UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 Commission File No. 2-88526
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 OR
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[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the transition period from to
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Commission file number
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PETROLEUM HEAT AND POWER CO., INC.
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(Exact name of registrant as specified in its charter)
Minnesota 06-1183025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2187 Atlantic Street, Stamford, CT 06902
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(Address of principal executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 325-5400
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
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(Title of Each Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 1, 1995 was approximately $73,118,000.
As of March 1, 1995 there were 22,855,097 shares of the Registrant's Class
A Common Stock, 15,603 shares of the Registrant's Class B Common Stock and
2,597,519 shares of the Registrant's Class C Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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The documents incorporated by reference into this Form 10-K and the
parts hereof into which such documents are incorporated are listed below:
Document Part
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Those portions of the registrant's proxy III
statement for the registrant's 1995 Annual
Meeting (the "Proxy Statement") that are
specifically identified herein as incorporated
by reference into this Form 10-K
PART I
ITEM 1. BUSINESS
Petroleum Heat and Power Co., Inc. (the "Company" or "Petro") is the
largest retail distributor of home heating oil (#2 fuel oil) in the United
States and, as a result of its acquisition of Star Gas Corporation ("Star"
or "Star Gas") on December 7, 1994, is also the tenth largest retail
distributor of propane in the United States. Prior to December 7, 1994,
the Company's investment in Star Gas was accounted for by the equity
method; subsequent to that date, Star's results are included in the
Company's consolidated financial statements. The Company's home heating
oil division had total sales of $535.6 million for the year ended December
31, 1994 and currently serves approximately 409,000 customers from 33
branch locations in 28 markets in the Northeast, including the metropolitan
areas of Boston, New York City, Baltimore, Providence and Washington, D.C.
Exclusive of operations that were sold during the period, Star had total
sales of $97.8 million for the twelve months ended December 31, 1994.
However, the Company's consolidated results for 1994 include only sales by
Star of $11.1 million, which represents Star's revenues since the date of
acquisition. Star currently serves approximately 145,000 customers in 49
locations in the Midwest and 14 locations in the Northeast sections of the
United States. Despite its leading position in the home heating oil
market, the Company estimates that its heating oil customer base represents
approximately 5% of the residential customers in the Northeast. The
Company also estimates that sales to its propane customers represents less
than 1% of retail propane sold in the United States.
In addition to selling home heating oil and propane, the Company
installs and repairs heating equipment, rents water softeners, sells
propane appliances and to a limited extent, markets other petroleum
products to commercial customers, including diesel fuel and gasoline.
Installation and repair of heating equipment is provided as a service
by the Company to its heating oil customers. The Company considers the
provision of service and installation services to be an integral part of
its basic fuel oil business. Accordingly, the Company regularly provides
various service incentives to obtain and retain fuel oil customers and such
services are not designed to generate profits. The Company provides home
heating equipment repair service on a seven days a week, 52 weeks a year
basis, generally within four hours of request. Except in isolated
instances, the Company does not provide service to any person who is not a
heating oil or propane customer.
2
The Company's volume, cash flow and operating profits before
depreciation and amortization have increased significantly since 1980,
primarily because of its acquisition of other home heat businesses. Since
September 1979, the Company had acquired 154 retail heating oil
distributors and in December 1994 completed its acquisition of Star Gas
Corporation. During 1994, Star completed two propane acquisitions.
ACQUISITION OF STAR GAS CORPORATION
In December 1993, the Company purchased a 29.5% equity interest in
Star Gas for $16.0 million and acquired options to purchase the remaining
equity interest. In connection with this investment, the Company entered
into a management agreement with Star Gas wherein the Company agreed to
provide Star Gas with executive, financial and managerial oversight
services. This structure allowed the Company to limit its financial
exposure until Star Gas was operationally restructured. In December 1994,
the Company completed the acquisition of Star Gas for approximately $25.9
million, by exercising its right to purchase the remaining outstanding
common equity of Star Gas by paying $3.8 million in cash and issuing 2.5
million shares of the Company's Class A Common Stock.
In connection with its initial investment in Star Gas, William Powers,
a former Vice President of Petro, became President of Star Gas. With the
assistance of the Company's management, Star Gas during the past year
restructured its operations through the sale of various non-core assets,
including a trucking operation in Texas and underperforming propane
operations in Texas and Georgia. Star Gas realized net proceeds of
approximately $23.4 million from the sale of these assets.
FUNDAMENTAL CHARACTERISTICS
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles.
As home heating oil and propane for residential use are such basic
necessities, variations in the amount purchased as a result of general
economic conditions have been limited.
Customer Stability
The fuel oil division has a relatively stable customer base due to the
tendency of homeowners to remain with their traditional distributors or
home buyers to remain with the previous homeowner's distributor. While the
Company loses approximately 90% of the customers acquired in a heating oil
acquisition (during the first six years), the Company is able to retain a
majority of the homes underlying the original customer list purchased.
Management believes its propane customer base to be relatively stable as
well. In excess of 95% of the Company's retail propane customers lease
their tanks from the Company. The inconvenience associated with switching
tanks greatly reduces a propane customer's tendency to change distributors.
Approximately 90% of the Company's heating oil customers receive their
home heating oil pursuant to an automatic delivery system without the
customer having to make an affirmative purchase decision, whereby
deliveries are scheduled by computer based upon each customer's historical
consumption patterns and prevailing weather conditions. The Company
delivers home heating oil approximately six times during the year to the
average customer. The Company's practice is to bill customers promptly
3
after delivery. In addition, approximately 30% of the Company's heating
oil customers are on the Company's budget payment plan where their
estimated annual oil purchases and service contract are paid for in a
series of equal monthly payments over an eleven or twelve month period.
The majority of Star's residential customers also receive their
propane pursuant to a similar automatic delivery system. Certain other
propane customers receive delivery of propane based on a "Lapse-Day Routing
System," whereby deliveries are made based on the passage of a
predetermined number of days, and its efficient fit within a delivery
route. Star Gas delivers propane to its average customers approximately
four times during the year, and like the heating oil division, also offers
a similar budget payment plan.
Weather Stability
The Company's business is directly related to the heating needs of its
customers and the weather can have a material effect on the Company's sales
in any particular year, such as in 1990 and 1991 which were the first and
third warmest years in the century. However, the temperatures over the
past 30 years have been relatively stable, and as a result have not had a
significant impact on the Company's performance except on a short-term
basis.
Insulation from Oil and Propane Price Volatility
The Company has been insulated from the volatility of wholesale oil
prices due to its policy of maintaining on average no more than a ten day
inventory of home heating oil and by limiting its activities to the retail
distribution of home heating oil. Although the price of crude oil has been
volatile, this has not materially affected the performance of the Company's
fuel oil division. The Company has been able to add an increasing gross
margin onto its wholesale costs, whatever their level, designed to offset
the impact of inflation, account attrition and weather.
To reduce its exposure to price fluctuations, the Company intends to
maintain an inventory policy with respect to propane similar to that
traditionally maintained for home heating oil. The Company intends to
purchase propane on a short-term basis so that its supply costs will
fluctuate with market price variations. Should wholesale propane prices
change in the future, the Company believes that margins on its retail
propane distribution business would also change in the short-term since
retail prices tend to change less rapidly than wholesale prices. The
Company is unable to predict, however, how and to what extent a substantial
change in wholesale cost of propane would affect margins and profitability.
Conversions to Natural Gas
The rate of conversion from the use of home heating oil to natural gas
is primarily affected by the relative prices of the two products and the
cost of replacing an oil fired heating system with one that uses natural
gas. The Company believes that approximately 1% of its customer base
annually converts from home heating oil to natural gas. Even when natural
gas had a significant price advantage over home heating oil, such as in
1980 and 1981 when there were government controls on natural gas prices or,
for a short time in 1990 and 1991, during the Persian Gulf crisis, the
Company's customers converted to natural gas at only a 2% annual rate.
During the latter part of 1991 and through 1994, natural gas conversions
4
have returned to their approximate 1% historical annual rate as the prices
for the two products have been at parity.
The rate of conversion from the use of propane to natural gas is
primarily affected by the availability of natural gas. When natural gas
becomes available to an area, residential propane customers can easily and
inexpensively convert their systems. The expansion of natural gas into
rural propane markets has been inhibited by the required capital costs to
natural gas suppliers. For 1994, Star customers converted to natural gas
at a rate of approximately 0.5% per annum.
HOME HEATING OIL
Business Strategy
Current management assumed control of the Company in 1979 and
restructured the Company's fuel oil operation by consolidating operating
branches and focusing primarily on the retail sale of home heating oil. In
addition, corporate overhead was significantly reduced, primarily through a
reduction in the number of employees and related expenses. After this
reorganization, management perceived an opportunity to achieve substantial
growth and increased profitability by acquiring fuel oil distributors in
new and existing markets.
Acquisition Strategy
The Company's strategy is to continue to grow its fuel oil operations
through the acquisition and integration of additional distributors in
existing and new markets.
The Company acquires two types of fuel oil distributors. The first
type are relatively small and easily integrated into the Company's branch
system, resulting in significant economies of scale through the
centralization of accounting, data processing, fuel oil purchasing, credit
and marketing functions of the acquired distributor. The second type are
larger, stand-alone businesses that cannot be integrated, but are usually
in new markets. Acquisitions of these businesses not only provide
attractive investment returns, but also provide hubs for future expansion.
Operating Strategy
The Company has historically achieved operating economies of scale
through the centralization of accounting, financial, fuel oil purchasing,
credit and marketing functions. The Company has identified the best
operating practices being employed by its branches and is implementing
those procedures throughout the Company. Petro has recently adopted an
operating strategy to capitalize upon its size and upon developments in
technology to become more operationally efficient as well as to improve its
customer retention through the utilization of advanced information
processing and telecommunication systems. Such systems are currently in
use by other distribution businesses, but not generally employed by other
retail heating oil companies. To accomplish this goal, in August 1994, the
Company hired Thomas M. Isola as Chief Operating Officer.
5
Marketing Strategy
The Company has recently begun to refine its marketing efforts by
focusing on customer satisfaction rather than the solicitation of new
customers through the use of financial incentives. This effort, led by the
Company's new Senior Vice President of Marketing, Alex Szabo, consists of
two phases. The first phase is to implement Company-wide the best
marketing practices employed at its branches to add and retain accounts.
The second phase is designed to enhance customer satisfaction and thereby
improve customer retention by implementing its new operating procedures.
Customers and Sales
As of December 31, 1994, the Company's home heating oil division
served approximately 409,000 customers in the following 28 markets:
New York Massachusetts New Jersey
Bronx, Queens and Boston (Metropolitan) Camden
Kings Counties Northeastern Massachusetts Neptune
Dutchess County (Centered in Lawrence) Newark(Metropolitan)
Staten Island Springfield North Brunswick
Eastern Long Island Worcester Rockaway
Western Long Island Trenton
Rhode Island
Connecticut Providence New Hampshire
Bridgeport--New Haven Milford
Hartford (Metropolitan) Pennsylvania Portsmouth
Litchfield County Allentown
Southern Fairfield County Berks County
(Centered in Reading)
Maryland/Virginia/D.C. Bucks County
Baltimore (Metropolitan) (Centered in Southampton)
Washington, D.C. Lebanon County
(Metropolitan) (Centered in Palmyra)
Approximately 85% of the #2 fuel oil sales made by the heating oil
division are to homeowners, with the balance to industrial, commercial and
institutional customers. Historically, the Company has lost a portion of
its customer base each year for various reasons, including customer
relocation, price competition and conversions to natural gas.
6
PROPANE
Business Strategy
The Company believes that the propane industry is an attractive
complement to its heating oil business and possesses many of the same
industry and operating characteristics. The Company has begun to apply the
acquisition and operating techniques it has successfully applied in the
heating oil industry to its propane operations. In connection with its
investment in Star Gas, William Powers, a former Vice President of Petro,
became President of Star Gas. With the assistance of the Company's
management, during the past year, Star restructured its operations through
the sale of various non-core assets and consolidated various corporate
functions, thereby reducing overhead. Star Gas initiated the Company's
propane acquisition strategy with the purchase of two propane distributors
with aggregate annual volume of 1.2 million gallons.
Acquisition Strategy
The Company intends to expand its propane division through the
acquisition and integration of additional distributors in existing and new
markets. The Company intends to expand its propane business primarily
through the acquisition of smaller propane distributors that can be
integrated with existing operations. The Company will also pursue
acquisitions of larger distributors which would establish new markets and
broaden its geographic coverage. However, there are a number of propane
companies larger than Star Gas actively seeking to grow through
acquisition. Although the presence of such competitors may make it more
difficult for Star Gas to acquire propane distributors, it could also
present the opportunity to grow more significantly through the acquisition
of larger entities.
Operating Strategy
Star Gas currently operates from 63 branch locations, 49 in four
operating regions in the Midwestern states of Ohio, Indiana, Kentucky and
Michigan, and 14 in two operating regions in six Northeastern states. The
accounting, propane purchasing, and financial functions are centralized,
while branch locations maintain autonomy over delivery, service and
customer relations. Star gas emphasizes and maintains corporate oversight
regarding safety, employee training and compliance.
Marketing Strategy
The Company intends to expand its propane volume by competing for new
customers and by marketing incremental use to its existing base, such as
offering to supply a customer who uses propane for space heating with
propane for cooking and water heating. During 1994 Star experienced a
growth of approximately 2% in its retail base due largely to programs
designed to introduce additional uses of propane to existing residential
customers.
Segment Reporting
With the acquisition of Star Gas in December 1994, the Company's
operations are now classified into two business segments: Home Heating Oil
and Propane. For financial information regarding the Company's business
7
segments, see note 14 to the Company's Consolidated Financial Statements
included elsewhere herein.
As of December 31, 1994 Star Gas served approximately 145,000
customers in the following 63 locations:
Indiana Kentucky Ohio
Akron Glencoe Defiance
Batesville Propsect Deshler
Bluffton Shelbyville Fairfield
Coal City Williamstown Ft. Recovery
College Corner Hebron
Columbia City Maine Ironton
Decatur Fairfield Lancaster
Ferdinand Fryeburg Lewisburg
Greencastle Wells Lynchburg
Jeffersonville Windham Macon
Linton Milford
Madison Massachusetts Mt. Orab
N. Manchester Belchertown North Star
N. Vernon Ludlow Peebles
New Salisbury Rochdale Ripley
North Webster Sabina
Portland Waverly
Remington Michigan West Union
Richmond Hillsdale
Salem Pennsylvania
Seymour New Jersey Hazelton
Sulphur Springs Maple Shade Wind Gap
Versailles Tuckahoe
Warren Rhode Island
Waterloo New York Davisville
Winamac Poughkeepsie
Washington
In residential and commercial markets, propane is primarily used for
space heating and, to a lesser extent, for water heating and cooking.
Agricultural uses include crop drying, space heating, irrigation and weed
control. Propane is used for certain industrial applications, including
use as an engine fuel for both vehicles and fork lifts, and as a heating or
energy source in manufacturing and drying processes.
Approximately 85% of Star Gas' propane sales are to retail customers
with the balance to wholesale customers.
SUPPLIERS
The Company obtains its fuel oil in either barge or truckload
quantities, and has contracts with approximately 70 third party storage
terminals for the right to temporarily store its heating oil at their
facilities. Purchases are made pursuant to supply contracts or on the spot
market. The Company has market price based contracts for substantially all
its petroleum requirements with 13 different suppliers, the majority of
which have significant domestic sources for their product, and many of
which have been suppliers to the Company for over 10 years. The Company's
current suppliers are: Amerada Hess Corporation; Bayway Refining Co.; Citgo
8
Petroleum Corp.; Coastal New England and New York; Exxon Company USA;
Global Petroleum Corp.; Kerr McGee Refining Corp.; Louis Dreyfus Energy
Corp.; MG Refining and Marketing Co.; Mobil Oil Corporation; Northeast
Petroleum, a division of Cargill, Inc.; Stuart Petroleum Company and Sun
Oil Company. Typically the Company's supply contracts have terms of 12
months and generally expire in May and or June of each year. All of the
supply contracts provide for maximum and in some cases minimum quantities,
but do not establish in advance the price at which fuel oil is sold, which,
like the Company's price to its customers, is established from time to
time.
