdings ($11,000,000) and FRC ($1,975,000). Holdings is a
corporation formed for the purpose of investing in the Company by a group
of investors, including Petro who contributed $2,000,000 of the
$11,000,000 invested. The preferred shares were sold in the following
series: Series A - 179,750 shares and Series C - 90,000 shares. The cash
proceeds received by the Company from the issuance of the preferred stock
were used to repay: $14,325,000 of its outstanding 11.56% Senior Notes,
$2,800,000 of its outstanding Term Loan and $7,957,000 of interest in
arrears. The expenses relating to the issuance were $720,727. In
addition, the Company, issued 250,000 shares of its 8% Cumulative
Convertible Preferred Stock (150,000 shares of Series B and 100,000 shares
of Series D) and 75,000 shares of its 12.625% Cumulative Redeemable
Preferred Stock (15,000 shares of Series A and 60,000 Series B) to
Prudential in exchange for $25,000,000 and $7,500,000, respectively, of
its 12.625% Senior Subordinated Participating Notes. (see note 5).
Petro has an option to buy all of the shares of common stock and the 8%
Cumulative Convertible Preferred Stock owned by Holdings, FRC and
Prudential. This option commences after the issuance of the audited
financial statements for the year ended September 30, 1994 and ends on
December 31, 1998. In addition, Holdings, FRC and Prudential have the
option, beginning on January 1, 1999 and ending on December 31, 1999, to
require Petro to purchase all of their shares of the Company's common
stock and 8% Cumulative Convertible Preferred Stock. Under the terms of
the put/call agreements with FRC and Prudential, Petro has the right to
purchase these shares with either cash or shares of Petro's Class A Common
Stock. Under the terms of the put/call agreement with Holdings, Petro has
the right to purchase these shares for cash, notes or Petro preferred
stock. In addition, Petro and FRC have each been granted an option to
purchase 500 shares of the Company's Class A Common Stock for $9,903.10
and $14,854.60 per share, respectively. These options expire on December
20, 1998.
During the year ended September 30, 1994, the Company declared stock
dividends on the 8% Cumulative Convertible Preferred Stock as follows:
11,462 shares of Series A, 9,565 shares of Series B, 5,509 shares of
Series C, 4,817 shares of Series D and 319 shares of Series E. The
Company also declared stock dividends on the 12.625% Cumulative Redeemable
Preferred Stock as follows: 1,528 shares of Series A and 6,113 shares of
Series B. In addition, the Company declared and paid a dividend of $.24
per share on its Series C 8% Cumulative Convertible Preferred Stock.
(Continued)
3
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2), Continued
Each share of Series A, C and E 8% Cumulative Convertible Preferred Stock
is convertible into .0092278 shares of Class A Common Stock and the
shareholders are entitled to one vote for each as-if-converted common
share. Each share of Series B 8% Cumulative Convertible Preferred Stock
is convertible into .0070746 shares of nonvoting Class B Common Stock and
each share of Series D 8% Cumulative Convertible Preferred Stock is
convertible into .0092278 shares of nonvoting Class B Common Stock.
The holders of Series A, C and E 8% Cumulative Convertible Preferred Stock
are entitled to vote together with the holders of the shares of common
stock as a single class, with each as-if-converted common share of such
8% Cumulative Convertible Preferred Stock entitled to one vote. The
holders of shares of the Series B and D 8% Cumulative Convertible
Preferred Stock and the Series A and B 12.625% Cumulative Redeemable
Preferred Stock are not entitled to vote on any matters, except as
required by law or as specified in the Company's Articles of
Incorporation.
Upon the occurrence of any liquidating event, each holder of shares of
Series A, B, C and D 8% Cumulative Convertible Preferred Stock and Series
A 12.625% Cumulative Redeemable Preferred stock is entitled, before any
distribution or payment is made upon any shares of common stock or any
other junior security, to receive a pro rata amount of each series'
liquidation value per share. In the event of liquidation, the remaining
order of liquidation is as follows: Series B 12.625% Cumulative
Redeemable Preferred Stock, Series E 8% Cumulative Convertible Preferred
Stock and finally, the common stock of the Company, with each share of
Class A, B, and C Common Stock sharing ratably.
The Company, simultaneously with the issuance of the 8% Cumulative
Convertible Preferred Stock and the 12.625% Cumulative Redeemable
Preferred Stock, retired its treasury stock and redeemed $4,080,000 plus
accrued interest in certain notes held by FRC, 1,420 shares of previously
outstanding 8% Cumulative Convertible Preferred Stock, the previously
outstanding Series A Preferred Stock and all previously outstanding shares
of common stock in exchange for 5,000 shares of Series E 8% Cumulative
Convertible Preferred stock and 480.695 shares of Class A Common Stock.
