PETROLEUM HEAT & POWER CO INC - 10-K405 - 19990325 - DIRECTORS_AND_OFFICERS
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors and executive officers of the Company
as of December 31, 1998 is set forth below:
Name Age Office
---- --- ------
Irik P. Sevin 51 Chairman of the Board, Chief Executive Officer,
and Director
William G. Powers, Jr. 45 President and Chief Operating Officer
C. Justin McCarthy 54 Senior Vice President - Operations
Audrey L. Sevin 72 Secretary and Director
George Leibowitz 61 Treasurer
James J. Bottiglieri 42 Vice President and Controller
Angelo Catania 49 Vice President and General Manager - Mid Atlantic
Region
Vincent De Palma 41 Vice President and General Manager - New York
Region
John D. Ryan 45 Vice President - Sales and Marketing
Matthew J. Ryan 41 Vice President - Supply
Peter B. Terenzio, Jr. 42 Vice President - Human Resources and Risk
Management
Paul Biddelman(1) 52 Director
Phillip Ean Cohen(1)(2) 50 Director
Thomas J. Edelman 47 Director
Stephen Russell 57 Director
Wolfgang Traber(2) 54 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
See Item 12 for information concerning a shareholder's agreement governing the
election of directors.
Irik P. Sevin has been a director of Petro since its organization in
October 1983 and Chairman of the Board of Petro since January 1993. Mr. Sevin
has been President of Petro, Inc. (a predecessor of Petro) since November 1979
and was President of Petro from 1983 through January 1997. Mr. Sevin has also
been the Chairman of the Board of Directors of Star Gas Corporation since
December 1993. Mr. Sevin was an associate in the investment banking division of
Kuhn Loeb & Co. and then Lehman Brothers Kuhn Loeb Incorporated from February
1975 to December 1978.
William G. Powers, Jr. has been President of Petro since December 1997.
Mr. Powers was President of Star Gas Corporation from December 1993 through
November 1997, and has been a Director of Star Gas Corporation since December
1997. Prior to joining Star Gas Corporation, he was employed by Petro from 1984
to 1993 where he served in various capacities, including Regional Operations
Manager and Vice President of Acquisitions. He has participated in over 90
acquisitions for Petro. From 1977 to 1983, he was employed by The Augsbury
Corporation, a company engaged in the wholesale and retail distribution of fuel
oil and gasoline throughout New York and New England and served as Vice
President of Marketing and Operations.
C. Justin McCarthy has been Senior Vice President--Operations of Petro,
Inc. since January 1979 and of the Company since its organization in October
1983. Prior to joining the Company, Mr. McCarthy was General Manager of the New
York City operations for Whaleco Fuel Oil Company from 1976 to 1979 and was
General Manager of the Long Island Division of Meenan Oil Co., Inc. from 1973 to
1976.
Audrey L. Sevin has been a director and Secretary of Petro since its
organization in October 1983. Mrs. Sevin has also been a director of Star Gas
Corporation since December 1993 and the Secretary of Star Gas Corporation since
June 1994. Mrs. Sevin was a director, executive officer and principal
shareholder of A. W. Fuel Co., Inc. from 1952 until its purchase by Petro Inc.
in May 1981.
George Leibowitz has been Treasurer of Petro since April 1997. From
November 1992 to March 1997 he was Senior Vice President--Finance and Corporate
Development of Petro. From
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1985 to 1992, Mr. Leibowitz was the Chief Financial Officer of Slomin's Inc., a
retail heating oil dealer. From 1984 to 1985, Mr. Leibowitz was the President of
Lawrence Energy Corp., a consulting and oil trading company. From 1971 to 1984,
Mr. Leibowitz was Vice President--Finance and Treasurer of Meenan Oil Co., Inc.
Mr. Leibowitz is a Certified Public Accountant.
James J. Bottiglieri has been Controller of Petro since 1994. He was
Assistant Controller of Petro from 1985 to 1994 and was elected Vice President
in December 1992. From 1978 to 1984, Mr. Bottiglieri was employed by a
predecessor firm of KPMG Peat Marwick LLP, a public accounting firm. Mr.
Bottiglieri has been a Certified Public Accountant since 1980.