Star Gas obtains propane from approximately 30 sources including Amoco
Canada; Ashland Petroleum Company; Coastal; Enron Gas Liquids Inc.;
Marathon Corp.; Petrolane Gas Service; Shell Oil Company; Sea 3, Inc.; Sun
Oil Company; Shell Canada Limited; and Texaco Exploration and Production
Inc. The Company is not dependent upon any single propane supplier or
group of propane suppliers. To assure adequate supply, a portion of the
Company's propane inventory is purchased under supply contracts which
typically have a one year term and a fluctuating price relating to spot
market prices. The balance of the Company's propane supplies are purchased
on the spot market. In addition, the Company owns a storage facility in
Seymour, Indiana in which it is able to store 22 million gallons of propane
in an underground cavern. The facility is on a pipeline connected to Mont
Belvieu, Texas, a major supply source for propane in the United States.
Supplies of propane are typically readily available and not easily subject
to disruption by international market forces.
The Company believes that its policy of contracting for substantially
all its supply needs with diverse and reliable sources will enable it to
obtain sufficient product should unforeseen shortages develop in worldwide
supplies. The Company further believes that relations with its current
suppliers are satisfactory.
COMPETITION
The Company's businesses are highly competitive. The Company's fuel
oil division competes with fuel oil distributors offering a broad range of
services and prices, from full service distributors, like the Company, to
those offering delivery only. Competition with other companies in the fuel
oil industry is based primarily on customer service and price.
Long-standing customer relationships are typical in the retail home
heating oil industry. Many companies in the industry, including Petro,
deliver home heating oil to their customers based upon weather conditions
and historical consumption patterns without the customer having to make an
affirmative purchase decision each time oil is needed. In addition, most
companies, including Petro, provide home heating equipment repair service
on a 24-hour per day basis, which tends to build customer loyalty.
Long-standing customer relationships are also typical of the retail
propane industry. Retail propane customers generally lease their storage
tanks from their suppliers. The lease terms and, in most states, certain
fire safety regulations restrict the refilling of a leased tank solely to
the propane supplier that owns the tank. The inconvenience of switching
tanks minimizes a customer's tendency to switch among suppliers of propane
on the basis of minor variations in price.
9
EMPLOYEES
As of December 31, 1994, the fuel oil division had 2,574 employees, of
whom 780 were office, clerical and customer service personnel, 807 were
heating equipment repairmen, 629 were oil truck drivers and mechanics, 216
were management and staff and 142 were employed in sales. Approximately
380 of those employees are seasonal, and management expects to rehire the
majority of them for the next heating season. Approximately 700 employees
are represented by 19 different local chapters of local unions.
As of December 31, 1994, Star Gas had 582 full time employees, of
which 29 were employed at the corporate office in Stamford, Connecticut and
553 were located in branch offices of which 217 were administrative, 243
were engaged in transportation and storage and 93 were engaged in field
servicing. Approximately 50 of Star Gas' employees are represented by four
different local chapters of labor unions.
Management believes that its relations with both its union and non-
union employees are satisfactory.
ENVIRONMENTAL MATTERS
The Company has implemented environmental programs and policies
designed to avoid potential liability under applicable environmental laws.
The Company has not incurred any significant environmental compliance costs
and compliance with environmental regulations has not had a material effect
on the Company's operating or financial condition. This is primarily due
to the Company's general policy of not owning or operating fuel oil
terminals and of closely monitoring its compliance with all environmental
laws. In light of the Company's general policy regarding operations and
environmental compliance, the Company does not expect environmental
compliance to have a material effect on its operations and financial
condition in the future. While the Company has received notifications for
three sites under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, two claims against the Company were voluntarily
dismissed and the third was closed for $20,000. There is no environmental
risk associated with propane since if it is accidentally released from a
storage container it becomes a gas and dissipates. Propane is, however, a
highly explosive liquid. The Company's policy for determining the timing
and amount of any environmental cost is to reflect an expense as and when
the cost becomes probable and reasonably capable of estimation.
10
ITEM 2. PROPERTIES
The following table presents information concerning the Company's
heating oil facilities:
Owned/Lease
Expiration
Location Type of Facility Date
- -------- ---------------- -----------
New York
Astoria Office/Garage 12/31/95
Billings Office/Garage/Storage 11/30/99
Brooklyn Office Owned
Brooklyn Garage Owned
Brooklyn Office/Garage 10/31/00
Brooklyn Garage 10/31/05
Hicksville Office/Garage 7/14/01
Oyster Bay Office/Garage 8/31/96
Patchogue Office/Garage 10/03/96
Plainview Garage Owned
Plainview Office/Garage 10/31/00
Southampton Office/Storage 7/31/98
Staten Island Office/Garage 6/30/96
Westbury Office/Garage 10/31/95
New Jersey
Camden Office/Garage Owned
Clark Office 4/30/99
Hanover Office/Garage 5/31/96
Lakewood Office/Garage 9/30/95
Linden Office/Warehouse 6/30/99
Princeton Office/Garage/Storage Owned
Connecticut
Bristol Office 5/31/95
Canton Office/Garage/Storage Owned
East Hartford Office/Garage/Storage 2/01/00
Greenwich Storage 9/30/96
New Milford Office/Garage 8/31/98
North Haven Office/Garage 9/15/00
Norwalk Office/Garage 12/31/96
Stamford Corporate Headquarters 8/31/03
Stamford Office/Garage 6/30/99
Waterbury Office 6/30/96
11
Owned/Lease
Expiration
Location Type of Facility Date
- -------- ---------------- -----------
Massachusetts
Attleboro Office/Storage 6/30/95
Holden Office/Garage/Storage Owned
Lawrence Office/Garage Owned
Revere Office/Garage 8/31/96
Rochdale Office/Storage Owned
Springfield Office/Garage/Storage Owned
Westwood Office/Storage/Garage 6/15/97
Westwood Boston Corporate 11/30/98
Pennsylvania
Allentown Office/Garage 5/31/98
East Stroudsbourg Office/Garage/Warehouse 8/11/95
Hatfield Office/Storage 9/12/97
Palmyra Office/Garage/Storage Owned
Reading Office/Garage Owned
Southampton Office 9/12/99
New Hampshire
Amherst Storage Owned
Milford Office/Garage 3/31/96
Portsmouth Office/Garage 9/01/95
Rhode Island
East Greenwich Office/Storage 6/30/95
Providence Office/Garage 5/31/98
Woosocket Office 6/30/95
Maryland
Baltimore Office/Garage/Storage Owned
Forrestville Office/Garage 3/31/08
12
The following table presents information concerning the Star Gas
facilities:
Owned/Lease
Expiration
Location Type of Facility Date
- -------- ---------------- -----------
New York
Poughkeepsie Office/Storage/Plant Owned
Washingtonville Office/Storage/Plant 1/11/05
New Jersey
Maple Shade Office/Storage/Plant Owned
Pennsauken Office Owned
Tuckahoe Office/Storage/Plant Owned
Connecticut
Stamford Corporate Headquarters 5/1/04
Massachusetts
Athol Tank Owned
Belchertown Office/Storage/Plant Owned
Clinton Office/Storage/Plant Owned
Gardner Land Owned
Ludlow Office/Storage/Plant Owned
Milbury Storage Owned
Oxford Storage/Tank Owned
Rochdale Office/Storage/Plant Owned
Swansea Office/Storage Owned
Winchendon Office/Tank Owned
Pennsylvania
Ashland Tank Owned
Brandonville Storage Owned
Hazelton Office/Storage/Plant Owned
Hometown Storage Owned
Wind Gap Office/Storage/Plant Owned
New Hampshire
Swanzey Tank Owned
Wolfboro Office 12/31/95
Rhode Island
Davisville Office/Storage/Plant Owned
Pawtucket Tank Owned
Maine
Fairfield Office/Storage/Plant Owned
Fryeburg Plant Owned
Fryeburg Office 2/28/98
Portland Storage/Plant Owned
Skowhegan Office/Storage/Plant Owned
Wells Office/Plant 9/27/96
Windham Office/Plant 3/31/99
13
Owned/Lease
Expiration
Location Type of Facility Date
- -------- ---------------- -----------
Ohio
Cincinnati Office 6/30/96
Custar Tank Owned
Defiance Office/Storage/Plant Owned
Deshler Office/Storage/Plant Owned
Fairfield Office/Storage/Plant Owned
Fort Recovery Office/Storage/Plant Owned
Hebron Office/Storage/Plant Owned
Ironton Office/Storage/Plant Owned
Lancaster Office/Storage/Plant Owned
Lewisburg Office/Storage/Plant Owned
Loveland Office/Storage/Plant 7/28/97
Lynchburg Office/Storage/Plant Owned
Macon Office/Storage/Plant Owned
Milford Office/Storage/Plant Owned
Mount Orab Office/Storage/Plant Owned
New Richmond Storage Owned
North Star Office/Storage/Plant Owned
Ripley Office/Storage/Plant Owned
Sabina Office/Storage/Plant Owned
Sidney Storage Owned
Waverly Office/Storage/Plant Owned
West Union Office/Storage/Plant Owned
Michigan
Hillsdale Office/Storage/Plant Owned
Kentucky
Bedford Storage Owned
Glencoe Office/Storage/Plant Owned
Prospect Office/Storage/Plant Owned
Sadieville Storage Owned
Shelbyville Office/Storage/Plant 8/1/97
Silgo Storage Owned
Williamstown Office/Storage/Plant 8/1/99
Indiana
Akron Office/Storage/Plant Owned
Bainbridge Storage Owned
Batesville Office/Storage/Plant Owned
Bluffton Office Owned
Bluffton Storage/Plant 12/31/95
Charlestown Storage Owned
Coal City Office/Storage/Plant 5/1/98
College Corner Office/Storage/Plant Owned
Columbia City Office/Storage/Plant Owned
Crothersville Storage Owned
Decatur Office/Storage/Plant Owned
East Enterprise Storage Owned
Ferdinand Office 8/1/96
Ferdinand Storage/Plant Owned
14
Owned/Lease
Expiration
Location Type of Facility Date
- -------- ---------------- -----------
Indiana (Continued)
Greencastle Office/Storage/Plant Owned
Huntington Storage Owned
Jeffersonville Office/Storage/Plant Owned
Laconia Storage Owned
Lanesville Storage 12/31/95
Linton Office/Storage/Plant Owned
Madison Office/Storage/Plant 12/31/95
Marengo Storage Owned
Medora Storage Owned
New Salisbury Office/Storage/Plant Owned
North Manchester Office/Storage/Plant Owned
North Vernon Office/Storage/Plant Owned
North Webster Office/Storage/Plant Owned
Portland Office/Storage/Plant Owned
Remington Office/Storage/Plant Owned
Richmond Office/Storage/Plant Owned
Salem Office/Storage/Plant Owned
Sellersburg Office 7/1/95
Seymour Office/Plant Owned
Sulphur Springs Office/Storage/Plant Owned
Versailles Office/Storage/Plant Owned
Warren Office/Storage/Plant Owned
Waterloo Office/Storage/Plant Owned
Winamac Office/Storage/Plant Owned
The Company believes its existing facilities are sufficient and that
there are numerous comparable facilities available at similar rentals in
each of its marketing areas should they be required.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceeding which
could have a material adverse effect on the results of operations or the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Class A Common Stock
The Company's Class A Common Stock is traded on the National
Association of Securities Dealers Inc. National Market under the symbol
"HEAT". The high and low per share price of the Class A Common Stock and
dividends declared on the Class A Common Stock for 1993 and 1994 were as
follows:
1993 1994
------------------------- --------------------------
High Low Dividend High Low Dividend
------- ------- -------- ------ ------- --------
Quarter
1st $10 3/4 $ 8 1/4 $.1125 $ 9 1/4 $ 8 1/8 $.1375
2nd 11 1/4 8 1/4 .1375 8 5/8 6 3/4 .1375
3rd 9 7 3/4 .1375 9 1/2 6 5/8 .1375
4th 10 7 .1375 9 1/4 8 1/4 .1375
The last sale price of the Class A Common Stock on March 1, 1995 was
$7.00 per share. As of March 1, the Company had 120 shareholders of record
of its Class A Common Stock. The Company declared a dividend of $.1375 per
share of Class A Common Stock which was paid on January 3, 1995 to holders
of record as of December 15, 1994. The Company has also declared a
dividend of $.15 per share of Class A Common Stock payable on April 3, 1995
to holders of record on March 15, 1995.
Class B Common Stock
During July 1994, the Company exercised its right to terminate the
Special Dividends on the Class B Common Stock, effective August 31, 1994.
The Company's Articles of Incorporation provide that when the Company
terminates the Special Dividends, the holders of Class B Common Stock have
the right to require the Company to purchase their shares at $17.50 per
share plus all accrued and unpaid Special Dividends. As a result of
terminating the Special Dividends, the Company was required to repurchase
201,298 shares of Class B Common Stock for approximately $3.5 million.
As of March 1, 1995 there were 15,603 shares of Class B Common Stock
outstanding. The remaining Class B Common Stockholders will not be paid
any dividends until the aggregate amount of dividends paid on all other
classes of stock exceeds the Common Stock Allocation as defined. At
December 31, 1994 the Common Stock Allocation was approximately $112.3
million.
As a result of this stock repurchase, the Class B Common Stock is no
longer listed on the American Stock Exchange, and there is no longer an
established public trading market for it.
16
Class C Common Stock
There is no established trading market for the Company's Class C
Common Stock, $.10 par value. The number of record holders of the
Company's Class C Common Stock at March 1, 1995 was 20.
The Company declared cash dividends on its Class C Common Stock of
$.525 per share in 1993 and declared cash dividends of $.55 per share in
1994. In addition, the Company declared a dividend of $.1375 per share of
Class C Common Stock which was paid on January 3, 1995 to holders of record
as of December 15, 1994. The Company has declared a dividend of $.15 per
share of Class C Common stock payable on April 3, 1995 to holders of record
on March 15, 1995.
Dividend Policy
One of the Company's primary financial objectives is to pay dividends
on its Common Stock and to increase such dividends to reflect improvements
in the Company's financial performance. Pursuant to this objective, the
Company has recently adopted a policy of paying annual dividends of at
least 30% of NIDA. It is also the Company's objective to have consistency
in dividends. As a result, the Company will not necessarily increase or
decrease dividends based on what it considers to be temporary increases or
decreases in NIDA.
The Company is currently paying quarterly dividends on its Class A and
Class C Common Stock at an annual rate of $0.60 per share. The Company has
historically paid dividends on January 2, April 1, July 1 and October 1 of
each year.
The Company reviews its dividend policy from time to time in light of
the Company's results of operations, financial condition, capital needs,
future projects and other facts deemed relevant by the Board of Directors.
While the board of Directors may vary the dividend policy to reduce or
eliminate dividends, the approval of the Class C Common stockholders is
required to reduce dividends lower than the level established by a
shareholders' agreement among the Class C Common Stockholders.
The Company may pay dividends on the Class A Common Stock and Class C
Common Stock only upon paying all current and cumulative dividends on the
Redeemable Preferred Stock. The Company has paid all current and
cumulative dividends on such stock. The Company believes that it has
sufficient liquidity to meet all dividend requirements on the Redeemable
Preferred Stock and to pay dividends on the Class A Common Stock and the
Class C Common Stock in accordance with its dividend policy as set forth
above.
Under the terms of the Company's debt instruments, the Company is
restricted to the amount of dividend distributions it can make on its
capital stock. Under the most restrictive dividend limitations, $26.0
million was available for the payment of dividends on all classes of Common
Stock at December 31, 1994.