Upon the sale of Highway and Federal, the Company was required to apply,
and did apply, the net proceeds received to repurchase, at $100 per share
plus an additional amount sufficient to generate a yield equal to 12.625%
compounded semiannually from
(Continued)
4
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2), Continued
December 21, 1993, the required number of shares of Series D 8% Cumulative
Convertible Preferred stock from Prudential. In addition, the Company has
an option, which expires on December 31, 1995, to repurchase the balance
of the Series D shares at the same formula price. In December 1993, the
Company sold Federal for a net price of $2.1 million, consisting of $1.6
million in cash and a $500,000 note. The cash from the Federal sale was
used to repurchase 16,285 shares of the Series D 8% Cumulative Preferred
Stock from Prudential. In July 1994, the Company sold Highway for a net
price of $4.1 million in cash. The proceeds of that sale were used to
repurchase 40,026 shares of Series D 8% Cumulative Convertible Preferred
Stock from Prudential.
As the Company redeems shares of its Series D 8% Cumulative Convertible
Preferred Stock, FRC has agreed to return, as a contribution to the
capital of the Company, a number of shares of Class A Common Stock of the
Company owned by FRC, determined by multiplying 48.569 by a fraction, the
numerator of which is the face value of the Series D 8% Cumulative
Convertible Preferred Stock redeemed and the denominator of which is a
total of $10 million. In connection with the Federal and Highway sales,
FRC contributed 27.877 shares of Class A Common Stock back to the Company.
The following table summarizes the number of recapitalized shares issued,
redeemed and contributed from December 21, 1993 through September 30,
1994:
Shares Stock Shares
Issued Dividends Contributed Balance
December 21, Declared Shares to the September 30,
1993 and Issued Redeemed Company 1994
------------- ---------- ------- ---------------- -------------
Class A Common Stock 480.695 (27.877) 452.818
======= ======= =======
8% Cumulative Convertible
Preferred Stock:
Series A 179,750 11,462 191,212
Series B 150,000 9,565 159,565
Series C 90,000 5,509 95,509
Series D 100,000 4,817 (56,311) 48,506
Series E 5,000 319
------------- ---------- ------- -------
5,319
524,750 31,672 (56,311) 500,111
======== ====== ======= ========
12.625% Cumulative Redeemable
Preferred Stock:
Series A 15,000 1,528 16,528
Series B 60,000 6,113 66,113
-------- ------ --------
75,000 7,641 82,641
======== ====== ========
(Continued)
5
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2), Continued
The 12.625% Cumulative Redeemable Preferred Stock must be exchanged into
subordinated notes due on January 10, 2001 at the rate of $100 per share
once the Company meets certain financial ratios. To the extent not
previously exchanged, the Company is required to apply up to $2 million on
January 10, 2000 to redeem the 12.625% Cumulative Redeemable Preferred
Stock plus an amount sufficient to redeem any 12.625% Cumulative
Redeemable Preferred Stock received as dividends thereon. To the extent
shares still remain outstanding, the Company is required to redeem the
remaining shares on January 10, 2001.
As of September 30, 1994, after giving effect to the recapitalization of
the Company, the buyback of the Series D 8% Cumulative Convertible
Preferred Stock, the concurrent contribution of common shares by FRC to
the Company, the preferred stock dividends declared in the year ended
September 30, 1994, and assuming conversion of all of the 8% Cumulative
Convertible Preferred Stock into common stock, and no issuance of any
option shares, the investors would have the following equity interests and
voting percentages on most matters:
Equity Voting
Percentage Percentage
---------- ----------
Petro 29.3% 44.0%
Holdings 22.6 33.9
FRC 14.7 22.1
Prudential 33.4 -
----- ------
100.0% 100.0%
===== =====
Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 33.3%, but its voting interest would
remain at 44.0%.
(Continued)
6
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market following the moving
weighted average method, which approximates first-in, first-out cost. The
components of inventory were as follows at the dates indicated:
September 30,
----------------------
1993 1994
---- ----
Propane gas $ 4,982,284 $ 2,936,331
Appliances and equipment 1,463,009 1,841,676
----------- -----------
$ 6,445,293 $ 4,778,007
=========== ============
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the depreciable assets (generally thirty
years for buildings and five to thirty years for equipment) using the
straight-line method.
Intangible Assets
Beginning in October 1992, the excess of cost over the fair value of net
assets acquired is being amortized using the straight-line method over 10
years. Prior to October 1992, such assets were being amortized over 40
years. The effect of the change in 1993 was to increase amortization
expense by $1,160,000. Other intangible assets, principally covenants not
to compete, capitalized consulting costs and customer lists are being
amortized over their estimated useful lives, ranging from one to ten
years. Deferred charges, representing costs associated with the issuance
of the Company's debt, are being amortized over the lives of the related
debt.
(Continued)
7
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3), Continued
The Company assesses the recoverability of intangible assets by comparing
the carrying values of such intangibles to market values, where a market
exists, supplemented by cash flow analyses to determine that the carrying
values are recoverable over the remaining estimated lives of the
intangibles through undiscounted future operating cash flows. Where an
intangible asset is deemed to be impaired, the amount of intangible
impairment is measured based on market values, as available, or by
projected cash flows.