Angelo Catania has been Vice President and General Manager of the
Mid-Atlantic Region since February 1998 and Vice President--Acquisitions of the
Company from March 1996 to January 1998. From 1990 to 1996 he was the Company's
Regional Operations Manager and Co-Director of Acquisitions. From 1984 to 1990
he was Chief Financial Officer and Vice President--Operations of Acme Oil Co.,
Inc., a retail heating oil dealer. From 1974 to 1984, Mr. Catania was Corporate
Controller and Assistant Secretary of Meenan Oil Co., Inc., a retail heating oil
dealer.
Vincent De Palma has been Vice President and General Manager--New York
Region of the Company since March 1997. Prior thereto he was a divisional vice
president and General Manager of the Long Island Region since April 1996. Prior
to joining Petro, Mr. De Palma was a Principal with McKinsey & Company, Inc.,
which he joined in 1984. From 1979 until 1982, Mr. De Palma held various
engineering positions with Exxon, USA.
John D. Ryan has been Vice President - Sales and Marketing since February
1998 and Vice President of Sales since August of 1996. From 1991 through 1996 he
held various positions within the Petro organization including Branch Manager,
Regional Marketing Manager, and Director of Sales. From 1985 through 1991 he
held various Marketing, Sales, and Operations Management positions with Meenan
Oil Co., Inc., a retail heating oil dealer. From 1977 through 1985 Mr. Ryan held
various Marketing and Sales Management positions within the resale marketing
division of the Mobil Corporation.
Matthew J. Ryan has been Vice President--Supply of the Company since
December 1992. He was Manager of Supply and Distribution of the Company from
1990 to 1992 and has been employed by the Company since 1987. From 1974 to 1987,
Mr. Ryan was employed by Whaleco Fuel Corp., a subsidiary of the Company which
was acquired in 1987.
Peter B. Terenzio, Jr. joined the Company in June 1995 as Vice
President--Human Resources and in December 1997 was given the added
responsibility of overseeing risk management. Prior to joining the Company, Mr.
Terenzio spent one year as the Vice President--Human Resources for Linens 'N
Things and 11 years in various operational and human resources positions for
Filene's Basement, including Senior Vice President, Human Resources and
Distribution from 1990 to 1994.
Paul Biddelman has been a director of Star Gas Corporation since October
1995. He also served in that capacity from December 1993 through June 1995. Mr.
Biddelman has been a director of Petro since October 1994. Mr. Biddelman has
been President of Hanseatic Corporation since December 1997. From April 1992
through December 1997, he was Treasurer of Hanseatic Corporation. Mr. Biddelman
joined Hanseatic from Clements Taee Biddelman Incorporated, a merchant banking
firm which he co-founded in 1991. From 1982 through 1990, he was a Managing
Director in Corporate Finance at Drexel Burnham Lambert Incorporated. Mr.
Biddelman also worked in corporate finance at Kuhn, Loeb & Co. from 1975 to
1979, and at Oppenheimer & Co. from 1979 to 1982. Mr. Biddelman is a director of
Celadon Group, Inc., Electronic Retailing Systems International, Inc.,
Institution Technologies, Inc., Natural Gas Vehicle Systems, Inc. and Premier
Parks, Inc.
Phillip Ean Cohen has been a director of Petro, Inc., a wholly-owned
subsidiary of the Company, since January 1979 and of the Company since its
organization in October 1983. Since 1985, Mr. Cohen has been Chairman of Morgan
Schiff & Co., Inc., an investment banking firm.
Thomas J. Edelman has been a Director of Petro since its organization in
October 1983. Mr. Edelman has also been a Director of Star Gas Corporation since
October 1995. He also served in that capacity from December 1993 through June
1995. Mr. Edelman has been the
24
Chairman and Chief Executive Office of Patina Oil & Gas Corporation since its
formation in 1996. Mr. Edelman also serves as Chairman of Range Resources
Corporation (formerly Lomak Petroleum, Inc.). He co-founded Snyder Oil
Corporation and was its President and a Director from 1981 through early 1997.
Prior to 1981, he was a Vice President of The First Boston Corporation. From
1975 through 1980, Mr. Edelman was with Lehman Brothers Kuhn Loeb Incorporated.