17
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of
the Company and should be read in conjunction with the more detailed
financial statements included elsewhere in this Report. The Company
typically generates net income and NIDA in the quarters ending in March and
December and experiences net losses and negative NIDA during the non-
heating season quarters ending in June and September. Although EBITDA and
NIDA should not be considered as substitutes for net income (loss) as an
indicator of the Company's operating performance and NIDA is not a measure
of the Company's liquidity, they are included in the following table as
they are the bases upon which the Company assesses its financial
performance, compensates management and establishes dividends. For
additional information as to liquidity, see the Consolidated Statements of
Cash Flows included elsewhere in this report. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
Year Ended December 31,
------------------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
Income Statement Data:
Net sales $567,414 $523,243 $512,430 $538,526 $546,677
Cost of sales 435,031 378,772 350,941 366,809 362,981
-------- -------- -------- -------- --------
Gross profit 132,383 144,471 161,489 171,717 183,696
Operating expenses 106,076 104,435 110,165 123,280 128,310
Amortization of customer lists 25,571 24,840 23,496 23,183 19,748
Depreciation and amortization of
plant and equipment 5,796 5,550 5,534 5,933 6,469
Amortization of deferred charges 4,946 5,185 5,363 5,548 6,177
Provision for supplemental benefit -- -- 1,974 264 373
------- -------- -------- -------- --------
Operating income (loss) (10,006) 4,461 14,957 13,509 22,619
Interest expense--net 20,900 20,728 18,622 20,508 23,766
Other income (expense)--net (228) (45) (324) (165) 109
-------- -------- -------- -------- --------
Loss before income taxes,
equity interest in Star Gas,
and extraordinary item (31,134) (16,312) (3,989) (7,164) (1,038)
Income taxes (benefit) (1,867) 250 400 400 600
-------- -------- -------- -------- --------
Loss before equity interest in
Star Gas and extraordinary item (29,267) (16,562) (4,389) (7,564) (1,638)
Share of loss of Star Gas -- -- -- -- (1,973)
-------- -------- -------- -------- --------
Loss before extraordinary item (29,767) (16,562) (4,389) (7,564) (3,611)
Extraordinary item-loss on
early extinguishment of debt -- -- -- (867) (654)
-------- -------- -------- -------- --------
Net loss $(29,267) $(16,562) $ (4,389) $ (8,431) $ (4,265)
======== ======== ======== ======== ========
Net loss applicable to Common Stock $(30,624) $(19,855) $ (8,842) $(11,798) $ (7,776)
Net Income (loss) per common share:
Class A Common Stock $ (2.81) $ (1.64) $ (.81) $ (.57) $ (.37)
Class B Common Stock 1.70 .31 1.14 1.88 1.10
Class C Common Stock (2.81) (1.64) (.81) (.57) (.37)
Other Data:
EBITDA(1) $ 26,307 $ 40,036 $ 51,325 $ 48,437 $ 55,386
NIDA(2) $ 4,639 $ 15,744 $ 27,721 $ 23,176 $ 27,012
Gallons of home heating oil
and retail propane sold 398,989 385,557 423,354 443,487 456,719
Cash Dividends declared per
common share:
Class A Common Stock $0.08 $ -- $0.18 $0.525 $0.55
Class B Common Stock 1.70 0.31 1.14 1.88 1.10
Class C Common Stock 0.08 -- 0.18 0.525 0.55
Weighted average number of
common shares outstanding:
Class A Common Stock 10,181 10,181 12,854 18,993 19,195
Class B Common Stock 3,034 3,034 2,447 217 152
Class C Common Stock 2,545 2,545 2,545 2,545 2,550
(Footnotes on next page)
18
At December 31,
------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- -------- ---------
(in thousands)
Balance Sheet Data:
Cash $ 5,529 $ 2,907 $ 3,860 $ 4,614 $ 15,474
Working capital (deficiency) (5,520) (12,038) (6,744) 16,694 28,344
Total assets 260,665 220,010 252,783 256,589 397,174
Long-term debt 146,193 141,830 135,058 185,311 309,945
Redeemable preferred stock
(long-term portion) 25,000 30,023 37,718 20,833 36,632
Stockholders' deficiency (40,087) (61,444) (33,917) (61,964) (66,176)
- ------------------------------------
(1) "EBITDA" means operating income before depreciation, amortization,
non-cash charges relating to the grant of stock options to executives
of the Company, non-cash charges associated with deferred compensation
plans and other non-cash charges of a similar nature, if any. EBITDA
is a component of the ratio of EBITDA to interest expense, net. This
is a significant ratio in that the Company's ability to incur
additional debt under various lending arrangements is dependent upon
achieving at least a 2.0 to 1 EBITDA to interest expense, net ratio.
(2) "NIDA" means net income (loss), plus depreciation, amortization, non-
cash charges relating to the grant of stock options to executives of
the Company, non-cash charges, associated with deferred compensation
plans and other non-cash charges of a similar nature, if any, less
dividends accrued on preferred stock, excluding net income (loss)
derived from investments accounted for by the equity method, except to
the extent of any cash dividends received by the Company. NIDA is the
principal basis upon which the Company compensates executives and
establishes dividends.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Overview
In analyzing the Company's results, one should consider the Company's
active acquisition program, the rapid rate of amortization of customer
lists purchased in heating oil acquisitions, the seasonal nature of the
demand for residential heating and the general ability of heating oil and
propane distributors to pass on variations in wholesale costs to their
customers. The following enumerates certain factors that should be
considered.
First, the financial results of a given year do not reflect the full
impact of that year's acquisitions. Historically, most acquisitions have
been made during the non-heating season because many sellers desire to
retain winter profits but avoid summer losses. Therefore, the effect of
acquisitions made after the heating season are not fully reflected in the
Company's sales volume and operating and financial results until the
following calendar year.
Second, substantially all purchased intangibles have been comprised of
customer lists and covenants not to compete. Amortization of customer lists
is a non-cash expense which represents the write-off of the amount paid for
customers acquired in connection with acquisitions who later terminate
their relationship with the Company. Based on the Company's analysis of
historical purchased fuel oil customer attrition rates, customer lists are
amortized 90% over a six-year period and the balance over a 25-year period.
However, the Company's net loss of heating oil customers has averaged
approximately 5% per annum over the past five years, as the loss of
purchased accounts has been partially offset by new customers obtained
through internal marketing. Amortization for propane customer lists is
computed using the straight-line method with cost amortized over fifteen
years. The covenants not to compete are amortized over the lives of the
covenants, which generally range from five to seven years.
Third, the seasonal nature of the Company's business results in the
sale by the Company of approximately 50% of its annual volume of fuel oil
in the first quarter and 30% in the fourth quarter of each year and 35% of
its annual volume of propane in each of the first and fourth quarters of
each calendar year. As a result, acquisitions made during the spring and
summer months generally have a negative effect on earnings in the calendar
year in which they are made. Most of the costs associated with an acquired
distributor are incurred evenly throughout the remainder of the year,
whereas a smaller percentage of the purchased company's annual volume and
gross profit is realized during the same period.
Finally, changes in total dollar sales do not necessarily affect the
Company's gross profit or net income. Since the Company historically has
added a per gallon margin onto its wholesale costs, variability in supply
prices has affected net sales but generally do not affect net income. As a
result, the Company's margins are most meaningfully measured on a per
gallon basis and not as a percentage of sales. While fluctuations in
wholesale prices have not significantly affected demand to date, it is
possible that significant wholesale price increases over an extended period
of time could have the effect of encouraging conservation. If demand were
reduced and the Company was unable to increase its gross profit margin or
20
reduce its operating expenses, the effect of the decrease in volume would
be to reduce net income.
Factors that impact the Company's ability to continue following its
current operating strategy in the foreseeable future include its ability to
continue to grow through acquisitions, while continuing to replace lost
customers through internal marketing.
Results of Operations and Other Data
1994 Compared to 1993
Net sales in 1994 increased to $546.7 million from $538.5 million in
1993. This $8.2 million increase was due to the Star Gas acquisition,
which increased sales by $11.1 million, offset by a decline of $2.9 million
in the heating oil division. Sales were lower in the heating oil division
as volume growth was more than offset by lower selling prices, reflecting a
lower wholesale costs of product.
In 1994 retail volume of home heating oil and propane increased to
456.7 million gallons, 3.0% greater than the 443.5 million gallons
delivered in 1993, due to the Star Gas acquisition (9.6 million gallons)
and the impact of the nine home heating oil acquisitions completed in 1993
whose annual volume was fully reflected for the first time in 1994 and the
nine home heating oil acquisitions completed in 1994. Partially offsetting
the positive impact of the acquisitions, was 1.5% warmer weather
experienced in the heating oil division and attrition in the Company s home
heating oil customer base. In 1994, the Company also sold 39.4 million
gallons of other petroleum products and wholesale propane, 8.2% greater
than the 36.4 million gallons sold in 1993. This increase of 3.0 million
gallons was primarily due to the wholesale propane volume associated with
the Star Gas acquisition.
Gross profit increased 7.0% from $171.7 million in 1993 to $183.7
million for 1994 due to the $5.8 million of gross profit realized by Star
Gas in December 1994 and to a $6.2 million increase in gross profit in the
heating oil division. The increase in the heating oil division gross profit
from $171.7 million to $177.9 million was attributable to an increase in
volume and to improved gross profit margins from 38.7 cents per gallon to
39.8 cents per gallon. The increase reflects an increase in heating oil gross
profit margins on the sale of home heating oil offset in part by an increase in
the net cost of providing heating equipment repair and maintenance services
and the additional costs associated with the severe winter weather
experienced during the first quarter of 1994.
Direct delivery expense increased $3.1 million from $29.9 million in
1993 to $33.0 million in 1994. This increase was due to the additional
costs associated with larger volume and temporary delivery inefficiencies
experienced during the first quarter of 1994 created by severe winter
weather conditions and delivery costs of $1.1 million associated with the
Star Gas volume.
Selling, general and administrative expenses increased 2.1% to $95.3
million in 1994 from $93.4 million in 1993. While expenses declined by
$0.4 million in the heating oil division despite larger volume, this
decline was offset by $2.3 million of expenses of Star Gas for December
1994. On a per gallon basis, the expenses in the heating oil division
declined by 1.2% due primarily to a $3.0 million reduction in marketing
21
expenses. The marketing expense decline resulted from the Company's more
disciplined customer service oriented marketing strategy. This decrease in
marketing expenses was offset by increases in insurance and operating
expenses attributable to the first quarter severe winter weather
conditions.
Amortization of customer lists, and deferred charges decreased 9.8% or
$2.8 million to $25.9 million. These non-cash expenses declined as certain
customer lists and deferred charges became fully amortized. Depreciation
and amortization of plant and equipment increased $0.5 million to $6.5
million due primarily to the Star Gas acquisition.
Operating income increased to $22.6 millon for 1994 from $13.5 million
in 1993. This significant improvement was due to volume growth and to
improved home heating oil margins which were partially offset by first
quarter 1994 weather related increases in service, delivery and operating
expenses. The decline in depreciation and amortization expense also
contributed to the increase in operating income.
Net interest expense increased $3.3 million to $23.8 million for 1994
due primarily to an increase of $26.1 million in total average borrowings
from $190.9 million to $217.0 million, offset by a reduction in the average
borrowing rate from 11.0% to 10.8%. Also contributing to the increase was
$0.6 million of interest expense of Star Gas.
Income taxes were $0.6 million in 1994 compared to $0.4 million in
1993 and represent certain state income taxes applicable to profitable
subsidiaries that are not included in consolidated state returns. The
Company had losses for Federal Income Tax purposes in each of these
periods. The Company has available $55.3 million of net operating loss
carryforwards at December 31, 1994.
Based on Petro's ownership percentage of Star Gas prior to December 7,
1994, $2.0 million was recorded as a loss under the equity method of
accounting. In December 1994, the Company exercised certain options to
acquire the remaining common equity of Star Gas and its results are
included in the consolidated financial statements of the Company.
The extraordinary loss of $0.7 million for 1994 represents the cash
premium paid in connection with the February 1994 refinancing of $50.0 in
long term notes which were scheduled to mature in June 1994. In 1993 the
Company recorded an extraordinary charge of $0.9 million representing a
cash premium of $0.4 million and the write-off of $0.5 million in debt
discount and related deferred charges when $25.0 million of subordinated
debt scheduled to mature in 1993 and 1995 was refinanced.
The net loss decreased from $8.4 million in 1993 to $4.3 million in
1994 due to the $9.1 million increase in operating income offset by an
increase in net interest expense of $3.3 million and the $2.0 million of
equity loss in Star Gas.
Despite 1994 being approximately 1.5% warmer than 1993, EBITDA
increased 14.3% to $55.4 million in 1994 from $48.4 million in 1993. This
$6.9 million improvement was due to volume expansion associated with the
Company s acquisition program, an increase in home heating oil gross profit
margins and operating expense control.
22
1993 Compared to 1992
Net sales increased in 1993 to $538.5 million from $512.4 million in
1992. This $26.1 million increase was attributable to volume growth and
related service revenues associated with acquisitions ($55.4 million or
10.8%), offset by attrition in the Company's customer base ($18.6 million
or 3.6%) and 2.6% warmer weather measured on a degree day basis ($10.9
million or 2.1%).
In 1993 home heating oil volume, increased to 443.5 million gallons,
4.8% greater than the 423.4 million gallons delivered in 1992 due to the
impact of the nine acquisitions completed in 1992 whose annual volume was
fully reflected for the first time in 1993, and to a lesser extent, the
nine acquisitions completed in 1993. The positive impact of the
acquisitions was offset by the slightly warmer weather and attrition in the
Company's customer base.
Gross profit increased $10.2 million, (6.3%), from $161.5 million
(38.1 cents per gallon) for 1992 to $171.7 million (38.7 cents per gallon)
for 1993. The increase in gross profit was attributable to volume related
increases aggregating $8.6 million and to a 2.0 cent per gallon increase in
home heating oil margins ($9.0 million) as the Company was able to maintain
selling prices despite a decline in wholesale product costs. The volume
and margin increases in gross profit were offset by the higher cost of
providing heating equipment repair and maintenance service to a larger
customer base and the utilization of this service as part of the Company's
internal marketing program.
Direct delivery expense increased $3.1 million from $26.8 million in
1992 to $29.9 million in 1993. This increase was due primarily to the 4.8%
increase in volume and the severe weather conditions experienced in March
1993 that temporarily increased delivery expenses.
Selling, general and administration expenses increased from $83.4
million in 1992 to $93.4 million in 1993. This $10.0 million increase was
due to expansion of the Company's marketing program ($2.4 million),
selling, general and administrative expenses associated with acquisitions
($5.9 million) and other expense increases ($1.7 million). On a per gallon
basis, these expenses increased 7.1% from 19.7 cents in 1992 to 21.1 cents
in 1993. However, after adjustment for the warmer weather in 1993, the
increase was 4.0% per gallon which was primarily attributable to the
expansion of the Company's marketing program.
The provision for supplemental benefits, representing the present
value of such benefits, returned to the more normal level of $0.3 million
compared to the accelerated accrual of $2.0 million in 1992.
Amortization of customer lists and deferred charges were $28.7 million
approximately the same as in 1992. While volume increased 4.8% these non
cash expenses remained equal as certain customer lists and capitalized
expenses became fully amortized. Depreciation and amortization of plant
and equipment increased 7.2%, or $0.4 million, to $5.9 million for 1993 due
to the acquisitions.
23
Operating income was $13.5 million for 1993 compared to $15.0 million
in 1992, as the 4.8% increase in volume and the increase in home heating
oil margins were offset by higher residential service related costs,
increased delivery and marketing expenses.
Net interest expense increased $1.9 million, 10.1%, to $20.5 million
for 1993. A reduction in the average borrowing rate was offset by a $31.1
million increase in long-term borrowings from $148.5 million, at an average
interest rate of 11.9%, to $179.6 million, at an average interest rate of
11.4%. This increase in long-term borrowings was due to the conversion in
March 1993 of $12.8 million of Redeemable Preferred Stock into Subordinated
Notes due in 2000 and the issuance in April 1993 of $50.0 million of 10 1/8%
Notes. The proceeds of this public issue were used to repay $25.0 million
of long-term obligations with the balance being used to fund, in part, the
Company's acquisition program. Offsetting the increase in long-term
borrowings was a decline in short-term borrowings from $17.9 million, at an
average interest rate of 5.9%, to $11.2 million, at an average interest
rate of 5.4%. In addition, the Company reduced bank fees and generated
interest income on higher cash balances in 1993 compared to 1992.