Customer Credit Balances
Customer credit balances represent pre-payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated
annual propane gas charges on a fixed monthly basis) in excess of actual
deliveries billed.
Cash Equivalents
For the purpose of determining cash equivalents used in the preparation of
the Consolidated Statements of Cash Flows, the Company considers all
highly liquid investments with a maturity of three months or less, when
purchased, to be cash equivalents.
Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. Deferred income taxes are provided to reflect the tax
effects of temporary differences between financial and tax reporting.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). (see note 6).
Basis of Presentation
Certain reclassifications have been made to the 1992 and 1993 financial
statements to conform to the 1994 presentation.
(4) Acquisitions
The Company expanded its operations in the retail propane gas business by
making several acquisitions during the fiscal years ended September 30,
1992, 1993 and 1994. The consideration for these acquisitions was
approximately $1,207,000, $61,000, and
(Continued)
8
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) (Continued)
$760,000, respectively. The acquisitions were accounted for under the
purchase method of accounting and the purchase prices have been allocated
to the assets and liabilities acquired based on their respective fair
market values on the dates of acquisition. The purchase prices in excess
of the fair values of net assets acquired were classified as intangibles
in the Consolidated Balance Sheets. The results of operations of the
respective acquired companies have been included in the Consolidated
Statements of Operations from the dates of acquisition.
(5) Long-Term Debt and Revolving Credit Loans
Long-term debt consists of the following:
September 30,
-----------------------
1993 1994
---- ----
Revolving credit facility(a) $ 6,808,704 $ 4,000,000
Acquisition loan(a) - 700,000
11.56% Senior Notes(b) 45,000,000 30,675,000
12.625% Senior Subordinated
Participating Notes(b) 40,000,000 7,500,000
Senior Reset Term Notes(c) 20,000,000 20,000,000
Term loan agreement(d) 12,125,000 9,325,000
Other liabilities(e) 6,287,259 1,440,610
Other notes payable(e) 1,333,920 737,686
Obligations under capital
leases (see note 8) 634,334 551,152
----------- -----------
132,189,217 74,929,448
Less current maturities
and revolving credit
loans 8,197,953 4,766,063
---------- -----------
$123,991,264 $70,163,385
============ ===========
(a) Under the terms of the restated and amended Credit Agreement as of
December 21, 1993, the Company may borrow up to $20 million to finance
working capital needs under a revolving credit facility which expires
on June 30, 1996. Amounts borrowed under the revolving credit facility
are subject to a 30 day clean up requirement each year. Interest on
borrowings is payable monthly and is based upon either the Eurodollar
Rate (as defined below) plus 2 1/4% or the Alternate Base Rate (as
defined below) plus 1/4%, at the Company's option.
(Continued)
9
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(a), (Continued)
The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar
Market adjusted for reserve requirements, if any. At September 30, 1994,
this rate was 4.9%. The Alternate Base Rate is the higher of (i) the
prime or base rate of The First National Bank of Boston or (ii) the
Federal Funds Rate plus 1/2%. At September 30, 1994, the prime rate was
7.8% and the Federal Funds Rate was 5.0%.
As of September 30, 1993, and 1994, outstanding revolving credit loans
aggregated $6,808,704 and $4,000,000. In addition, as of September 30,
1993 and 1994, the credit facility provided $2,648,816 and $2,438,816 in
letters of credit, respectively.
The Credit Agreement also provides for a revolving credit acquisition
facility under which the Company may borrow up to $20 million to fund
acquisitions of propane companies. This acquisition facility expires on
June 30, 1996 and the Company has the option to convert this facility into
a term loan, payable in 36 consecutive monthly installments commencing on
July 1, 1996, the acquisition loan conversion date. Interest on the
borrowings is payable monthly and is based upon either the Eurodollar Rate
plus 2 1/2% on loans made before the acquisition loan conversion date and
plus 3% on loans made after the acquisition loan conversion date or the
Alternate Base Rate plus 1/2% on loans made before the acquisition loan
conversion date and plus 1% on loans made after the acquisition loan
conversion date, at the Company's option. As of September 30, 1994,
$700,000 was borrowed to fund an acquisition completed during fiscal 1994.
Under the terms of the Credit Agreement, as amended, the Company is
restricted as to the declaration and distribution of dividends and is also
required to maintain certain financial and operational ratios. The
amounts borrowed under the Credit Agreement are secured by certain assets
of the Company. The Company pays a commitment fee equal to 1/2% of the
unused portion of the bank facilities.
(b) On January 10, 1989, the Company issued $85,000,000 of notes (the
"Note Agreements") to Prudential for cash. The Note Agreements
consisted of $45,000,000 of 11.56% Senior Notes due in six
consecutive annual installments of $7,500,000 commencing January 10,
1994; $30,000,000 of 12.625% Senior Subordinated Participating
Notes, Series A, due in six consecutive annual installments of
$4,250,000 commencing January 10, 1995, with a final installment of
$4,500,000 due on January 10, 2001; and $10,000,000 of 12.625%
Senior Subordinated Participating Notes, Series B, due in six
consecutive annual installments of $1,500,000 commencing January 10,
1995, with a final installment of $1,000,000 due on January 10, 2001.