Mr. Edelman also serves as a Director of Paradise Music & Entertainment, Inc.,
and as a Trustee of The Hotchkiss School.
Stephen Russell has been a director of Petro since July 1996. He has been
Chairman of the Board and Chief Executive Officer of Celadon Group Inc., an
international transportation company, since its inception in July 1986. Mr.
Russell has been a member of the Board of Advisors of the Johnson Graduate
School of Management, Cornell University since 1983.
Wolfgang Traber has been a director of Petro since its organization in
October 1983. Mr. Traber has also been a director of Star Gas Corporation since
October 1995. He also served in that capacity from December 1993 through June
1995. Mr. Traber is Chairman of the Board of Hanseatic Corporation, a private
investment corporation in New York, New York. Mr. Traber is a director of Deltec
Asset Management Corporation, Blue Ridge Real Estate Company and M.M. Warburg &
Co.
Audrey L. Sevin is the mother of Irik P. Sevin. There are no other
familial relationships between any of the directors and executive officers.
In January 1999, Vincent De Palma, Vice President and General Manager--New
York Region resigned from the Company and was replaced by John D. Ryan, Vice
President - Sales and Marketing. While Mr. Ryan immediately assumed the position
of Vice President and General Manager--New York Region, no immediate replacement
for the Vice President - Sales and Marketing position was determined.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation paid by the Company and its
subsidiaries for services during fiscal 1996, 1997 and 1998 to each of the
Company's five most highly compensated executive officers:
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- ------------
Other Restricted
Name and Annual Stock All Other
Principal Position Year Salary Bonus Compensation Awards Options Compensation
------------------ ---- ------ ----- ------------ ------ ------- ------------
Irik P. Sevin 1998 $ 500,000(1) $ -- $ -- $ -- -- $ 9,600(2)
Chairman and 1997 387,500(1) -- -- -- -- 9,600(2)
Chief Executive Officer 1996 350,000 339,000 -- -- -- --
William G. Powers 1998 250,000 -- -- -- 200,000(3) 9,600(2)
President and 1997 20,833 450,000(4) -- -- -- --
Chief Operating Officer
C. Justin McCarthy 1998 243,768 -- 116,664(5) -- -- 9,600(2)
Senior Vice President 1997 243,768 -- 116,664(5) -- -- 9,600(2)
Operations 1996 230,000 89,597 48,610(5) -- 35,000(6) 13,391(7)
George Leibowitz 1998 374,104(5) -- -- -- -- 9,600(2)
Treasurer 1997 309,961(5) -- -- -- -- 9,600(2)
1996 225,000 -- -- -- -- --
Vincent De Palma 1998 235,000 -- -- -- -- 9,600(2)
Vice President and 1997 235,000 84,500 -- -- -- 9,292(2)
General Manager 1996 166,500 109,871(8) 80,512(9) 171,875(10) 15,000(11) --
New York Region
(1) This amount includes $150,000 for 1998 and $37,500 for 1997 of
compensation paid by the Star Gas Partnership (See "Certain Relationships
and Related Transactions - Compensation to Mr. Sevin from the Partnership"
section of this document).
(2) This amount represents the Company's contributions under its defined
contribution retirement plan.
(3) These options are exercisable to purchase shares of Class A Common Stock
of the Company. 50,000 options vested immediately, and each year beginning
on June 1, 1999 and ending on June 1, 2001, 50,000 options vest.
(4) This amount represents a signing bonus of $450,000 in connection with the
appointment of Mr. Powers as President and Chief Operating Officer
effective as of December 1, 1997. Mr. Power's current annual salary is
$250,000 with a 40% bonus potential. Amounts do not include Mr. Power's
compensation while he was an officer of Star Gas.
(5) This amount represents payments made pursuant to an employment contract
(See "Employment Contracts" section of this document).
(6) These options were exercisable to purchase shares of Class A Common Stock
of the Company with a vesting period of 20% each year beginning March 21,
1997. In December 1998 all such options were forfeited.
(7) Other compensation consists of amounts paid in lieu of contributions under
the Company's 401(k) plan in which Mr. McCarthy did not participate.
(8) This amount includes a signing bonus of $35,000.