The loss before income taxes and extraordinary items was $7.2 million,
$3.2 million or 79%, greater than in 1992 due to the reduction in operating
income and the increase in interest expense. Income taxes of $0.4 million
were the same for both periods and represent certain state income taxes
applicable to profitable subsidiaries that are not included in consolidated
state returns. The Company had losses for federal income tax purposes in
each of these periods.
In May 1993, the Company recorded an extraordinary charge against
earnings of $0.9 million. This represented the cash premium paid of $0.4
million to retire $25.0 million of the Company's long-term obligations
maturing in 1993 and 1995 and the write off of $0.5 million in debt
discount and deferred charges associated with these obligations.
The net loss increased from $4.4 million in 1992 to $8.4 million in
1993 due to the decline in operating income, the increase in interest
expense and the extraordinary charge.
24
Liquidity and Financial Condition
One of the Company's primary financial strategies has been to finance
its growth through a combination of internally generated capital, the sale
of Common Stock, the issuance of Redeemable Preferred Stock and debt. This
strategy has been pursued by financing acquisitions and other asset
requirements made in the last five years, 41.6% with internally generated
cash and funds from the 1992 offering of 4.3 million shares of Class A
Common Stock and the issue of 2.5 million shares of Class A Common Stock in
the 1994 acquisition of Star Gas, 10.4% with Redeemable Preferred Stock and
48.0% and with long-term debt and working capital. As a result of this
strategy, for the year ended December 31, 1994, EBITDA was 2.3 times net
interest expense.
During 1994 the Company completed a public offering of $75.0 million
of its 9 3/8% subordinated debentures due 2006. The net proceeds of the
offering, $71.1 million, were used to repay $50.7 million of outstanding
notes maturing in 1994 and the balance of the proceeds, $20.4 million,
became available for the Company's acquisition program. Upon repayment of
the notes, a $20.0 million cash collateral account securing the notes was
released to the Company, thereby increasing the amount available for
acquisitions to $40.4 million.
Net cash provided by operating activities of $31.4 million, along with
the $40.4 million of net proceeds from the issuance and refinancing of debt
in February 1994 as mentioned above and the $24.0 million borrowed under
the Company's credit facility amounted to $95.8 million for the year ended
December 31, 1994. These funds were utilized in investing activities for
acquisitions, the purchase of fixed assets and an additional cash
investment in Star Gas totalling $31.7 million and in financing activities
to repay $27.8 million of working capital, to purchase Redeemable Preferred
Stock of $4.2 million, to repurchase Class B Common Stock for $3.4 million,
to pay dividends of $15.5 million, and for other financing activities of
$2.3 million. In addition, the Company financed a portion of its 1994
acquisitions with notes payable in the aggregate amount of $9.5 million.
As a result of the above activity, the Company's cash balance increased by
$10.9 million at December 31, 1994.
In December 1994, the Company completed its acquisition of Star Gas by
purchasing certain equity securities for cash of $3.8 million and issuing
2.5 million shares of the Company's Class A Common Stock.
The Company currently has available a $140 million credit facility
consisting of a $75 million working capital commitment, a $50 million
acquisition facility and a $15 million letter of credit commitment to
secure certain insurance requirements. At December 31, 1994 there were no
outstanding working capital borrowings, $16.0 million remained available
under the acquisition facility and the Company had $28.3 million of working
capital.
In February 1995, the Company completed public offerings of $125.0
million of its 12 1/4% Subordinated Debentures due February 1, 2005 and
approximately 2.9 million shares of Class A Common Stock. The net proceeds
of the two offerings were approximately $139.2 million. In February 1995,
$98.9 million of the proceeds were used to purchase $85.4 million of long
term debt and preferred stock of Star Gas and to retire approximately 1.5
million shares of Class A Common Stock issued in the Star transaction. The
Company intends to use $14.2 million of the proceeds in April 1995, to
25
repay approximately $12.8 million of long-term debt due in March 2000. The
balance of the net proceeds, approximately $26.1 million, will be available
for general corporate purposes.
For the remainder of 1995, the Company anticipates paying dividends on
its Common Stock of approximately $14.9 million, redeeming $4.2 million of
Redeemable Preferred Stock and paying $3.0 million in preferred dividends.
Based on the Company's current cash position, bank credit availability,
expected net cash provided by operating activities and the $26.1 million of
available proceeds from the February 1995 public offerings, the Company
expects to be able to meet all of the above mentioned obligations in 1995.
Currently, the Company has no material commitments for capital
expenditures.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements, Page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
27
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- --------------------------------------------------
The information appearing in the Proxy Statement under the caption
ELECTION OF DIRECTORS and under the caption EXECUTIVE OFFICERS, is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- ----------------------
The information appearing in the Proxy Statement under the caption
EXECUTIVE COMPENSATION, is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- --------------------------------------------------------------
The information appearing in the Proxy Statement under the caption
ELECTION OF DIRECTORS -- Ownership of Equity Securities in the Company, is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- ----------------------------------------------
The information appearing in the Proxy Statement under the caption
ELECTION OF DIRECTORS -- Certain Transactions, is incorporated herein by
this reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements are included in
Part II, Item 8:
Consolidated Financial Statements of Petroleum Heat and Power
Co., Inc. and Subsidiaries:
Independent Auditors' Reports
Consolidated Balance Sheets, December 31, 1993 and 1994
Consolidated Statements of Operations, years ended
December 31, 1992, 1993 and 1994
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) years ended December 31, 1992, 1993 and 1994
Consolidated Statements of Cash Flows, years ended December 31,
1992, 1993 and 1994
Notes to Consolidated Financial Statements
2. The following financial schedule is submitted herewith:
Schedule VIII - Valuation and Qualifying Accounts -
Years Ended December 31, 1992, 1993 and 1994
3. (a) Exhibits
The Exhibits which are listed on the Exhibit Index attached
hereto.
29
List of Exhibits
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 -- Restated and Amended Articles of Incorporation, as amended,
and Articles of Amendment thereto.(2)
3.2 -- Restated By-Laws of the Registrant.(2)
4.1 -- Indenture, dated as of April 1, 1993, between the Company
and Chemical Bank, as trustee, including Form of Notes.(1)
4.2 -- Form of Indenture, dated as of October 1, 1985 between the
Company and Manufacturers Hanover Trust Company, as trustee,
including Form of Notes.(3)
4.3 -- Restated and Amended Articles of Incorporation and Articles
of Amendment thereto.(3)
4.4 -- Certificate of Designation creating a series of preferred
stock designated as Cumulative Redeemable Exchangeable 1991
Preferred Stock and Certificate of Amendment relating
thereto.(6)
4.5 -- Certificate of Designation creating a series of preferred
stock designated as Cumulative Redeemable 1991 Preferred
Stock.(3)
4.6 -- Form of Indenture between the Company and Chemical Bank, as
trustee, including Form of Debentures.(8)
4.7 -- Certificate of Designation creating a series of Preferred
Stock designated as Cumulative Redeemable Exchangeable 1993
Preferred stock.(8)
9.1 -- Shareholders' Agreement dated as of July 1992, among the
Company and certain of its stockholders.(2)
10.1 -- Amended and Restated Credit Agreement dated as of December 31,
1992 among the Company, Maxwhale Corp., certain banks party
thereto and Chemical Bank. (1)
10.2 -- Pension Plan, as amended, of Petroleum Heat and Power Co., Inc.
(2)
10.3 -- Savings Plan, as amended of Petroleum Heat and Power Co., Inc.(2)
10.4 -- Supplemental Executive Retirement Plan of Petroleum Heat and
Power Co., Inc.(2)
10.5 -- Lease dated July 15, 1981 with respect to offices and garage
located at 477 West John Street and 5 Alpha Plaza, Hicksville,
New York.(4)
10.6 -- Lease dated February 15, 1982,(5) First Amendment dated February
14, 1986, and Second Amendment dated July 1, 1989, with respect
to offices, garage and terminal located at 818 Michigan Avenue,
N.E., Washington, D.C.(2)
10.7 -- Lease dated June 26, 1989 with respect to offices and garage
located at 40 Lee Burbank Highway, Revere, Massachusetts.(2)
10.8 -- Lease dated December 1, 1985 with respect to office and garage
located at 3600-3620 19th Avenue, Astoria, New York.(3)
10.9 -- Lease dated November 1, 1985 with respect to office and garage
located at 522 Grand Blvd., Westbury, New York.(5)
10.10 -- Lease dated June 5, 1986 with respect to office and garage
located at 2541 Richmond Terrace Co., Staten Island, New
York.(5)
10.11 -- Lease dated July 31, 1986 with respect to office and garage
located at 71 Day Street, Norwalk, Connecticut.(5)
10.12 -- Lease dated July 9, 1984 with respect to office located at 1245
Westfield Avenue, Clark, New Jersey.(5)
30
10.13 -- Lease dated April 5, 1991 with respect to office and garage
located at 10 Spring Street, New Milford, Connecticut.(2)
10.14 -- Lease dated October 26, 1990 with respect to office and garage
located at 1 Coffey Street, Brooklyn, New York.(2)
10.15 -- Lease dated February 6, 1990 with respect to office and garage
located at 62 Oakland Avenue and 64 Oakland Avenue, East
Hartford, Connecticut.(2)
10.16 -- Lease dated July 29, 1988 and Addendum to lease dated August 1,
1988 with respect to office, garage and terminal located at 224
North Main Street, Southampton, New York.(2)
10.17 -- Lease dated April 1, 1988 with respect to office and garage
located at 171 Ames Court, Plainview, New York.(2)
10.18 -- Lease dated August 12, 1988 with respect to office and garage
located at 326 South Second Street, Emmaus, Pennsylvania.(2)
10.19 -- Lease dated July 15, 1990, Addendum to lease dated July 27, 1990
and Second Addendum to lease dated November 30, 1990, with
respect to office and garage located at 212 Elm Street, North
Haven, Connecticut.(2)
10.20 -- Lease dated August 14, 1989 with respect to office and garage
located at foot of South Street, Oyster Bay, New York.(2)
10.21 -- Lease and Addendum to lease dated September 26, 1990 with respect
to office and garage located at 930 Park Avenue, Lakewood, New
Jersey.(2)
10.22 -- Lease dated December 1, 1990 with respect to garage located at 10
Coffey Street, Brooklyn, New York.(2)
10.23 -- Lease dated May 9, 1991 with respect to office and garage located
at 260 Route 10 East, Whippany, New Jersey.(2)
10.24 -- Lease dated June 1, 1987 with respect to garage located at 817
Pennsylvania Avenue, Linden, New Jersey.(2)
10.25 -- Lease dated June 1, 1989 with respect to office and garage
located at 2 Selleck Street, Stamford, Connecticut.(2)
10.26 -- Lease dated April 28, 1992 with respect to office and garage
located at 8087-8107 Parston Drive, Forestville, Maryland.(1)
10.27 -- Demand Promissory Notes of Thomas J. Edelman in favor of Petro,
Inc. in the amounts of $500,000 and $100,000 dated April 15, 1985
and May 17, 1985, respectively, and Pledge and Security
Agreement, as amended, made by Thomas J. Edelman in favor of
Petro, Inc. dated April 15, 1986.(5)
10.28 -- Letter dated June 5, 1985 with respect to redemption of 55,250
shares of common stock of Petroleum Heat and Power Co., Inc. from
Thomas J. Edelman and promissory note of Petroleum Heat and Power
Co., Inc. in the amount of $884,000 in favor of Thomas J.
Edelman, dated June 6, 1985.(3)
10.29 -- Option dated October 18, 1984 granted to Irik P. Sevin to
purchase 64,000 shares of common stock of Petroleum Heat and
Power Co., Inc.(3)
10.30 -- Form of Equipment Lease and related documentation dated as of
October 21, 1983 relating to vehicle leasing transaction between
Atlas Oil Corporation and various equipment lessors.(3)
10.31 -- Form of Equipment Lease and related documentation dated as of
March 2, 1985 relating to vehicle leasing transaction between
Petro, Inc. and various equipment lessors.(3)
10.32 -- Agreement dated October 22, 1986 relating to purchase of 64,000
shares of Class A Common Stock by Irik P. Sevin.(5)
31
10.33 -- Agreement dated December 2, 1986 relating to stock options
granted to Malvin P. Sevin.(5)
10.34 -- Agreement dated December 2, 1986 relating to stock options
granted to Irik P. Sevin.(5)
10.35 -- Agreements dated December 28, 1987 and March 6, 1989 relating to
stock options granted to Irik P. Sevin and Malvin P. Sevin.(2)
10.36 -- Form of Note dated December 31, 1992, in the amount of
$1,499,378, due December 31, 1993, from Irik P. Sevin to the
Company.(1)
10.37 -- Subordinated Note Agreement relating to $60 million Subordinated
Notes due October 1, 1998 issued to John Hancock Mutual Life
Insurance Company and other Investors.(2)
10.38 -- Note Agreement, dated as of January 15, 1991, relating to $12.5
million Subordinated Notes due January 15, 2001, between the
Company and Connecticut General Life Insurance Company.(2)
10.39 -- Purchase Agreement, dated as of September 1, 1991, between the
Company and United States Leasing International, relating to
purchase of 159,722 shares of the 1991 Preferred Stock.(2)
10.40 -- Purchase Agreement, dated as of August 1, 1989, between the
Company and John Hancock Mutual Life Insurance Company and The
Northwestern Mutual Life Insurance Company, relating to the
purchase of the 1989 Preferred Stock.(2)
10.41 -- Agreement dated as of November 1, 1992 relating to stock options
granted to George Leibowitz.(1)
10.42 -- Letter Agreement dated March 15, 1993 relating to the Credit
Agreement.(1)
10.43 -- Lease dated June 17, 1993 with respect to office facilities
located at 2187 Atlantic Street in Stamford, Connecticut. (8)
10.44 -- Form of Note dated December 31, 1993, in the amount of
$1,559,827, due December 31, 1994, from Irik P. Sevin to the
Company.(8)
10.45 -- Agreement dated December 1993 relating to stock options granted
to Malvin P. Sevin.(8)
10.46 -- Purchase Agreement, dated as of December 21, 1993, among Star Gas
Holdings, Inc., First Reserve Secured Energy Assets Fund, L.P.,
American Gas & Oil Investors, AmGo II, AmGo III, FRC Star Gas,
Inc., Star Gas and the Company.(9)
10.47 -- Option from Star Gas to the Company, dated as of December 21,
1993.(9)
10.48 -- Shareholder Put/Call Agreement, dated as of December 21, 1993,
among the Company, the Other Investors and Prudential.(9)
10.49 -- Shareholders' Agreement, dated as of December 21, 1993, among the
Company, the Other Investors and Prudential.(9)
10.50 -- Management Services Agreement, dated as of December 21, 1993,
between the Company and Star Gas.(9)
10.51 -- First Amendment to the Company's 10 1/8% Subordinated Notes
Indenture dated as of January 12, 1994.(8)
10.52 -- Form of First Amendment to the US Leasing Purchase Agreement.(8)
10.53 -- Form of Third Amendment to the Connecticut General Note
Agreement.(8)
10.54 -- Form of Second Amendment to the Hancock Note Agreement.(8)
10.55 -- Form of First Amendment to the Hancock/Northwestern Purchase
Agreement.(8)
32
10.56 -- Form of Fourth Amendment dated January 21, 1994 to the Second
Amended and Restated Credit Agreement.(8)
10.57 -- Employment Agreement dated July 21, 1994 with Thomas Isola.(10)
10.58 -- Agreement entered into as of the 7th day of December, 1994 among
the Company, Pru Supply, Inc. and the Prudential Insurance
Company of America.(2)
10.59 -- Agreement dated April 4, 1994 relating to stock options granted
to Irik P. Sevin.(11)
10.60 -- Note dated December 31, 1994, in the amount of $1,640,060 due
December 31, 1995 from Irik P. Sevin to the Company.(11)
10.61 -- Employment Agreement dated June 2, 1994 with Alex Szabo (12)
11.0 -- Computation of Per Share Earnings.(12)
21.0 -- Subsidiaries of Registrant.(12)
23.0 -- Consent of KPMG Peat Marwick LLP (12)
27.0 -- Financial Date Schedule (12)
(1) Filed as Exhibits to Registration Statement on Form S-2, File No.