(Continued)
10
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(b), (Continued)
The Series A and Series B Senior Subordinated Participating Notes bore
additional interest aggregating to the greater of (a) $487,500 or 2.5% of
the first $33,500,000 of the Company's operating profit (as defined) for
each of the fiscal years ended September 30, 1991 through 1999 and (b)
$622,400 or 3.19% of the first $33,500,000 of the Company's operating
profit (as defined) for the fiscal year ended September 30, 2000. This
participating interest feature on the Notes was eliminated in connection
with the recapitalization.
As part of the recapitalization (see note 2), the Company exchanged in
direct order of maturity, $15,000,000 of Series A 12.625% Senior
Subordinated Participating Notes for 150,000 shares of Series B 8%
Cumulative Convertible Preferred Stock, the entire $10,000,000 of Series B
12.625% Senior Subordinated Participating Notes for 100,000 shares of
Series D 8% Cumulative Convertible Preferred Stock, and in inverse order
of maturity, $1,500,000 of Series A 12.625% Senior Subordinated
Participating Notes for 15,000 shares of Series A 12.625% Cumulative
Redeemable Preferred Stock and $6,000,000 of Series A 12.625% Senior
Subordinated Participating Notes for 60,000 shares of Series B 12.625%
Cumulative Redeemable Preferred Stock.
Additionally, the Company was also allowed to prepay $14,325,000 of the
11.56% Senior Notes in direct order of their maturity. The remaining
1995 payment of $675,000 and part of the 1996 payment of $1,325,000 were
deferred such that the 1997, 1998 and 1999 payments were increased from
$7,500,000 per year to $8,166,667 per year.
Under the terms of the Note Agreements, as amended at various dates, the
Company is restricted as to the declaration and distribution of dividends
and is also required to maintain certain financial and operational ratios.
The amounts borrowed under the 11.56% Senior Notes and the 12.625% Senior
Subordinated Participating Notes are secured by substantially all of the
Company's assets.
(c) On February 28, 1991, the Company issued $20,000,000 in Senior Reset
Term Notes (the "Notes") to Prudential for cash. The Notes were due
in semi-annual installments of $2,500,000 which were to commence
August 28, 1994. The Company, at various dates, amended the terms
of the notes and as a result, the payments of principal are
(Continued)
11
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(c), (Continued)
now $2,500,000 on August 28, 1999, $5,000,000 on February 28, 2000, August
28, 2000 and February 28, 2001, respectively and $2,500,000 on August 28,
2001.
Interest on the notes was based on the Treasury rate in effect on the
issuance date, which under the terms of the note agreement, was scheduled
to be adjusted to the then current Treasury rate on the "Reset Date",
February 28, 1994. Prior to the recapitalization, the rate was based on
the 2.25 year Treasury rate plus 3.75%. In connection with the
recapitalization, the notes were amended such that the interest rate
became the 6.5 year Treasury rate plus 3.30%. On February 28, 1994, the
notes were reset and the rate was reduced from 10.72% to 9.11%.
Under the terms of the Notes, as amended, the Company is restricted as to
the declaration and distribution of dividends and is also required to
maintain certain financial and operational ratios. The amounts borrowed
under the Notes are secured by substantially all of the Company's assets.
(d) In March 1991, the Company entered into a Term Loan Agreement (the
"Term Loan") with PruSupply, Inc. which provided a $20,000,000
facility. The Company amended the Term Loan at various dates such
that the Term Loan was to be repaid in nineteen consecutive quarterly
installments of $875,000, which commenced in May 1991, with a final
payment of $3,375,000 due at maturity in February 1996. The Term
Loan bears interest at the one month London Interbank Offered Rate
("LIBOR") plus 2.7%.
As part of the recapitalization, the Term Loan was amended to allow for the
prepayment of $1,925,000 on December 23, 1993. In addition, the Company
paid $875,000 that had been deferred. This agreement was further amended
such that the remaining required payments on these notes will be $4,325,000
in 1996 and $5,000,000 in 1997.
Under the terms of the Term Loan, as amended, the Company is restricted as
to the declaration and distribution of dividends and is also required to
maintain certain financial and operational ratios. The amounts outstanding
under the Term Loan are secured by substantially all of the Company's
assets.
(Continued)
12
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5), Continued
(e) In connection with certain acquisitions, the Company was required to
pay, over a several year period, an aggregate of $6,287,259 as of
September 30, 1993, and $1,440,610 as of September 30, 1994, pursuant
to certain covenant not-to-compete agreements and consulting
payments. In addition, the Company had obligations of $1,333,920 at
September 30, 1993 and $737,686 at September 30, 1994 of notes
payable to former owners.