(9) This amounts represent reimbursement by the Company for moving expenses in
connection with Mr. De Palma's relocation to Long Island, New York at the
Company's request, and the additional reimbursement to offset the tax
effects of such payments.
(10) In accordance to the employment agreement granting Mr. De Palma 25,000
restricted shares of the Company's Class A Common Stock, (See "Employment
Contracts" section of this document) 20% of such shares vest on each
anniversary date after April 15, 1996. The market price of the Company's
Class A Common Stock on April 15, 1996 was $6.875 per share. As of
December 31, 1998, 10,000 restricted shares had vested, and the aggregate
value of all 25,000 restricted shares using the December 31, 1998 closing
price of $0.75 per share, was $18,750.
(11) These options were exercisable to purchase shares of Class A Common Stock
of the Company with a vesting period of 20% each year beginning April 15,
1997. In December 1998 all such options were forfeited.
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The following table presents the value of unexercised options held by the named
executives at December 31, 1998:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Unexercised Value of
Options at December 31, 1998 In the Money Options at
Name Exercisable (E) /Unexercisable (U) December 31, 1998 (1)
---- ---------------------------------- ---------------------
Irik P. Sevin
Class A Common Stock 100,000 (E) / 0 (U)
William G. Powers
Class A Common Stock 50,000 (E) / 150,000 (U)
(1) Values are calculated by deducting the exercise price from the fair market
value of the stock at December 31, 1998.
Options Granted In Last Fiscal Year
Potential Realizable
Value at Assumed
% of Total Annual Rates of
Options Market Stock Price
Granted to Exercise Price On Appreciation
Options Employees Price the Date Expiration for Option Term
Name Granted (#) in 1998 ($ Share) of Grant Date 5% 10%
---- ----------- ------- --------- -------- ---- -- ---
William G. Powers 200,000(1) 100.0% $1.8125 $1.8125 5/31/08 $227,980 $577,740
(1) These options were issued in May 1998. 50,000 of these options are
immediately exercisable and on each June 1st, 50,000 of the remaining
option become exercisable.
Pension Plans
The Company maintained various retirement plans for substantially all non-union
employees. The executive officers of the Company were eligible to participate in
a qualified defined benefit pension plan (the "Pension Plan") which the Company
maintained for its non-union employees until December 31, 1996, at which time
the benefits covered under the plans were frozen.
The Pension Plan covered non-union employees who completed one year of service.
The Pension Plan generally provided to each participant who retires at age 65 an
annual benefit equal to 1.25% of the participant's average annual compensation
(defined as the average of such participant's highest five consecutive years
earnings out of the prior 10 years before retirement) multiplied by the number
of such participant's benefit years of service. A participant who has attained
age 55 and has completed five years of service may retire early and receive an
actuarial reduced benefit.
For the purposes of the Pension Plan, the following are the benefit years of
service and the covered compensation for the calendar year ended December 31,
1996, the year that the plans were frozen, for each individual named in the
preceding compensation table:
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Benefit Covered
Name Years Compensation
---- ------- ------------
Irik P. Sevin 18 $150,000
William G. Powers 9.5 150,000
C. Justin McCarthy 18 150,000
George Leibowitz 4 150,000
The following table shows estimated annual benefits which are not offset by
Social Security or any other reductions, payable in the form of a straight life
annuity under the Pension Plan to participants in the specified covered
compensation and benefit years of service classifications who retire having
reached their normal retirement dates.
* Exceeds Maximum Covered Compensation considered under the Plan of $150,000.
** Exceeds Maximum Benefit Payable under the Plan of $120,000.
The Company also maintained a non-qualified supplemental retirement plan (the
"Supplemental Retirement Plan") which benefited 15 employees and retirees,
including Irik P. Sevin, William G. Powers, C. Justin McCarthy, and George
Leibowitz.
Effective December 31, 1996, the Company froze the benefits provided by the
Pension Plan and the Supplemental Retirement Plan. Under the Pension Plan, as
frozen, the projected normal retirement pension benefits of Messrs. Sevin,
Powers, McCarthy, and Leibowitz are $5,150, $1,500, $3,265, and $638,
respectively. Under the Supplemental Retirement Plan, as frozen, Mr. Sevin's
normal retirement benefit would not increase, Mr. Powers' normal retirement
benefit would be increased by $125 per month, Mr. McCarthy's normal retirement
benefit would be increased by $1,764 per month, and Mr. Leibowitz's normal
retirement benefit would be increased by $507 per month.