33-58034.
(2) Filed as Exhibits to Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Filed as Exhibits to Registration Statement on Form S-1, File No.
2-99794, and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No.
2-88526, and incorporated herein by reference.
(5) Filed as Exhibits to Registration Statement on Form S-1, File No.
33-9088, and incorporated herein by reference.
(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991, File No. 2-88526, and incorporated
herein by reference.
(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for
the year ended December 31, 1988, File No. 2-88526, and incorporated
herein by reference.
(8) Filed as Exhibits to the Registration Statement on Form S-2, File
No. 33-72354, and incorporated herein by reference.
(9) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed
on January 4, 1994, File No. 2-88526 and incorporated herein by
reference.
(10) Filed as an Exhibit to the Company's Periodic Report on Form 10-Q
for the quarter ended September 1994 and incorporated herein by
reference.
(11) Filed as Exhibits to the Registration Statement on Form S-2, File
No.33-57059, and incorporated herein by reference.
(12) Filed herein.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
March 15, 1995
PETROLEUM HEAT AND POWER CO., INC.
(Registrant)
By: Irik P. Sevin
--------------------------------
Irik P. Sevin
President, Chairman of the Board,
Chief Executive Officer and Chief
Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Irik P. Sevin President, Chairman of the March 15, 1995
------------------- Board, Chief Executive Officer,
Irik P. Sevin and Chief Financial and Accounting
Officer and Director
Audrey L. Sevin Secretary and Director March 15, 1995
- ------------------------
Audrey L. Sevin
Phillip E. Cohen Director March 15, 1995
- ------------------------
Phillip E. Cohen
Thomas J. Edelman Director March 15, 1995
- ------------------------
Thomas J. Edelman
Paul Biddelman Director March 15, 1995
- ------------------------
Paul Biddelman
34
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements of Petroleum Heat and Power Co.,
Inc. and Subsidiaries
Independent Auditors' Report F-2
Consolidated Balance Sheets, December 31, 1993
and 1994 F-3
Consolidated Statements of Operations, Years
ended December 31, 1992, 1993 and 1994 F-4
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency), Years ended December 31, 1992,
1993 and 1994 F-5
Consolidated Statements of Cash Flows, Years
ended December 31, 1992, 1993 and 1994 F-6
Notes to Consolidated Financial Statements F-8
Schedule for the years ended December 31, 1992,
1993 and 1994:
VIII - Valuation and Qualifying Accounts F-28
F-1
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
PETROLEUM HEAT AND POWER CO., INC.:
We have audited the accompanying consolidated balance sheets of
Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1993
and 1994, and the related consolidated statements of operations, changes in
stockholders' equity (deficiency) and cash flows for each of the years in
the three-year period ended December 31, 1994. In connection with our
audit of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1993
and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1994 in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
March 2, 1995
F-2
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-----------------------------------
Assets 1993 1994
------------- -------------
Current Assets:
Cash $ 4,613,546 $ 15,473,726
Accounts receivable (net of allowance of
$1,026,202 and $1,769,225) 74,818,503 87,245,872
Inventories 13,992,928 21,745,912
Prepaid expenses 5,230,865 7,382,370
Notes receivable and other current assets 1,715,329 1,278,754
U.S.Treasury Notes held in Cash Collateral Account 20,000,000 -
------------- -------------
Total current assets 120,371,171 133,126,634
------------- -------------
Property, plant and equipment - net 31,540,530 127,173,765
------------- -------------
Intangible assets (net of accumulated amortization
of $217,190,143 and $243,115,249)
Customer lists 73,177,198 102,635,953
Deferred charges and pension costs 15,049,897 32,691,593
------------- -------------
88,227,095 135,327,546
------------- -------------
Investment in Star Gas Corporation 16,000,000 -
------------- -------------
Other assets 450,000 1,545,560
------------- -------------
$ 256,588,796 $ 397,173,505
============= =============
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Current debt $ 28,033,345 $ 5,617,431
Current maturities of cumulative redeemable
preferred stock 4,166,667 4,166,667
Accounts payable 16,664,026 19,786,545
Customer credit balances 22,324,023 26,902,593
Unearned service contract revenue 13,018,983 14,333,612
Accrued expenses and other liabilities 19,469,875 33,975,297
------------- ------------
Total current liabilities 103,676,919 104,782,145
------------- -------------
Supplemental benefits and other liabilities 1,652,314 2,961,441
------------- -------------
Pension plan obligation 7,079,494 9,029,232
------------- -------------
Notes payable and other long-term debt 50,047,059 99,680,918
------------- -------------
Senior notes payable - 42,631,832
------------- -------------
Subordinated notes payable 135,263,663 167,631,831
------------- -------------
Star Gas preferred stock - 19,965,766
------------- -------------
Cumulative redeemable exchangeable preferred stock 20,833,333 16,666,533
------------- -------------
Stockholders' equity (deficiency):
Common stock - par value $.10 per share 2,175,462 2,411,963
Additional paid-in capital 54,416,259 72,295,754
Deficit (112,741,672) (132,952,881)
Minimum pension liability adjustment (4,534,035) (6,651,029)
------------- ----------
(60,683,986) (64,896,193)
Note receivable from stockholder (1,280,000) (1,280,000)
------------- -----------
Total stockholders' equity (deficiency) (61,963,986) (66,176,193)
------------- -----------
$ 256,588,796 $ 397,173,505
============= =============
See accompanying notes to consolidated financial statements.
F-3
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31,
----------------------------------------------
1992 1993 1994
------------ ------------ ------------
Net sales $512,430,194 $538,526,317 $546,677,217
Cost of sales 350,941,386 366,809,517 362,981,191
------------ ------------ ------------
Gross profit 161,488,808 171,716,800 183,696,026
Selling, general and administrative
expenses 83,407,680 93,378,666 95,314,239
Direct delivery expense 26,756,585 29,901,565 32,995,251
Amortization of customer lists 23,496,438 23,182,730 19,748,453
Depreciation and amortization of
plant and equipment 5,534,205 5,933,100 6,469,374
Amortization of deferred charges 5,363,321 5,548,246 6,176,653
Provision for supplemental benefits 1,973,728 263,586 373,034
------------ ------------ ------------
Operating income 14,956,851 13,508,907 22,619,022
Other income (expense):
Interest expense (20,204,808) (22,155,840) (25,281,531)
Interest income 1,582,885 1,647,435 1,515,737
Other (324,293) (164,686) 108,975
------------ ------------ ------------
Loss before income taxes, equity
interest in Star Gas and
extraordinary item (3,989,365) (7,164,184) (1,037,797)
Income taxes 400,000 400,000 600,000
------------ ------------ ------------
Loss before equity interest in Star
Gas and extraordinary item (4,389,365) (7,564,184) (1,637,797)
------------ ------------ ------------
Share of loss of Star Gas Corporation - - (1,973,000)
------------ ------------ ------------
Loss before extraordinary item (4,389,365) (7,564,184) (3,610,797)
------------ ------------ ------------
Extraordinary item-loss on early
extinguishment of debt - (867,110) (654,500)
------------ ------------ ------------
Net loss $ (4,389,365) $ (8,431,294) $ (4,265,297)
============ ============ ============
Net loss applicable to common stock $ (8,842,105) $(11,798,320) $ (7,775,508)
Income (loss) before extraordinary
item per common share:
Class A Common Stock $ (.81) $ (.53) $ (.34)
Class B Common Stock 1.14 1.88 1.10
Class C Common Stock (.81) (.53) (.34)
Extraordinary loss per common share:
Class A Common Stock $ - $ (.04) $ (.03)
Class B Common Stock - - -
Class C Common Stock - (.04) (.03)
Net income (loss) per common share:
Class A Common Stock $ (.81) $ (.57) $ (.37)
Class B Common Stock 1.14 1.88 1.10
Class C Common Stock (.81) (.57) (.37)
Weighted average number of common
shares outstanding:
Class A Common Stock 12,854,266 18,992,579 19,195,086
Class B Common Stock 2,447,473 216,901 152,370
Class C Common Stock 2,545,139 2,545,139 2,549,504
See accompanying notes to consolidated financial statements.
F-4
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 1992, 1993 and 1994
Common Stock
-------------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------------------------------------------------------------------
No. of No. of No. of
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at December 31, 1991 10,180,558 $1,018,056 3,034,060 $303,406 2,545,139 $254,514
Net Loss
Cash dividends declared and
paid
Cash dividends payable
Accretion of redeemable
preferred stock
Class A Common Stock issued 4,330,000 433,000
Class A Common Stock
exchanged for Class B
Common Stock 4,482,021 448,202 (2,817,159) (281,716)
Class A Commmon Stock issuance
and exchange offer costs
------------------------------------------------------------------------------------------
Balance at December 31, 1992 18,992,579 1,899,258 216,901 21,690 2,545,139 254,514
Net Loss
Cash dividends declared
and paid
Cash dividend payable
Accretion of redeemable
preferred stock
Minimum pension liability
adjustment
------------------------------------------------------------------------------------------
Balance at December 31, 1993 18,992,579 1,899,258 216,901 21,690 2,545,139 254,514
Net loss
Cash dividends declared and
paid
Cash dividends payable
Repurchase of Class B Common
Stock (196,198) (19,620)
Repurchase of Class A Common
Stock (190,309) (19,031)
Class A Common Stock issued 2,489,626 248,962
Class A Stock Options exercised 209,517 20,952
Class C Stock Options exercised 52,380 5,238
Minimum pension liability
adjustment
Stock option compensation
------------------------------------------------------------------------------------------
Balance at December 31, 1994 21,501,413 $2,150,141 20,703 $2,070 2,597,519 $259,752
==========================================================================================
Minimum Note
Additional Pension Receivable
Paid-In Liability from
Capital Deficit Adjustment Stockholder Total
------- ------- ---------- ----------- -----
Balance at December 31, 1991 $12,550,522 ($74,290,322) - ($1,280,000) ($61,443,824)
Net Loss
Cash dividends declared and (4,389,365) (4,389,365)
paid
Cash dividends payable (7,987,026) (7,987,026)
Accretion of redeemable (2,607,435) (2,607,435)
preferred stock (194,740) (194,740)
Class A Common Stock issued 47,197,000 47,630,000
Class A Common Stock
exchanged for Class B
Common Stock (166,486) -
Class A Commmon Stock issuance
and exchange offer costs (4,924,164) (4,924,164)
---------------------------------------------------------------------------------------
Balance at December 31, 1992 54,462,132 (89,274,148) - (1,280,000) (33,916,554)
Net Loss (8,431,294) (8,431,294)
Cash dividends declared
and paid (11,972,850) (11,972,850)
Cash dividend payable (3,063,380) (3,063,380)
Accretion of redeemable
preferred stock (45,873) (45,873)
Minimum pension liability
adjustment (4,534,035) (4,534,035)
---------------------------------------------------------------------------------------
Balance at December 31, 1993 54,416,259 (112,741,672) (4,534,035) (1,280,000) (61,963,986)
Net loss (4,265,297) (4,265,297)
Cash dividends declared and
paid (12,462,544) (12,462,544)
Cash dividends payable (3,483,368) (3,483,368)
Repurchase of Class B Common
Stock (3,413,845) (3,433,465)
Repurchase of Class A Common
Stock (1,693,750) (1,712,781)
Class A Common Stock issued 21,846,469 22,095,431
Class A Stock Options exercised 838,068 859,020
Class C Stock Options exercised 209,523
Minimum pension liability 214,761
adjustment (2,116,994) (2,116,994)
Stock option compensation 93,030 93,030
---------------------------------------------------------------------------------------
Balance at December 31, 1994 $72,295,754 ($132,952,881) ($6,651,029) ($1,280,000) ($66,176,193)
=======================================================================================
See accompanying notes to consolidated financial statements.
F-5
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
--------------------------------------------
1992 1993 1994
------------- ------------ ------------
Cash flows from operating activities:
Net loss $(4,389,365) $ (8,431,294) $(4,265,297)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Amortization of customer lists 23,496,438 23,182,730 19,748,453
Depreciation and amortization of
plant and equipment 5,534,205 5,933,100 6,469,374
Amortization of deferred charges
and debt discount 5,394,397 5,548,246 6,176,653
Share of loss of Star Gas
Corporation - - 1,973,000
Provision for losses on accounts
receivable 2,444,581 1,836,113 1,421,419
Provision for supplemental benefits 1,973,728 263,586 373,034
Loss on bond redemptions 332,590 867,110 654,500
Other (33,082) 138,279 (135,327)
Decrease (increase) in accounts
receivable (6,994,519) 1,703,898 (3,752,014)
Decrease (increase) in inventory (2,438,308) 1,736,377 (3,497,813)
Increase in prepaid expenses,
notes receivable and other
current assets (12,823) (642,128) (119,394)
Decrease (increase) in other assets (200,000) 110,000 (214,000)
Increase in accounts payable 2,360,312 1,374,508 (1,329,749)
Increase (decrease) in customer
credit balances (822,574) 3,006,160 2,302,819
Increase (decrease) in unearned
service contract revenue 823,902 (161,448) 1,314,629
Increase (decrease) in accrued
expenses (756,093) 171,555 4,328,524
------------ ------------ ------------
Net cash provided by operating
activities 26,713,389 36,636,792 31,448,811
------------ ------------ ------------
Cash flows used in investing activities:
Acquisitions (43,828,180) (15,398,682) (26,411,206)
Capital expenditures ( 5,842,766) (3,232,234) (4,171,603)
Net proceeds from sales of fixed assets 528,376 294,014 282,663
Investment in Star Gas Corporation,
net of cash acquired - (16,000,000) (1,371,743)
------------ ------------ ------------
Net cash used in investing activities $(49,142,570) $(34,336,902) $(31,671,889)
------------ ------------ ------------
See accompanying notes to consolidated financial statements
F-6
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------------- ------
1992 1993 1994
- ------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 42,705,836 - 1,073,781
Net proceeds from issuance of
redeemable exchangeable
preferred stock 7,499,950 - -
Net proceeds from issuance of
subordinated notes 6,800,000 48,067,642 71,087,500
Repayment of notes payable - - (50,654,500)
Repurchase of preferred stock - - (4,166,800)
Repurchase of common stock - - (5,146,246)
Repurchase of subordinated notes (6,964,693) (25,368,574) -
Credit facility borrowings 166,000,000 127,000,000 45,200,000
Credit facility repayments (173,750,000) (131,000,000) (49,000,000)
Decrease (increase) in cash
collateral account (10,000,000) (5,000,000) 20,000,000
Cash dividends paid (8,279,636) (14,580,285) (15,525,924)
Other (630,179) (664,684) (1,784,553)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 23,381,278 (1,545,901) 11,083,258
----------- ---------- ----------
Net increase in cash 952,097 753,989 10,860,180
Cash at beginning of year 2,907,460 3,859,557 4,613,546
----------- ----------- ---------
Cash at end of year $ 3,859,557 $ 4,613,546 $15,473,726
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $20,238,486 $21,705,736 $22,712,191
Income taxes 319,487 495,739 382,034
Noncash investing activities:
Acquisitions - - (9,548,750)
Noncash financing activities:
Issuance of notes payable - - 9,548,750
See accompanying notes to consolidated financial statements
F-7
PETROLEUM HEAT AND POWER CO.,INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Petroleum
Heat and Power Co., Inc. (Petro) and its subsidiaries (the Company), each of
which is wholly owned. The Company's home heating oil division currently
operates in 28 major markets in the Northeast, including the metropolitan areas
of Boston, New York City, Baltimore, Providence and Washington, D.C., serving
approximately 409,000 customers in those areas. Star Gas, the Company's propane
division, currently serves more than 145,000 customers in 63 locations in the
Midwest and Northeast. Credit is granted to substantially all of these customers
with no individual account comprising a concentrated credit risk.