In December 1992, the Prior Shareholders purchased from a third party the
Company's obligation to pay $5,500,000 of consulting and non-competition
payments due in equal installments of $2,750,000 in November 1992 and
November 1993. The November 1992 payment was initially deferred until June
1993, however, in March 1993, $1,420,000 of this payment was exchanged for
1,420 shares of newly issued 8% Cumulative Convertible Preferred Shares of
the Company. The balance of the June 1993 payment, $4,080,000, was
deferred. In December 1993, as part of the recapitalization (see note 2),
the Company exchanged the 1,420 shares of newly issued 8% Cumulative
Convertible Preferred Shares and the $4,080,000 deferred amount (the
balance of the purchased payments) plus accrued interest, for 5,000 shares
of Series E 8% Cumulative Convertible Preferred Stock and 230.895 shares of
Class A Common Stock.
As of September 30, 1994, the annual maturities of long-term debt, borrowings
under the revolving credit agreement and the acquisition loan are set forth in
the following table:
1995 $ 4,766,063
1996 11,814,759
1997 13,652,044
1998 10,343,708
1999 15,008,420
Thereafter 19,344,454
-----------
$74,929,448
===========
As of September 30, 1994, the Company was in compliance with all borrowing
agreement covenants, as amended.
(Continued)
13
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Income Taxes
The income tax provision (benefit) shown in the accompanying Consolidated
Statements of Operations consists of the components set forth below:
Year Ended September 30,
-------------------------------------
1992 1993 1994
---- ---- ----
Federal:
Deferred $(1,489,055) $ - $ -
----------- ---------- ---------
State:
Current $ 203,837 $ 270,727 $ 284,700
Deferred (8,785) (13,700) 15,300
----------- ---------- ---------
195,052 257,027 $ 300,000
----------- ---------- ---------
$(1,294,003) $ 257,027 $ 300,000
=========== ========== =========
A federal income tax benefit was recorded in 1992 as a result of reversing
previously recorded federal deferred income tax liabilities. No federal
income tax benefits were recorded as a result of the losses for 1993 or
1994. State tax expense was recorded each year in jurisdictions where the
Company had to pay taxes and where net operating loss carryforwards or
carrybacks are not recognized.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109"). This statement requires that deferred income taxes be recorded
following the liability method of accounting and adjusted periodically when
income tax rates change. Adoption of the new Statement did not have any
significant effect on the Company's financial condition or results of
operations, since the Company did not carry any material deferred income
tax accounts on its balance sheet at September 30, 1993 and any net
deferred tax assets set up as a result of applying SFAS No. 109 have been
fully reserved.
Under SFAS No. 109, as of October 1, 1993, the Company had total deferred
tax assets of approximately $35.8 million subject to a valuation allowance
of approximately $10.6 million. With the recapitalization in December 1993
(see note 2), the Company's NOL's were limited for purposes of general
carryforward availability and otherwise limited for specified carryforward
purposes since the recapitalization constituted a change in control for
income tax reporting purposes. The Company believes that it has sufficient
tax strategies available that will enable it to utilize most of its NOL
carryforwards.
(Continued)
14
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6), Continued
The components of and changes in the net deferred taxes and the changes in
the related valuation allowance for the year ended September 30, 1994 were
as follows:
Deferred
October 1, Benefit September 30,
1993 (Expense) 1994
---------- --------- --------------
Deferred tax assets:
Net operating loss carryforwards $ 28,798,684 $ 2,655,318 $ 31,454,002
Accounts receivable reserves 243,476 (66,473) 177,003
Intangibles, principally due to
differences in amortization 6,489,063 (520,629) 5,968,434
Other 263,799 (121,753) 142,046
------------- ------------- -------------
35,795,022 1,946,463 37,741,485
Valuation allowance (10,584,168) (780,229) (11,364,397)
------------ ------------ ------------
Total deferred tax assets 25,210,854 1,166,234 26,377,088
------------ ------------ ------------
Deferred tax liabilities:
Assets held for sale, principally due
to differences in amortization
and depreciation (312,321) 312,321 -
Property and equipment, principally
due to differences in depreciation (25,119,933) (1,493,855) (26,613,788)
------------ ------------ ------------
Total deferred tax liabilities (25,432,254) (1,181,534) (26,613,788)
------------ ------------ ------------
Net deferred tax liability $ (221,400) $ (15,300) $ (236,700)
============ ============ ============
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company
has determined, based on the Company's recent history of annual net losses
and the tax strategies available, that at September 30, 1994, a valuation
allowance of $11.4 million is appropriate.
At September 30, 1994, the Company had approximately $92.5 million of
Federal net operating loss (NOL) carryforwards available to offset future
taxable income. Such NOL's expire in the years 2004 through 2009.