Effective December 31, 1996, the Company adopted a defined contribution
retirement savings plan, in which the Company's executive officers are eligible
to participate. Under this plan, for the calendar year ended December 31, 1998
the Company contributed $9,600 each for Messrs. Sevin, Powers, McCarthy,
Leibowitz, and De Palma.
Meetings and Compensation of Directors
During fiscal 1998, the Board of Directors met six times. Messrs. Sevin,
Biddelman, Cohen, Russell, and Traber, and Mrs. Sevin attended all meetings; Mr.
Edelman attended all meetings except two. The Company pays each of its directors
other than Irik P. Sevin and Stephen Russell an annual fee of $12,000. Mr. Sevin
does not receive director fees and Mr. Russell due to his participation on the
Board's Executive Committee receives $24,000 annually. Directors are elected
annually and serve until the next annual meeting of Shareholders or until their
successors are elected and qualified. The Shareholders' Agreement governs
matters relating to the nomination of and voting for directors by the
Shareholders who are party thereto. Though the Company does not pay any other
direct or indirect compensation to directors in their capacity as such, it has
entered into certain transactions with certain of the directors. See "Certain
Transactions."
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Committees of the Board of Directors
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The members of each committee are appointed by the Board of Directors
for a term beginning after the first regular meeting of the Board of Directors
following the Annual Meeting of Shareholders and until their respective
successors are elected.
Audit Committee. The duties of the Audit Committee are to (i) recommend to the
full Board the auditing firm to be selected each year as the Company's
independent auditors, (ii) consult with the persons so chosen to be the
independent auditors with regard to the plan of audit, (iii) review, in
consultation with the independent auditors, their report of audit, or proposed
report of audit, and the accompanying management letter, if any, (iv) consult
with the independent auditors (periodically, as appropriate, out of the presence
of management) with regard to the adequacy of the internal accounting and
control procedures, (v) review the Company's financial condition and results of
operations with management and the independent auditors and (vi) review any
non-audit services and special engagements to be performed by the independent
auditors and consider the effect of such performance on the auditors'
independence.
The members of the Audit Committee are Phillip Ean Cohen and Paul Biddelman.
Members of the Audit Committee may not be employees of the Company. The Audit
Committee met in January, March, and December of 1998. Both members of the Audit
Committee were present at all meetings.
Compensation Committee. The duties of the Compensation Committee are (i) to
determine the annual salary, bonus and other benefits, direct and indirect, of
any and all named executive officers (as defined under Regulation S-K
promulgated by the Securities and Exchange Commission), (ii) prepare an annual
Report of the Compensation Committee for inclusion in the Company's Proxy
Statement in accordance with the requirements of Schedule 14A of the Securities
Exchange Act of 1934, as amended, (iii) to review and recommend to the full
Board any and all matters related to benefit plans covering the foregoing
officers and any other employees in the event such matters are appropriate for
stockholder approval, and (iv) to administer the Company's 1994 Stock Option
Plan as the Option Committee thereunder.
The members of the Compensation Committee are Wolfgang Traber and Phillip Ean
Cohen. The Compensation Committee met in March of 1998. Both members of the
Compensation Committee were present at the meeting.
Compensation Committee Interlocks and Insider Participation
Messrs. Wolfgang Traber and Phillip Ean Cohen, both of whom are directors of the
Company, served as the members of the Compensation Committee during 1998.