Basis of Presentation
Certain reclassifications have been made to the 1992 and 1993 financial
statements to conform to the 1994 presentation.
Investment in Star Gas Corporation
The Company's investment in Star Gas Corporation was accounted for using
the equity method up until December 7, 1994, when the Company exercised its
right to purchase the remaining outstanding common equity of Star Gas (the "Star
Gas Acquisition") (see note 12). Since December 7, 1994 Star Gas operations,
assets and liabilities have been included in the consolidated financial
statements of the Company.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. The components of inventories were as follows at the dates
indicated:
December 31,
-----------------------------
1993 1994
----------- -----------
Fuel oil and propane gas $ 6,289,676 $11,777,680
Parts, appliances and
equipment 7,703,252 9,968,232
----------- -----------
$13,992,928 $21,745,912
=========== ===========
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
Customer Lists and Deferred Charges
Customer lists are recorded at cost less accumulated amortization.
Amortization for the fuel oil customer lists is computed using the straight-line
method with 90% of the cost amortized over six years and 10% of the cost
amortized over 25 years. Amortization for propane customer lists is computed
using the straight-line method with cost amortized over fifteen years.
Deferred charges include goodwill, acquisition costs and payments related
to covenants not to compete. The covenants are amortized using the straight-
line method over the terms of the related contracts; acquisition costs are
amortized using the straight-line method over a six-year period; while goodwill
is amortized using the straight-line method over a twenty-five year period.
Also included as deferred charges are the costs associated with the issuance of
the Company's subordinated debt. Such costs are being amortized using the
interest method over the lives of the instruments.
F-8
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1) Summary of Significant Accounting Policies - (continued)
The Company assesses the recoverability of intangible assets at the end of
each fiscal year and, when appropriate, at the end of each fiscal quarter, by
comparing the carrying values of such intangibles to market values, where a
market exists, supplemented by cash flow analyses to determine that the carrying
values are recoverable over the remaining estimated lives of the intangibles
through undiscounted future operating cash flows. When an intangible asset is
deemed to be impaired, the amount of intangible impairment is measured based on
market values, as available, or by projected operating cash flows, using a
discount rate reflecting the Company's assumed average cost of funds.
Customer Credit Balances
Customer credit balances represent payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated annual
fuel charges on a fixed monthly basis) in excess of actual deliveries billed.
Revenue Recognition
Sales of fuel oil, propane, heating equipment and propane appliances are
recognized at the time of delivery of the product to the customer or at the time
of sale or installation. Revenue from repairs and maintenance service is
recognized upon completion of the service. Payments received from customers for
heating equipment service contracts are deferred and amortized into income over
the terms of the respective service contracts, on a straight line basis, which
generally do not exceed one year.
Environmental Costs
The Company expenses, on a current basis, costs associated with managing
hazardous substances and pollution in ongoing operations. The Company also
accrues for costs associated with the remediation of environmental pollution
when it becomes probable that a liability has been incurred and the amount can
be reasonable estimated.
Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. When appropriate, deferred income taxes are provided to reflect
the tax effects of timing differences between financial and tax reporting.
Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) (See Note 9).
Pensions
The Company funds accrued pension costs currently on its pension plans, all
of which are noncontributory.
Common Stock
In July 1992, the holders of Class A Common Stock exchanged 2,545,139
shares of Class A Common Stock for 2,545,139 shares of Class C Common stock (see
note 6). All numbers of Class A and Class C Common Stock and related amounts
have been retroactively adjusted in the accompanying financial statements to
reflect such exchange.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed utilizing the three class
method based upon the weighted average number of shares of Class A Common Stock,
Class B Common Stock and Class C Common Stock outstanding, after adjusting the
net loss for preferred dividends and the accretion of 1991 Redeemable Preferred
Stock, aggregating $4,452,000, $3,367,000, and $3,510,000 for the years ended
1992, 1993, 1994, respectively. Fully diluted net income (loss) per common
share is not presented because the effect is not material or is antidilutive.
F-9
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Property, Plant and Equipment
The components of property, plant and equipment and their estimated useful lives were as follows at the
indicated dates:
December 31, Estimated
----------------------------
1993 1994 Useful Lives
---------- ----------- ------------
Land $ 1,519,065 $ 7,183,465
Buildings 5,069,864 13,520,485 20-45 years
Fleet and other equipment 34,895,844 49,797,684 3-7 years
Tanks and equipment 5,867,082 73,075,418 8-30 years
Furniture and fixtures 11,861,514 15,381,273 5-7 years
Leasehold improvements 3,430,193 4,013,650 Terms of leases
----------- ------------
62,643,562 162,971,975
Less accumulated depreciation
and amortization 31,103,032 35,798,210
----------- ------------
$31,540,530 $127,173,765
=========== ============
(3) Notes Payable and Other Long-Term Debt
Notes payable and other long-term debt, including working
capital borrowings and current maturities of long-term debt, consisted
of the following at the indicated dates:
December 31,
----------------------------
1993 1994
----------- -----------
Notes payable to banks under credit
facility (a)(c) $28,000,000 $ 24,000,000
Notes payable in connection with the
acquisition of Whale Oil Corp., with
interest at the rate of 9% per annum(b)(c) 50,000,000 -
Notes payable to bank under revolving
credit facility of subsidiary (d) - 5,100,000
Star Gas long term debt (e) - 65,350,000
Notes payable in connection with the purchase
of fuel oil dealers, due in monthly,
quarterly and annual installments with
interest at various rates ranging from
6% to 9% per annum, maturing at various
dates through September 13, 1999 80,404 9,595,809
Other notes payable (f) - 722,575
Obligations under capital leases (See Note 4) - 529,965
---------- -----------
78,080,404 105,298,349
Less current debt 28,033,345 5,617,431
---------- -----------
$50,047,059 $ 99,680,918
=========== ============
F-10
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) Notes Payable and Other Long-Term Debt - (Continued)
(a) Pursuant to a Credit Agreement, dated December 31, 1992 as restated and
amended (Credit Agreement), the Company may borrow up to $75 million under
a revolving credit facility with a sublimit under a borrowing base
established each month. Amounts borrowed under the revolving credit
facility are subject to a 45 day clean-up requirement prior to September 30
of each year and the facility terminates on June 30, 1996. As collateral
for the financing arrangement, the Company granted to the lenders a
security interest in the customer lists, trademarks and trade names owned
by the Company, including the proceeds therefrom.
On August 1, 1994, the Company further amended the Credit Agreement to
include a $50 million two-year revolving credit acquisition facility,
convertible into a three-year self amortizing loan. Assuming the
refinancing of the Company's 11.85%, 12.17% and 12.18% Senior and
Subordinated Notes due in 1998, repayments and/or sinking fund deposits
equal to 1/3 of the outstanding balance of the facility on June 30, 1996
would be payable annually with the final payment due May 30, 1999. If the
assumed refinancing does not occur on or prior to June 30, 1998, the final
payment due on May 30, 1999 would be accelerated to June 30, 1998. The
Company has additionally pledged its accounts receivable and inventory as
security under the Credit Agreement.
Interest on borrowings is payable monthly and is based upon the floating
rate selected at the option of the Company plus 0 to 225 basis points,
based upon the ratio of Consolidated Operating Profit to Interest Expense
(as defined in the Credit Agreement). At December 31, 1994, there were no
borrowings outstanding under the working capital portion of the facility
and $24,000,000 was outstanding on the acquisition portion of the facility.
The rate on the acquisition borrowings was 8.2% at December 31, 1994. The
Company pays a facility fee of 0.375% on the unused portion of the
revolving credit facility. Compensating balances equal to 5.0% of the
average amount outstanding during the relevant period are also required
under the agreement.
(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly owned subsidiary of
Petro, acquired certain assets of Whale Oil Corp. for $50.0 million. The
purchase price was paid by the issuance of $50 million of 9% notes due June
1, 1994. The notes were nonrecourse to Petro, but were secured by letters
of credit issued by certain banks pursuant to the Credit Agreement.
Maxwhale paid a fee on these letters of credit, calculated at a range of
1.75% to 2.25% on $50.0 million less the balance maintained in a Cash
Collateral Account, plus 0.25% on the Cash Collateral Account balance.
Petro had fully guaranteed these letters of credit. The Maxwhale customer
list was pledged pursuant to a security agreement in favor of the banks.
On February 4, 1994, the Company repaid the $50.0 million of the Maxwhale
notes at a purchase price of 101.33% of the principal amount thereof, with
a portion of the proceeds of its $75.0 million 9 3/8% public subordinated
debenture offering completed on February 3, 1994 (see note 5). The Company
recorded an extraordinary loss in 1994 of approximately $0.7 million as a
result of the early payment of such debt. Since the Maxwhale notes were
refinanced with the proceeds of new long term debt, such notes were
classified as long term at December 31, 1993.
Under the Credit Agreement, the Company was required to make annual
deposits into a Cash Collateral Account to secure the outstanding letters
of credit. The first such deposit of $5 million was made on June 15, 1991
with additional deposits of $10 million occurring on April 1, 1992 and $5
million on May 15, 1993. As a result of the repayment of the Maxwhale
notes, the $20 million in the cash collateral account was released for
general corporate purposes on February 4, 1994.
(c) The customer lists, trademarks and trade names pledged to the banks under
the Credit Agreement are carried on the December 31, 1994 balance sheet at
$102,635,953. Under the terms of the Credit Agreement, the Company is
required, among other things, to maintain certain minimum levels of cash
flow, as well as certain ratios on consolidated debt. In the event of
noncompliance with certain of the covenants, the banks have the right to
declare all amounts outstanding under the loans to be due and payable
immediately.
F-11
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) Notes Payable and Other Long-Term Debt - (Continued)
(d) These amounts were outstanding under the terms of a Credit Agreement
between Star Gas Corporation and a certain bank. The notes were repaid
in January and February of 1995 and the Credit Agreement was terminated.
The interest rate on such borrowings was 8.7% at December 31, 1994.
(e) The Star Gas debt consists of 11.56% Senior Notes, 12.625% Senior
Subordinated Notes, Senior Reset Term Notes and borrowings under a term
loan agreement. These notes were purchased in February 1995 with a portion
of the proceeds of the Company's $125.0 million 12 1/4% Subordinated
Debentures issued in February 1995 (see note 5).
(f) In connection with certain Star Gas Corporation acquisitions, Star Gas had
obligations of $722,575 at December 31, 1994 consisting of notes payable to
former owners.
Aggregate annual maturities for each of the next five years, including
working capital borrowings and assuming the refinancing of the Company's 11.85%,
12.17% and 12.18% notes due in 1998 as mentioned in paragraph (a) above is
completed, are as follows:
Year Ending
December 31,
------------
1995 $ 5,617,431
1996 469,867
1997 8,357,267
1998 8,237,757
1999 16,678,081
(4) Leases and Capital Lease Obligations
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.
Certain of the real property leases contain renewal options and require the
Company to pay property taxes.
The future minimum rental commitments at December 31, 1994 under leases
having an initial or remaining noncancellable term of one year or more are
as follows:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ -------- -----------
1995 $157,476 $ 4,613,000
1996 119,226 3,399,000
1997 80,976 2,641,000
1998 80,976 2,137,000
1999 80,976 1,770,000
Thereafter 404,880 5,412,000
-------- -----------
Total minimum lease payments 924,510 $19,972,000
Less amount representing interest ===========
at rates ranging from 14% to 15% 394,545
Present value of net minimum --------
capital lease obligation $529,965
========
Rental expense under operating leases for the years ended December 31,
1992, 1993, and 1994 was $4,448,000, $5,346,000 and $6,114,000 respectively.
F-12
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) Senior and Subordinated Notes Payable
Senior and Subordinated notes payable at the dates indicated, consisted of:
December 31,
-----------------------------
1993 1994
------------ ------------
11.85%, 12.17% and 12.18%
Subordinated and Senior Notes due
October 1, 1998 (a) $ 60,000,000 $ 60,000,000
14.10% Subordinated and Senior Notes
due January 15, 2001 (b) 12,500,000 12,500,000
Subordinated and Senior Notes
due March 1, 2000 (c) 12,763,663 12,763,663
10 1/8% Subordinated Notes due
April 1, 2003 (d) 50,000,000 50,000,000
9 3/8% Subordinated Debentures due
February 1, 2006 (e) - 75,000,000
------------ ------------
Total long-term Senior and Subordinated
Notes payable 135,263,663 210,263,663
Less long-term Senior Notes payable (e) - 42,631,832
------------ ------------
Total long-term Subordinated Notes Payable $135,263,663 $167,631,831
============ ============
(a) On September 1, 1988, the Company authorized the issuance of $60,000,000 of
Subordinated Notes due October 1, 1998 bearing interest payable
semiannually at an average rate of 11.96%. All such notes are redeemable
at the option of the Company, in whole or in part, from time to time, upon
payment of a premium rate as defined.
(b) On January 15, 1991, the Company authorized the issuance of $12,500,000 of
14.10% Subordinated Notes due January 15, 2001 bearing interest payable
quarterly. The notes are redeemable at the option of the Company, in whole
or in part, from time to time, upon payment of a premium rate as defined.
On each January 15, commencing 1996 and ending January 15, 2000, the
Company is required to repay $2,100,000 of the Notes. The remaining
principal of $2,000,000 is due on January 15, 2001. No premium is payable
in connection with these required payments.
(c) In March 1993, the Company issued $12,763,663 of Subordinated notes due
March 1, 2000 in exchange for an equal amount of 1991 Redeemable Preferred
Stock. These notes call for interest payable monthly based on the sum of
LIBOR plus 9.28%. At December 31, 1994, LIBOR was 6.0%. On March 1, 1995,
the Company gave notice of its intention to redeem these securities on
April 3, 1995. The Company will pay a premium of approximately $1.4 to
redeem these securities.
(d) On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated
Notes due April 1, 2003. These Notes are redeemable at the Company's
option, in whole or in part, at any time on or after April 1, 1998 upon
payment of a premium rate as defined. Interest is payable semiannually.
F-13
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) Senior and Subordinated Notes Payable - (Continued)
(e) On February 3, 1994, the Company issued $75.0 million of 9 3/8%
Subordinated Debentures due February 1, 2006. These Debentures are
redeemable at the Company's option, in whole or in part, at any time on or
after February 1, 1997 upon payment of a premium rate as defined. Interest
is payable semiannually.
In connection with the offering of its 9 3/8% Subordinated Debentures, the
Company received consents of the holders of a majority of each class of
subordinated debt and redeemable preferred stock (see note 7) to certain
amendments to the respective agreements under which the subordinated debt
and the redeemable preferred stock were issued. In consideration for the
consents, the Company paid to the holders of the subordinated debt due in
1998, 2000 and 2001 a cash payment $0.6 million and caused 50% of the
aggregate balance or approximately $42.6 million of the subordinated debt
to be ranked as senior debt. In addition, the Company agreed to increase
dividends on the redeemable preferred stock by $2.00 per share per annum.
The Company also paid approximately $1.5 million in fees and expenses to
obtain such consents.
Expenses connected with the above five offerings, and amendments thereto,
amounted to approximately $8,420,000. At December 31, 1993 and 1994, the
unamortized balances relating to notes still outstanding amounted to
approximately $2,762,000 and $6,715,000, respectively, and such balances
are included in deferred charges.