(Continued)
15
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Employee Benefit Plans
The Company has a 401(k) plan which provides benefits for all eligible
non-union employees. Subject to IRS limitations, the 401(k) plan provides
for each employee to contribute from 1% to 15% of compensation with the
Company contributing a matching amount of each employee's contribution up
to a maximum of 3% of compensation. Aggregate Company contributions made
to the 401(k) plan during fiscal 1992, 1993, and 1994 were $537,703,
$313,652, and $312,925 respectively.
The Company also makes monthly contributions on behalf of its union
employees to a union sponsored defined benefit pension plan. The amount
charged to expense was $202,545, $198,206, and $207,107 in fiscal 1992,
1993 and 1994, respectively.
(8) Lease Commitments
The Company has entered into noncancellable capital lease agreements with
former owners of acquired businesses for certain premises and related
equipment. These leases contain bargain purchase options, exercisable on
the lease termination dates. Amortization of premises and equipment under
capital leases is included in depreciation expense. The Company has also
entered into operating leases for office space, trucks and other
equipment.
The future minimum rental commitments at September 30, 1994 under leases
having an initial or remaining noncancellable term of one year or more are
as follows:
Capital Operating
Leases Leases
------- ---------
1995 $157,476 $1,200,000
1996 138,351 800,000
1997 80,976 600,000
1998 80,976 200,000
1999 80,976 200,000
Thereafter 425,121 800,000
-------- ----------
Total minimum lease payments 963,876 $3,800,000
==========
Less amount representing interest 412,724
--------
Present value of net minimum
rentals $551,152
========
The Company incurred rent expense of $3,586,450, $4,174,689, and
$3,451,376 in 1992, 1993 and 1994, respectively.
(Continued)
16
STAR GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Impairment of Long-Lived Assets
During fiscal 1993, in connection with the recapitalization (see note 2),
and the impending sales of Federal and Highway (see note 1), the Company
reviewed the carrying values of its long-lived assets and identifiable
intangible assets for possible impairment. The Company determined, based
on expected future cash flows and the estimated fair values of certain
operations, that it would not be able to recover the carrying values of
some of these assets. Accordingly, as of September 30, 1993, the Company
recorded a write-off of approximately $33 million representing the
estimated impairment to its long-lived assets.
(10) Subsequent Events
On November 17, 1994, in an effort to focus on its core profitable
business, the Company sold all of its retail propane operations located in
the Southeast portion of the United States for $13,250,000 in cash. The
consideration received from the sale approximates the net book value of
the assets sold and therefore, no material gain or loss was recognized.
The Company applied a portion of the proceeds from the sale to reduce
outstanding principal and accrued interest on its 11.56% Senior Notes and
Term Loan in the amount of $3,382,539 and $602,310, respectively. In
addition, the Company redeemed the remaining outstanding shares of the
Series D 8% Cumulative Convertible Preferred Stock from Prudential
amounting to $5,091,011. As a result of the redemption, FRC has agreed to
return 20.693 shares of Common stock (see note 2) held by them, as a
contribution to the capital of the Company. The remainder of the proceeds
were used by the Company for general operating purposes.
17
PRO FORMA FINANCIAL STATEMENTS
The following Pro Forma Condensed Statement of Operations for the year ended
December 31, 1993 is derived from the Company's audited consolidated financial
statements for the year ended December 31, 1993. The Pro Forma Balance Sheet
and Condensed Statement of Operations for the nine months ended September 30,
1994 are derived from the unaudited financial statements of the Company at and
for the nine months ended September 30, 1994, which include all adjustments
(consisting of only normal recurring accruals) that, in the opinion of
management, are necessary for a fair presentation of such data. The Pro Forma
Financial Statements do not purport to represent what the Company's financial
position or results of operations would have been if the events described
therein had occurred on the dates specified, nor are they intended to project
the Company's financial position or results of operations for any future period.
The Pro Forma Financial Statements should be read in conjunction with the
Consolidated Financial Statements, and the Notes thereto.
Petroleum Heat and Power Co., Inc.