Employment Contracts
Agreement with Justin McCarthy. In July 1995, the Company entered into an
agreement with Mr. McCarthy which provides that if his employment is terminated
before August 1, 1996 for any reason he will receive a severance payment of
$350,000. The agreement also stipulates that if he is employed by the Company on
August 1, 1996: (i) the Company will make 36 monthly payments aggregating
$350,000 in addition to salary and bonus otherwise payable, and during such
period, he will continue to receive certain benefits (or their cash equivalent)
regardless whether he is employed by the Company, and (ii) commencing on such
date (or such later date as his employment is terminated), he will receive
monthly payments of $25,000 until such payments equal the balance in his
Supplemental Retirement Account (the "Account"), which shall equal $175,000,
$410,000, $645,000 and $1,000,000 if he is employed on August 1, 1996, 1997,
1998 and 1999, respectively; provided, that if he is employed until August 1,
1999 and his aggregate salary and bonuses for the prior three years exceed $1
million, the Account will be increased by the amount of such excess. Such
payments shall continue for so long as he is recovering payments from the
Account. Beginning August 1, 1996, for so long as he is employed, the Account
will accrue 5% per annum simple interest. If a change in control (as defined)
occurs after such monthly payments have commenced, the remaining balance of the
Account will become payable
29
promptly. If his employment is terminated prior to August 1, 1999 for any of the
following reasons, he will receive a single payment of $1 million in addition to
the payments described in clause (i) but in lieu of payments described in clause
(ii) above: death, permanent disability, termination of employment for any
reason within six months after a change in control or termination by the Company
without cause (as defined). In consideration of the foregoing, he will not
compete against the Company for the longer of two years after termination or the
number of months he receives supplemental retirement payments.
Agreement with George Leibowitz. In November 1992, the Company entered into an
employment agreement with Mr. Leibowitz. The agreement, as amended, had an
indefinite term, and was terminable by either party on 30 days' notice. During
the term of this agreement, Mr. Leibowitz received a base salary of $200,000,
subject to discretionary increases and bonuses. Simultaneously with the
execution of such employment agreement, the Company issued to Mr. Leibowitz an
option to purchase 25,000 shares of the Company's Class A Common Stock at $11
per share. On June 30, 1993, the Company issued Mr. Leibowitz an identical
option to purchase 25,000 shares of Class A Common Stock at $11 per share. 20%
percent of the options become exercisable on each of the first five anniversary
dates of the date of each grant. The Company has entered into a new employment
agreement with Mr. Leibowitz, effective April 1, 1997, which terminates the
prior employment agreement and provides (i) for an indefinite period of no less
than one year of 1/2 time employment at an annual salary of $112,750 and (ii)
payment of $18,750 per month for a period of 36 months.
Agreement with Vincent De Palma. In February 1996, the Company entered into an
employment agreement with Mr. De Palma which provided for a base annual salary
of $235,000, and an annual target bonus of 45%, subject to increase or decrease
depending on the achievement of certain management objectives and the
performance of the Company. Under the agreement Mr. De Palma's 1996 bonus was
guaranteed for the full target percentage, prorated based on his employment
tenure; and his 1997 bonus was guaranteed at a minimum of 80% of the target
percentage. The employment agreement also provided for an incentive signing
bonus of $35,000; reimbursement of relocation expenses; 15,000 options to
purchase the Company's Class A Common Stock at $6.875 per share, the then market
price, which are to vest 20% on each anniversary date of employment; and 25,000
shares of restricted Class A Common Stock, which are to vest at no cost to Mr.
De Palma also at a rate of 20% on each anniversary date of employment.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Ownership of Equity Securities in the Company
The table below sets forth as of February 5, 1999 the number of shares
beneficially owned by each director and each of the five most highly compensated
executive officers of the Company, each beneficial owner of, or institutional
investment manager exercising investment discretion with respect to, 5% or more
of the outstanding shares of capital stock, and all directors and officers as a
group, and the respective percentage ownership of the outstanding Class A Common
Stock and Class C Common Stock held by each such holder and group:
Percent
Number of Shares (1) Percent of Total of Total
-------------------- ---------------- Voting
Name Class A Class C Class A Class C Power(2)
---- ------- ------- ------- ------- --------
Wolfgang Traber (3) 1,834,951(4) 606,472(5) 7.69% 23.35% 15.85%
Paul Biddelman (3) 1,837,337(4) 597,434(5) 7.70 23.00 15.68
Hubertus Langen (6) 731,473 606,472(5) 3.07 23.35 13.64
Audrey L. Sevin (7) 1,876,862 477,716 7.87 18.39 13.35
Richard O'Connell (8) 1,018,745 302,461 4.27 11.64 8.11
Irik P. Sevin (7)(9) 720,226 201,641 3.01 7.76 5.48
Barcel Corporation (10) 616,853 151,231 2.59 5.82 4.27
Thomas J. Edelman (7) 653,312(11) 129,019 2.74 4.97 3.90
Phillip Ean Cohen (7) 679,262 113,423 2.85 4.37 3.64
Frank Russell Company (12) 1,643,400 -- 6.89 -- 3.30
Schneider Capital Management (13) 1,372,000 -- 5.75 -- 2.75
William G. Powers (7)(14) 50,000 -- (15) -- (15)
Stephen Russell (7)(14) 8,333 -- (15) -- (15)
George Leibowitz (7) -- -- -- -- --
C. Justin McCarthy (7) -- -- -- -- --
All officers and directors as a
group (15 persons) (16) 5,885,507 1,528,271 24.51% 58.84% 42.35%
(1) For purposes of this table, a person or group is deemed to have
"beneficial ownership" of any shares which such person has the right to
acquire within 60 days after February 5, 1999. For purposes of calculating
the percentage of outstanding shares held by each person named above, any
shares which such person has the right to acquire within 60 days after
February 5, 1999 are deemed to be outstanding, but not for the purpose of
calculating the percentage ownership of any other person.