Aggregate annual maturities for each of the next five years, are as follows
as of December 31, 1994:
Year ended
December 31,
------------
1995 $ -
1996 2,100,000
1997 2,100,000
1998 62,100,000
1999 2,100,000
On February 3, 1995, the Company issued $125.0 million of 12 1/4%
Subordinated Debentures due February 1, 2005. These debentures are
redeemable at the Company's option, in whole or in part, at any time on or
after February 1, 2000 upon payment of a premium rate as defined. Interest
is payable semi-annually. The Company also issued on February 3, 1995,
2,875,000 shares of Class A Common Stock in a public offering. The net
proceeds of the two offerings were approximately $139.2 million and $98.9
million of the proceeds were used in February 1995 to purchase $65.4
million of Star Gas Long Term Debt, to purchase approximately $20.0 million
of Star Gas preferred stock, to retire approximately 1.5 million shares of
Class A Common Stock issued to a third party in the Star Gas acquisition
and $14.2 will be used to repay approximately $12.8 of subordinated and
senior notes due in March 2000 at a premium of approximately $1.4 million.
The balance of the net proceeds, approximately $26.1 million, will be used
for general corporate purposes.
F-14
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(6) Common Stock and Common Stock Dividends
The Company's outstanding Common Stock consists of Class A Common Stock,
Class B Common Stock and Class C Common Stock, each with various designations,
rights and preferences. In 1992, the Company restated and amended its Articles
of Incorporation increasing the authorized shares of Class A Common Stock to
40,000,000 and authorizing 5,000,000 shares of Class C Common stock, $.10 par
value. On July 29, 1992, the holders of Class A Common Stock exchanged pro rata
2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C Common
Stock.
Holders of Class A Common Stock and Class C Common Stock have identical
rights, except that holders of Class A Common Stock are entitled to one vote per
share and holders of Class C Common Stock are entitled to ten votes per share.
Holders of Class B Common Stock do not have voting rights, except as required by
law, or in certain limited circumstances.
On July 29, 1992 and September 2, 1992, the Company sold an aggregate of
4,330,000 shares of its Class A Common Stock in a Public Offering at an initial
offering price of $11.00 per share.
On September 17, 1992 the Company commenced an Exchange Offer for all of
the outstanding shares of its Class B Common Stock pursuant to which each holder
of Class B Common Stock who tendered a share of Class B Common Stock was
entitled to receive 1.591 shares of Class A Common Stock. The Exchange Offer
expired on October 16, 1992 and, as a result 2,817,159 shares of Class B Common
Stock (92.8% of the total then outstanding) were exchanged for 4,482,021 shares
of Class A Common Stock.
Holders of Class B Common Stock were entitled to receive Special Dividends
based upon the Company's Cash Flow, as defined, for its prior fiscal year.
Special Dividends were cumulative and payable quarterly. If not paid, dividends
on any other class of stock could not be paid until all Special Dividends in
arrears were declared and paid.
During July 1994, the Company exercised its right to terminate the Special
Dividends on the Class B Common Stock, effective August 31, 1994, "the
expiration date." As a result of the termination of the Special Dividends, the
holders of Class B Common Stock have the right to require the Company to
purchase their shares at $17.50 per share plus all accrued and unpaid Special
dividends through the expiration date ($0.2763 per share for the period July 1,
1994 through August 31, 1994). As of December 31, 1994, 196,198 shares of Class
B Common Stock were repurchased for approximately $3.4 million. The remaining
Class B Common Stockholders will not be paid any dividends until the aggregate
amount of dividends paid on all other classes of stock exceeds the Common Stock
Allocation, as defined, which amounted to approximately $112.3 million at
December 31, 1994. After the Common Stock Allocation has been satisfied, each
share of Class B Common Stock will participate equally with each share of Class
A Common Stock and Class C Common Stock with respect to all dividends.
The following table summarizes the cash dividends declared on Common Stock
and the cash dividends declared per common share for the years indicated:
Year Ended December 31,
------------------------------------
1992 1993 1994
---------- ---------- ----------
Cash dividends declared
Class A $3,157,000 $9,971,000 $10,791,000
Class B 2,715,000 408,000 238,000
Class C 465,000 1,336,000 1,407,000
Cash dividends declared per share
Class A $ .18 $ .525 $ .55
Class B 1.14 1.88 1.10
Class C .18 .525 .55
F-15
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(6) Common Stock and Common Stock Dividends - (Continued)
Under the Company's most restrictive dividend limitation, $26.0 million was
available at December 31, 1994 for the payment of dividends on all classes of
Common Stock. The amount available for dividends is increased each quarter by
50% of the cash flow, as defined, for the previous fiscal quarter.
On February 3, 1995, the Company issued 2,875,000 shares of Class A Common
Stock in a public offering in connection with the issuance of $125.0 million of
12 1/4% subordinted debentures due February 1, 2005 and used a portion of the
proceeds to retire 1,521,316 shares of Class A Common Stock which shares were
issued to a third party in the Star Gas Acquisition (see note 5).
(7) Preferred Stock
The Company entered into agreements dated as of August 1, 1989 with John
Hancock Mutual Life Insurance Company and Northwestern Mutual Life Insurance
Company to sell up to 250,000 shares of its Redeemable Preferred Stock, par
value $0.10 per share, at a price of $100 per share, which shares are
exchangeable into Subordinated Notes due August 1, 1999 (1999 Notes). In
connection with receiving consents in 1994 to modify certain covenants under
which the Redeemable Preferred Stock was issued, the Company has agreed to
increase dividends on the Redeemable Preferred Stock by $2.00 per share per
annum which began in February 1994. The average dividend rate on these shares is
$14.33 per share.
On August 1, 1994, and on August 1 of each year thereafter, one-sixth of
the number of originally issued shares of each series of Redeemable Preferred
shares outstanding, less the number of shares of such series previously
exchanged for 1999 Notes, are to be redeemed, with the final redemption
occurring on August 1, 1999. The redemption price is $100 per share plus all
accrued and unpaid dividends to such August 1. The first such redemption in the
amount of $4,166,800 occurred on August 1, 1994. As of December 31, 1993 and
1994, 250,000 and 208,332 shares respectively were outstanding of which 41,667
were reflected as current.
The Company entered into an agreement dated September 1, 1991 with United
States Leasing International Inc. to sell up to 159,722 shares of its 1991
Redeemable Preferred Stock, par value $.10 per share, at an initial price of
$78.261 per share, which shares were exchangeable into Subordinated Notes due
March 1, 2000 (2000 Notes). The Company sold 63,889 shares of the Redeemable
Preferred Stock in September 1991 at $78.261 per share and 94,995 shares in
March 1992 at $78.51 per share, the accreted value of the initial price. The
holders of the shares of 1991 Preferred Stock were entitled to receive monthly
dividends based on the annual rate of the sum of LIBOR plus 4.7%. In March 1993,
the Company issued $12,763,663 of 2000 Notes in exchange for all of the 1991
Redeemable Preferred Stock (see note 5).
Star Gas had outstanding $8,507,070 of 12.625% Cumulative Redeemable
Preferred Stock and $11,458,696 of 12.5% Preferred Stock. These shares were
purchased by the Company with a portion of the proceeds of the public offering
completed in February 1995 (see note 5).
Preferred dividends of $4,258,000, $3,321,000 and $3,510,000 were declared
on all classes of preferred stock in 1992, 1993 and 1994, respectively.
Aggregate annual maturities of Redeemable Preferred Stock are as follows as
of December 31, 1994:
Year ended
December 31,
------------
1995 $ 4,166,667
1996 4,166,633
1997 4,166,600
1998 4,166,700
1999 4,166,600
-----------
$20,833,200
===========
F-16
PETROLEUM HEAT AND POWER CO., INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(8) Pension Plans
The Company has several noncontributory defined contribution and defined
benefit pension plans covering substantially all of its nonunion employees.
Benefits under the defined benefit plans are generally based on years of service
and each employee's compensation, while benefits under the defined contribution
plans are based solely on compensation. Pension expense under all plans for the
years ended December 31, 1992, 1993 and 1994 was $2,447,000, $3,342,000 and
$3,559,000, respectively, net of amortization of the pension obligation
acquired.
The following table sets forth the defined benefit plans' funded status,
all of which are underfunded, and amounts recognized in the Company's balance
sheets at the indicated dates:
December 31,
--------------------------------
1993 1994
------------- ------------
Actuarial present value of benefit
bligations:
Accumulated benefit obligations,
ncluding vested benefits of
23,566,465 and $25,069,297 $ 23,848,149 $ 25,445,984
============= ============
Projected benefit obligation $(26,458,728) $(28,299,261)
Plan assets at fair value (primarily
listed stocks and bonds) 17,252,490 16,964,308
------------ ------------
Projected benefit obligation in excess
of plan assets (9,206,238) (11,334,953)
Unrecognized net loss from past
experience different from the assumed
and effects of changes in assumptions 7,538,164 9,604,101
Unrecognized net transitional obligation 546,784 487,174
Unrecognized prior service cost due to
plan amendments 785,832 704,538
Additional liability (6,260,201) (7,942,536)
------------ ------------
Accrued pension cost for defined benefit
plans $ (6,595,659) $ (8,481,676)
============ ============
Net pension cost for defined benefit plans for the periods indicated included
the following components:
Year Ended December 31,
--------------------------------------------
1992 1993 1994
------------ ------------ ------------
Service cost-benefits earned
during the period $ 1,162,736 $ 1,391,564 $ 1,340,777
Interest cost on projected
benefit obligation 1,781,444 1,778,401 1,911,335
Actual (return) loss on
assets (1,248,604) (994,937) 339,374
Net amortization and deferral
of (gains) and losses (71,885) 207,465 (1,150,691)
----------- ----------- ------------
Net periodic pension
cost for defined
benefit plans $ 1,623,691 $ 2,382,493 $ 2,440,795
=========== =========== ============
Assumptions used in the above
accounting were:
Discount rate 8.5% 7.0% 7.0%
Rates of increase in
compensation levels 6.0% 4.0% 4.0%
Expected long-term rate
of return on assets 10.0% 8.5% 8.5%
F-17
PETROLEUM HEAT AND POWER CO., INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(8) Pension Plan - (Continued)
In addition to the above, the Company made contributions to union-
administered pension plans during the years ended December 31, 1992, 1993 and
1994 of $2,442,000, $2,867,000 and $3,078,000, respectively.
The Company recorded an additional minimum pension liability for
underfunded plans of $5,866,651 at December 31, 1993, representing the excess of
unfunded accumulated benefit obligations over plan assets. This amount was
further increased by $1,976,090 at December 31, 1994 bringing the total minimum
pension liability to $7,842,741 at December 31, 1994. A corresponding amount is
recognized as a intangible asset except to the extent that these additional
liabilities exceed the related unrecognized prior service costs and net
transition obligation, in which case the increase in liabilities is charged as a
reduction of stockholders' equity of $6,651,029 as of December 31, 1994.
In connection with the purchase of shares of a predecessor company as of
January 1, 1979 by a majority of the Company's present holders of Class C Common
Stock, the Company assumed a pension liability in the aggregate amount of
$1,512,000, as adjusted, representing the excess of the actuarially computed
present value of accumulated vested plan benefits over the net assets available
for such benefits. Such liability, which amounted to $1,186,491 at December 31,
1994, is being amortized over 40 years.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's
then chairman and co-chief executive officer, was entitled to receive $25,000
per month for a period of 120 months following his retirement. In the event of
his death, his designated beneficiary is entitled to receive such benefit. Mr.
Sevin passed away in December 1992, prior to his retirement. The accrual for
such benefit payable at December 31, 1992 was adjusted to $1,973,000, the
present value (using a discount rate of 9%) of the payments now payable to his
beneficiary, which payments commenced in January 1993.
F-18
PETROLEUM HEAT AND POWER CO., INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Income Taxes
Income tax expense was comprised of the following for the indicated
periods:
Year Ended December 31,
--------------------------------------
1992 1993 1994
--------- -------- ---------
Current:
Federal $ - $ - $ -
State 400,000 400,000 600,000
--------- -------- ---------
$ 400,000 $400,000 $ 600,000
========= ======== =========
Deferred income tax expense results from temporary differences in the
recognition of revenue and expense for tax and financial statement purposes.
The sources of these differences and the tax effects of each were as follows:
Year Ended December 31,
---------------------------------------
1992 1993 1994
--------- ---------- -----------
Excess of tax over book (book
over tax) depreciation $ (11,000) $ 242,000 $ 1,338,000
Excess of book over tax
amortization expense - - (397,000)
Excess of book over tax
vacation expense (3,000) (93,000) (103,000)
(Excess of book over tax) tax
over book bad debt expense (165,000) 92,000 (25,000)
(Excess of book over tax) tax
over book supplemental benefit
expense (671,000) 12,000 7,000
Deferred service contracts 66,000 18,000 -
Equity in loss of Star Gas
Corporation - - (671,000)
Other, net 50,000 (60,000) (24,000)
Recognition of tax benefit of net
operating loss to the extent of
current and previously recognized
temporary differences - (2,606,000) (1,185,000)
Change in valuation allowance - 2,395,000 1,060,000
Deferred tax assets not
recognized 734,000 - -
--------- ---------- -----------
$ - $ - $ -
========= ========== ===========
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes (SFAS No.
109)." This statement requires that deferred income taxes be recorded following
the liability method of accounting and adjusted periodically when income tax
rates change. Adoption of the new Statement did not have any effect on the
Company's consolidated financial condition or results of operations since the
Company did not carry any deferred tax accounts on its balance sheet at December
31, 1992 and any net deferred assets set up as a result of applying SFAS No. 109
were fully reserved.
F-19
PETROLEUM HEAT AND POWER CO., INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Income Taxes - (Continued)
Under SFAS No. 109, as of January 1, 1993, the Company had net deferred tax
assets of approximately $14.1 million subject to a valuation allowance of
approximately $14.1 million. The components of the net deferred tax assets the
related valuation allowance for 1993 and 1994 using current rates were as
follows (in thousands):
December 31, December 31,
1993 1994
------------ -----------
Net operating loss carryforwards $ 16,995 $ 18,180
Excess of tax over book
depreciation (2,714) (4,052)
Excess of book over tax amortization - 397
Excess of book over tax vacation
expense 1,135 1,238
Excess of book over tax (tax over
book) supplemental benefit expense 659 652
Excess of book over tax (tax over
book) bad debt expense 348 373
Equity in loss of Star Gas
Corporation - 671
Other, net 118 142
------- --------
16,541 17,601
Valuation allowance (16,541) (17,601)
------- --------
$ - $ -
======== ========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent history of annual net losses, that a
full valuation allowance is appropriate.
At December 31, 1994, the Company had the following income tax
carryforwards for Federal income tax reporting purposes (in thousands):
Expiration
Date Amount
---------- ------
2005 $26,651
2006 15,012
2007 1,367
2008 8,400
2009 3,853
-------
$55,283
=======
F-20
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Related Party Transactions
In connection with the acquisition of customer lists, equipment and other
assets of previously unaffiliated fuel oil businesses, the Company entered into
lease agreements covering certain vehicles with individuals, including certain
stockholders, directors and executive officers. These leases are currently on a
month-to-month basis, on terms comparable with leases from unrelated parties.
Annual rentals under these leases are approximately $125,000.
On November 6, 1985, the Company sold a building to certain related parties
for $660,000, the same price the Company originally paid for the property in
June 1984 and which was also the facility's independently appraised fair market
value. The parties then leased the facility back to the Company pursuant to a
ten-year agreement providing for rentals of $90,000 per annum plus escalation
and taxes.
Until 1985, the Company occupied a certain building under a lease agreement
with an unaffiliated lessor. The lease was accounted for as a capital lease
and, as such, the capitalized leased asset and obligation were included on the
Company's balance sheet. In November 1985, pursuant to a competitive bidding
process, the Company purchased the building from the landlord for $1,500,000.
The building was resold for $1,500,000 in December 1985 to certain related
parties, some of whom are stockholders, directors and executive officers of the
Company. These related parties are leasing the building to the Company under a
lease agreement which calls for rentals of $315,000 per annum (which was the
independently appraised lease rental) plus escalations and which expires in
1995.