and Subsidiaries
Pro Forma Balance Sheet (Unaudited)
September 30, 1994
(In thousands)
Star Gas
Petroleum Heat Acquisitions/ Star Gas Pro Forma Pro Forma
and Power Co., Inc. Star Gas (1) Disposition(2) Adjusted Adjustments Combined
------------------- ---------------- ---------------- ----------- -------------- ----------
ASSETS
Current assets:
Cash $17,055 $1,825 $2,662 $4,487 $(3,827) (3) $17,715
Accounts receivable 43,687 8,172 8,172 51,859
Inventories 14,198 4,778 (859) 3,919 18,117
Other current assets 7,676 1,734 1,734 9,410
------------- ---------- -------- ------- --------- ---------
Total current assets 82,616 16,509 1,803 18,312 (3,827) 97,101
Property, plant and equipment-net 33,647 104,990 (12,735) 92,255 13,356 (4) 139,258
Intangibles-net 102,693 15,644 935 16,579 1,132 (4) 120,404
Other assets 425 425
Investment in Star Gas Corporation 14,757 25,923 (3)
(40,680) (4)
------------------- ---------- ---------- ---------- ------------ ---------
$234,138 $137,143 $(9,997) $127,146 $(4,096) $357,188
=================== ========== ========== ========== ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working capital borrowings $4,000 $4,000 $4,000
Current maturities of
preferred stock and
long term debt $4,200 767 767 4,967
Accounts payable 8,551 2,876 2,876 11,427
Customer credit balances 27,091 3,286 3,286 30,377
Unearned service contract
revenue 13,171 13,171
Accrued expenses 21,246 4,403 $(356) 4,047 25,293
------------------- ---------- ---------- ---------- ------------ ---------
Total current
liabilities 74,259 15,332 (356) 14,976 89,235
------------------- ---------- ---------- ---------- ------------ ---------
Long-term debt and note payable 51,452 70,163 (4,550) 65,613 117,065
Supplemental benefits payable
and other payables 1,637 643 643 2,280
Pension plan obligation 7,060 7,060
Subordinated notes payable 167,632 167,632
------------------- ---------- ---------- ---------- ------------ ---------
Total liabilities 302,040 86,138 (4,906) 81,232 383,272
------------------- ---------- ---------- ---------- ------------ ---------
Cumulative redeemable exchangeable
preferred stock 16,666 8,264 8,264 24,930
------------------- ---------- ---------- ---------- ------------ ---------
Non-voting preferred stock of
Star Gas 11,458 (4) 11,458
------------------- ---------- ---------- ---------- ------------ ---------
Stockholders' equity (deficiency) (84,568) 42,741 (5,091) 37,650 22,096 (3) (62,472)
(37,650) (4)
------------------- ---------- ---------- ---------- ------------ ---------
$234,138 $137,143 $(9,997) $127,146 $(4,096) $357,188
=================== ========== ========== ========== ============ =========
(1) Derived from Star Gas Corporation's consolidated audited balance sheet
as of September 30, 1994.
(2) Represents adjustments resulting from the disposition of Star Gas'
Southeast operations and the use of the proceeds therefrom and the
acquisition of an unaffiliated propane distributor, which occured
during November 1994, as if these events had occurred at
September 30, 1994.
(3) Reflects a cash payment of $3.8 million and the issuance of approximately
2.5 million shares of Petroleum Heat and Power Class A Common Stock for
the Star Gas Acquisition.
(4) Adjustment reflects the preliminary allocation of the excess of the
purchase price over the book value in connection with the Star Gas
Acquisition and the exchange by Star Gas Holdings of voting preferred
stock for non-voting preferred stock.
P-1
Petroleum Heat and Power Co., Inc.
and Subsidiaries
Pro Forma Condensed Statement of Operations (Unaudited)
for the Year Ended December 31, 1993
Star Gas
Petroleum Heat Acquisitions/ Star Gas Pro Forma Pro Forma
and Power Co., Inc. Star Gas (1) Disposition(2) Adjusted Adjustments Combined
------------------- ---------------- ---------------- ----------- -------------- ----------
Net Sales $538,526 $144,737 $(42,340) $102,397 $640,923
Cost of Sales 366,809 62,357 (14,825) 47,532 414,341
-------------- ---------- ---------- --------- ---------
Gross Profit 171,717 82,380 (27,515) 54,865 226,582
Operating Expenses 123,280 64,994 (28,103) 36,891 $(1,135) (3) 159,036
Amortization of Customer
Lists and Deferred Charges 28,731 7,987 (1,945) 6,042 (4,720) (4) 30,053
Depreciation of Amortization
of Plant and Equipment 5,933 7,326 (1,601) 5,725 418 (4) 12,076
Provision for Supplemental
Benefits 264 264
Impairment of Long Lived
Assets 33,913 33,913 33,913
-------------- ---------- ---------- --------- ---------
Operating Income 13,509 (31,840) 4,134 (27,706) (8,760)
Interest Expense-net 20,508 15,843 15,843 (7,694) (5) 28,657
Other Income (Expenses) (165) (165)
-------------- ---------- ---------- --------- ---------
Income (Loss) Before
Income Taxes (7,164) (47,683) 4,134 (43,549) (37,582)
Income Taxes 400 180 180 580
-------------- ---------- ---------- --------- ---------
Net Income (Loss) $(7,564) $(47,863) $4,134 $(43,729) $(38,162)
============== =========== =========== ========== ==========
Net Income (Loss) Per Common
Share
Class A Common Stock $(.53) $(1.73)
Class B Common Stock 1.88 1.88
Class C Common Stock (.53) (1.73)
Weighted Average Number of
Common Shares Outstanding
Class A Common Stock 18,993 2,489 21,482
Class B Common Stock 217 217
Class C Common Stock 2,545 2,545
(1) Derived from Star Gas Corporation's unaudited condensed
statement of operations for the twelve months ended December
31, 1993. The statement includes all adjustments
(consisting of only normal recurring adjustments) which, in
the opinion of management, are necessary for a fair
presentation of the results of operations.