In October 1986, Irik P. Sevin purchased 161,313 shares of Class A Common
Stock and 40,328 shares of Class C Common Stock (after giving retroactive effect
to the exchange of Class C Common Stock for Class A Common Stock in July 1992)
of the Company for $1,280,000 (which was the fair market value as established by
the Pricing Committee pursuant to the Stockholders' Agreement described below).
The purchase price was financed by a note originally due December 31, 1989, but
which has been extended to December 31, 1995. The note was amended in 1991 to
increase the principal amount by $152,841, the amount of interest due from
October 22, 1990 through December 31, 1991 and to change the interest rate of
the note effective January 1, 1992 from 10% per annum to the LIBOR rate in
effect for each month plus 0.75%. The note was amended again in 1992, 1993 and
1994 to increase the principal amount by $207,219, the amount of interest due
from January 1, 1992 through December 31, 1994. At any time prior to the due
date of the note, Mr. Sevin has the right to require the Company to repurchase
all or any of these shares (as adjusted for stock splits, dividends and the
like) for $6.35 per share (the Put Price), provided, however, that Mr. Sevin may
retain all shares of Class B Common Stock issued as stock dividends on the
shares without adjustments to the Put Price. In December 1986, 50,410 shares of
Class B Common Stock were issued as a stock dividend with respect to these
shares, which shares were exchanged in October 1992 for 80,202 Class A Common
Shares pursuant to the Exchange Offer discussed in Note 6. Upon the repurchase
of the shares, the Company has agreed to issue an eight-year option to Mr. Sevin
to purchase a like number of shares at the Put Price. Mr. Sevin has entered
into an agreement with the Company that he will not sell or otherwise transfer
to a third party any of the shares of Class A Common Stock or Class C Common
Stock received pursuant to this transaction until the note has been paid in
full.
In 1986, the Company issued stock options to purchase 105,000 shares and
70,000 shares, of the Class A Common Stock of the Company to Irik P. Sevin and
Malvin P. Sevin, respectively. The option price for the shares of Class A
Common Stock was $20 per share. These options were nontransferable and were to
expire on November 30, 1994. As a result of stock dividends in the form of
Class A Common Stock and Class B Common Stock declared by the Company in
December 1986, the exchange of Class C Common Stock for Class A Common stock in
July 1992, and special antidilution adjustments, the options held by Irik P.
Sevin then applied to 314,277 shares of Class A Common Stock and 78,569 shares
of Class C Common Stock and the options held by Malvin P. Sevin then applied to
209,517 shares of Class A Common Stock and 52,380 shares of Class C Common
Stock. The adjusted option price for each such share is $4.10. In November
1994, the options belonging to Malvin P. Sevin were exercised by his estate,
while Irik P. Sevin's options were extended to November 30, 1997 on generally
the same terms and conditions as the original options, however, Irik P. Sevin's
extended options will vest in three equal annual installments on each November
30th.
F-21
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Related Party Transactions--(Continued)
On December 28, 1987, the Company issued stock options to purchase 24,000
shares of Class A Common Stock and 6,000 shares of Class C Common Stock (after
giving retroactive effect to the exchange of Class C Common Stock for Class A
Common Stock in July 1992) to Irik P. Sevin. The option price for each such
share is $7.50. These options are not transferable and expire on January 1,
1996.
On March 3, 1989, the Company issued stock options to purchase 72,000
shares of Class A Common Stock and 18,000 shares of Class C Common Stock (after
giving retroactive effect to the exchange of Class C Common Stock for Class A
Common Stock in July 1992) to Irik P. Sevin and 48,000 shares of Class A Common
Stock and 12,000 shares of Class C Common Stock (after giving retroactive effect
to the exchange of Class C Common Stock for Class A Common Stock in July 1992)
to Malvin P. Sevin. The option price for each such share is $11.25. These
options are nontransferable. Malvin P. Sevin's options expired in March 1994
unexercised while the expiration date of Irik P. Sevin's options were extended
to March 3, 1999.
In March 1994 the Company issued stock options to Irik P. Sevin to purchase
100,000 shares of Class A Common Stock. The option price for each such share is
$8.50, the then market value of the stock on the date the options were granted.
These options are non-transferable and expire of March 31, 2004.
None of the aforementioned options of Irik and Malvin Sevin were granted
under a Stock Option Plan and no other options were authorized at the time the
options, were issued. All options granted vested upon issuance and were issued
at an exercise price that was estimated to be fair value at the date of grant.
On November 1, 1992, the Company authorized for issuance 50,000 options for
the purchase of Class A Common Stock to an officer of the Company, exercisable
at $11.00 per share, estimated to be the fair market value at the date of grant.
Options for 25,000 shares were issued on November 1, 1992 and options for 25,000
were issued in June 1993. Twenty percent of the options vest and become
exercisable on each of the next five anniversary dates of the issuances.
On August 23, 1994, the Company issued stock options to another officer of
the Company to purchase 50,000 shares of Class A Common Stock under the
Company's incentive stock option plan. The option price for each such share is
$7.50, the then market value of the stock on the date the options were granted.
Twenty percent of the options become exercisable on each of the next five
anniversary dates of the grant.
In connection with the Star Gas acquisition and in accordance with the
option agreements entered into during the Company's initial investment in Star
Gas, certain other investors of Star Gas received options on 732,840 shares of
the Company's Class A Common Stock exercisable through December 1999 at $10.14
per share in exchange for certain options they held in Star Gas.
F-22
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Related Party Transactions--(Continued)
Information relating to stock options during 1992, 1993 and 1994 are
summarized as follows:
Average
Number of shares Option Price
--------------------
Class A Class C Per Share Total
------- ------- ----------- ---------
Shares under option at
December 31,1992 (prices
range from $4.10 to $11.25
per share) 692,794 166,949 $ 5.67 $4,871,947
Granted 25,000 - 11.00 275,000
Exercised - - - -
------- ------- ------- ----------
Shares under option at
December 31, 1993 (prices
range from $4.10 to $11.25
per share) 717,794 166,949 5.82 5,146,947
Granted 882,480 - 8.17 8,652,347
Exercised (209,517) (52,380) 4.10 (1,073,781)
Expired (48,000) (12,000) 11.25 (675,000)
-------- ------- ------ ----------
Shares under option at
December 31, 1994 (prices
range from $4.10 to $11.25
per share) 1,342,757 102,569 $ 8.34 $12,050,513
========= ======= ====== ===========
Shares exercisable at
December 31, 1994 1,257,757 102,569 $ 8.30 $11,290,513
========= ======= ====== ===========
The existing holders of Class C Common Stock of the Company have entered
into a Shareholders' Agreement which provides that each will vote his shares to
elect certain designated directors. The Shareholders' Agreement also provides
for first refusal rights to the Company if a holder of Class C Common Stock
receives a bona fide written offer from a third party to buy such holder's Class
C Common Stock.
F-23
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Acquisitions
During 1992, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$41,500,000.
During 1993, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$13,600,000. In addition, during 1993, the Company acquired a 29.5% interest in
Star Gas Corporation for $16,000,000. (See note 12)
During 1994, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for those
acquisitions, accounted for by the purchase method, was approximately
$34,100,000.
Sales and net income of the acquired companies are included in the
consolidated statements of operations from the respective dates of acquisition.
Unaudited pro forma data giving effect to the purchased businesses and to
the acquisition of Star Gas Corporation, as described in Note 12, as if they had
been acquired on January 1 of the year preceding the year of purchase, with
adjustments, primarily for amortization of intangibles, and to give effect to
the subsequent Debenture and Stock Offerings (see note 5) as if the financings
had occurred on January 1, 1993, are as follows:
Year Ended December 31,
--------------------------------------------------
1992 1993 1994
-------- -------- --------
(in thousands, except per share data)
Net sales $604,491 $716,072 $666,021
Net loss $ (3,012) $(45,614) $ (6,589)
======== ======== ========
Net income (loss) per common share
Class A Common Stock $ (.81) $ (1.96) $ (.41)
Class B Common Stock 1.77 1.88 1.10
Class B Common Stock (.81) (1.96) (.41)
======== ======== ========
(12) Star Gas Acquisition
In December 1993, the Company acquired an approximate 29.5% equity interest
(42.8% voting interest) in Star Gas for $16.0 million in cash. Of such $16.0
million investment, $14.0 million was invested directly in Star Gas through the
purchase of Series A 8% pay-in-kind Cumulative Convertible Preferred Stock of
Star Gas, which is convertible into common stock of Star Gas, and $2.0 million
was invested through Star Gas Holdings, Inc. ("Holdings"), a newly formed
corporation. Each of the other investors in Star Gas granted the Company an
option, exercisable to December 31, 1998, to purchase such investor's interest
in Star Gas (or, in the case of Holdings, to purchase such investor's interest
in Holdings).
The Company was managing Star Gas' business under a Management Services
Agreement which provided for an annual cash fee of $500,000 and an annual bonus
equal to 5% of the increase in Star Gas' EBITDA over the fiscal year ended
September 30, 1993, payable in common stock of Star Gas pursuant to a formula
set forth in the Management Services Agreement. Star Gas also reimbursed the
Company for its expenses and the cost of certain Company personnel.
In December 1994, the Company exercised its right to purchase the remaining
outstanding common equity of Star Gas by paying $3.8 million in cash and issuing
approximately 2.5 million shares ($22.1 million) of the Company's Class A common
stock. The Company also incurred $0.9 million of acquisition related cost in
connection with the Star Gas acquisition.
The acquisition has been accounted for as a purchase, accordingly, the
purchase price has been allocated to the underlying assets and liabilities based
upon the Company's preliminary estimate of their respective fair value at the
date of acquisition. The fair value of assets acquired was $141.3 million
(including $3.3 million in cash) and liabilities and preferred stock was $109.5
million. The excess of the purchase price over the fair value of assets
acquired and liabilities assumed was $9.0 million and is being amortized over a
period of twenty-five years. The results of operations of the acquired company
has been included in the Company's results of operations from the date of
acquisition.
F-24
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Litigation
Propane is an explosive gas and serious personal injury and property damage
can occur in connection with its transportation, storage and use. A lawsuit has
been threatened against the Company based on a recent incident in the Midwest.
The Company believes that such lawsuit, if commenced, will not have a material
adverse effect on the Company. Additionally, in the ordinary course of
business, the Company is threatened with, or is named in, various other
lawsuits. The Company is not party to any litigation which individually or in
the aggregate could reasonably be expected to have a material adverse effect on
the Company.
(14) Segment Information
With the acquisition of Star Gas Corporation in December 1994, the
Company's operations are now classified into two business segments: Home
Heating Oil and Propane.
Home
Heating
Year Ended December 31, 1994 Oil Propane* Consolidated
---------------------------- ------- -------- ------------
(amounts in thousands)
Net Sales $535,568 $ 11,109 $546,677
Gross Profit 177,940 5,756 183,696
Operating Expenses 124,901 3,409 128,310
Depreciation and Amortization 32,145 622 32,767
Operating Income 20,894 1,725 22,619
Assets $247,879 $149,295 $397,174
* The Propane segment also incurred an equity loss, which is presented in the
Statement of Operations as a non-operating loss, of approximately $2.0
million representing its share of the loss of Star Gas from January 1, 1994
to the acquisition date of December 7, 1994.
F-25
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Disclosures About the Fair Value of Financial Instruments
Cash, Accounts Receivable, Notes Receivable and Other Current Assets, US
Treasury Notes held in a Cash Collateral Account, Working Capital Borrowings,
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value because of the short maturity
of these instruments.
Long-Term Debt, Subordinated Notes Payable and Cumulative Redeemable
Exchangeable Preferred Stock
The fair values of each of the Company's long-term financing instruments,
including current maturities, are based on the amount of future cash flows
associated with each instrument, discounted using the Company's current
borrowing rate for similar instruments of comparable maturity.
The estimated fair value of the Company's financial instruments are
summarized as follows:
At December 31, 1993 At December 31, 1994
-------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(amounts in thousands)
Long-term debt $ 50,080 $ 50,076 $ 36,126 $ 34,896
Star Gas long term debt - - 65,350 65,350
Subordinated notes payable 135,264 148,644 167,632 158,385
Senior notes payable - - 42,632 35,176
Star Gas preferred stock - - 19,966 19,966
Cumulative redeemable
exchangeable preferred stock 25,000 27,170 20,833 21,909
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-26
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Selected Quarterly Financial Data (Unaudited) (in thousands, except per
share data)
The seasonal nature of the Company's business results in the sale by the
Company of approximately 50% of its volume of home heating oil in the first
quarter and 30% of its volume of home heating oil in the fourth quarter of each
year. The Company generally realizes net income in both of these quarters and
net losses during the warmer quarters ending June and September.
Three Months Ended
---------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1993 1993 1993 1993 Total
--------- -------- --------- -------- ---------
Net sales $251,271 $ 71,978 $ 54,135 $161,142 $538,526
Gross profit 89,595 15,817 9,604 56,701 171,717
Income (loss) before taxes
and extraordinary item 39,269 (25,972) (29,571) 9,110 (7,164)
Net income (loss) $ 38,938 $(26,809) $(29,488) $ 8,928 $ (8,431)
======== ======== ======== ======== ========
Net income (loss) per
common share
Class A Common Stock $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
Class B Common Stock .47 .47 .47 .47 1.88
Class C Common Stock $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
======== ======== ======== ======== ========
Three Months Ended
-----------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1994 1994 1994 1994 Total
-------- -------- -------- -------- ---------
Net sales $266,793 $ 69,267 $ 49,231 $161,386 $546,677
Gross profit 103,530 17,616 6,905 55,645 183,696
Net income (loss) before
taxes, equity interest
and extraordinary item 50,417 (22,217) (32,678) 3,440 (1,038)
Net income (loss) $ 51,425 $(23,761) $(34,464) $ 2,535 $ (4,265)
======== ======== ======== ======== ========
Net income (loss) per
common share
Class A Common Stock $ 2.30 $ (1.11) $ (1.67) $ .11 $ (.37)
Class B Common Stock .41 .41 .28 - 1.10
Class C Common Stock $ 2.30 $ (1.11) $ (1.67) $ .11 $ (.37)
======= ======== ======= ======= ========
F-27
SCHEDULE VIII
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1992, 1993 and 1994
Additions
--------------------------------
Balance At Charged to Charged Other
Beginning Costs and to Other Changes Balance at
Year Description of Year Expenses Account Add(Deduct) End of Year
- ---- ----------- --------- --------- -------- ----------- -----------
1992 Accumulated amortization:
Customer lists $142,684,627 $ 23,496,438 $166,181,065
Deferred charges 16,914,781 5,363,321 22,278,102
------------- ------------ ------------
$159,599,408 $ 28,859,759 $188,459,167
------------ ------------ ------------
Allowance for doubtful
accounts $ 809,714 $ 2,444,581 $ 610,230(1) $(2,593,771)(2) $ 1,270,754
------------ ------------- --------- ----------- -------------
1993 Accumulated amortization:
Customer lists $166,181,065 $ 23,182,730 $189,363,795
Deferred charges 22,278,102 5,548,246 27,826,348
------------ ------------ ------------
$188,459,167 $ 28,730,976 $217,190,143
------------ ------------ ------------
Allowance for doubtful
accounts $ 1,270,754 $ 1,836,113 $ 713,773(1) $(2,794,438)(2) $ 1,026,202
------------- ------------- --------- ----------- -------------
1994 Accumulated amortization:
Customer lists $189,363,795 $ 19,748,453 $209,112,248
Deferred charges 27,826,348 6,176,653 34,003,001
------------- ------------- -------------
$217,190,143 $ 25,925,106 $243,115,249
------------ ------------ ------------
$ (2,210,114)(2)
531,913(3)
Allowance for doubtful -------------
accounts $ 1,026,202 $ 1,421,419 $ 999,805(1) $ (1,678,201) $ 1,769,225
------------- ------------- --------- ------------ -------------
- ---------------
(1) Recoveries
(2) Bad debts written off
(3) Allowance for doubtful accounts acquired from the Star Gas acquisition
F-28