(2) Represents the results of the disposition by Star Gas of
propane operations in Texas and Georgia and a trucking
operation in Texas plus the acquisition of two unaffiliated
propane distributorships, prior to Petro's acquisition of
Star Gas. Revenues and expenses are presented as if the
entities were acquired or disposed of on January 1, 1993.
(3) Elimination of general and administrative expenses of Star
Gas which do not have a continuing impact on income from
continuing operations. These expenses represent the
salaries and related costs of employees of Star Gas who were
not employed by the Company when Star Gas was acquired by
Petro. Petro was able to integrate the business without
incurring any incremental costs. The expenses eliminated
were as follows:
Salaries ......................................... $725
Other ............................................ 410
----
$1,135
(4) Adjustment of Star Gas amortization of customer lists and
deferred charges and depreciation and amortization of plant
and equipment, as applicable, to reflect an annual charge in
accordance with the Company's accounting policies.
(5) Decrease in Star Gas interest expense as a result of the
repayment of debt with a portion of the capital infusion in
Star Gas and the conversion of debt and preferred stock into
equity of Star Gas by certain investors in December 1993 as
if it has occurred on January 1, 1993.
P-2
Petroleum Heat and Power Co., Inc.
and Subsidiaries
Pro Forma Condensed Statement of Operations (Unaudited)
Nine Months Ended September 30, 1994
Star Gas
Petroleum Heat Acquisitions/ Star Gas Pro Forma Pro Forma
and Power Co., Inc. Star Gas (1) Disposition(2) Adjusted Adjustments Combined
------------------- ---------------- ---------------- ----------- -------------- ----------
Net Sales $385,291 $90,573 $(21,322) $69,251 $454,542
Cost of Sales 257,240 37,100 (6,140) 30,960 288,200
-------------- ---------- ---------- --------- ---------
Gross Profit 128,051 53,473 (15,182) 38,291 166,342
Operating Expenses 91,908 42,573 (15,923) 26,650 $(428) (3) 118,130
Amortization of Customer
Lists and Deferred Charges 19,466 3,038 44 3,082 (2,090) (4) 20,458
Depreciation of Amortization
of Plant and Equipment 4,308 5,958 (758) 5,200 (593) (4) 8,915
Provision for Supplemental
Benefits 209 209
-------------- ---------- ---------- --------- ---------
Operating Income 12,160 1,904 1,455 3,359 18,630
Interest Expense-net 16,721 5,753 5,753 22,474
Other Income (Expenses) 83 126 126 209
-------------- ---------- ---------- --------- ---------
Income (Loss) Before
Income Taxes
and Equity Interest (4,478) (3,723) 1,455 (2,268) (3,635)
Income Taxes 425 218 218 643
-------------- ---------- ---------- --------- ---------
Income (Loss) Before
Equity Interest (4,903) (3,941) 1,455 (2,486) (4,278)
Share of Loss of
Star Gas (1,243) (1,243) (5)
-------------- ---------- ---------- --------- ---------
Net Income (Loss) $(6,146) $(3,941) $1,455 $(2,486) $(4,278)
============== =========== =========== ========== ==========
Net Income (Loss) Per Common
Share
Class A Common Stock $(.45) $(.33)
Class B Common Stock 1.10 1.10
Class C Common Stock (.45) (.33)
Weighted Average Number of
Common Shares Outstanding
Class A Common Stock 18,993 2,489 21,482
Class B Common Stock 196 196
Class C Common Stock 2,545 2,545
(1) Derived from Star Gas Corporation's unaudited condensed
statement of operations for the nine months ended September
30, 1993. The statement includes all adjustments
(consisting of only normal recurring adjustments) which, in
the opinion of management, are necessary for a fair
presentation of the results of operations.
(2) Represents the results of the disposition by Star Gas of
propane operations in Texas and Georgia and a trucking
operation in Texas plus the acquisition of two unaffiliated
propane distributorships, prior to Petro's acquisition of
Star Gas. Revenues and expenses are presented as if the
entities were acquired or disposed of on January 1, 1993.
(3) Elimination of general and administrative expenses of Star
Gas which do not have a continuing impact on income from
continuing operations. These expenses represent the
salaries and related costs of employees of Star Gas who were
not employed by the Company when Star Gas was acquired by
Petro. Petro was able to integrate the business without
incurring any incremental costs. The expenses eliminated
were as follows:
Salaries ......................................... $388
Other ............................................ 40
----
$428
(4) Adjustment of Star Gas amortization of customer lists and
deferred charges and depreciation and amortization of plant
and equipment, as applicable, in accordance with the Company's
accounting policies.
(5) Reversal of the share of loss of Petro's interest in Star Gas
for the nine months ended September 30, 1994 since Star Gas
is assumed to have been 100% acquired on January 1, 1993.
P-3
EXHIBITS
Exhibit No. Exhibit Page Number
------- -----------
1. Agreement entered into as of the 35
7th day of December, 1994, among the
Company, Pru Supply, Inc. and The
Prudential Insurance Company of America