(2) Total voting power means the total voting power of all shares of Class A
Common Stock and Class C Common Stock. This column reflects the percentage
of total voting power represented by all shares of Class A Common Stock
and Class C Common Stock held by the named persons.
(3) The address of such person is 450 Park Avenue, New York, NY 10022.
(4) Includes 1,834,951 shares held by Hanseatic Americas LDC, a Bahamian
limited duration company in which the sole managing member is Hansabel
Partners, LLC, a Delaware limited liability company in which the sole
managing member is Hanseatic Corporation, a New York corporation
("Hanseatic"). Messrs. Traber and Biddelman are executive officers of
Hanseatic and Mr. Traber holds in excess of a majority of the shares of
capital stock of Hanseatic.
(5) Includes 298,717 shares owned by each of Hanseatic and Tortosa
Vermogensverwaltungsgesellschaft mbH ("Tortosa"), a German corporation
owned and controlled by Mr. Langen, and as to which Hanseatic and Tortosa
each hold shared voting power.
(6) The address of such person is Heinrich-Vogl-Strasse 17, 81479, Munich,
Germany.
(7) The address of such person is c/o the Company at P.O. Box 1457, Stamford,
CT 06904.
(8) The address of such person is 31 rue de Bellechasse, 75007, Paris, France.
(9) Includes options to purchase 100,000 shares of Class A Common Stock.
(10) The address of this company is c/o Trust Dept., Lloyds Bank International,
King & George Streets, Nassau, Bahamas.
(11) Includes 76,000 shares of Class A Common Stock owned by Mr. Edelman's wife
and trusts for the benefit of his minor children.
(12) The address of this company is 909 A Street, Tacoma, WA 98402. The Frank
Russell Company is the parent company of a number of funds that hold
Petroleum Heat and Power Co., Inc. Class A Common Stock.
(13) The address of this company is 460 E. Swedesford Road, Suite 1080, Wayne,
Pennsylvania 19087-1801. Schneider Capital Management has dispositive
power over these shares.
(14) Represents options to purchase shares of Class A Common Stock.
(15) Indicates less than 1%.
(16) Includes 2,503 shares of Class A Common Stock respectively held by five
officers who are not among the five most highly compensated executive
officers of the Company.
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Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors, executive officers and holders of more than 10% of the
Company's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. The Company believes that during the
fiscal year ended December 31, 1997, its officers, directors and holders of more
than 10% of the Company's Common Stock complied with all Section 16(a) filing
requirements.
Based upon the Shareholders' Agreement (defined below), all or some of the
beneficial owners listed above may be deemed a "group" within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Messrs. Paul Biddelman, Phillip Ean Cohen, Thomas J. Edelman, Stephen Russell,
Irik P. Sevin, Wolfgang Traber and Mrs. Audrey L. Sevin are directors of the
Company, and Messrs. Irik P. Sevin, William G. Powers, C. Justin McCarthy,
George Leibowitz, Vincent De Palma, and Mrs. Audrey Sevin are officers of the
Company.
Shareholders' Agreement
Certain Shareholders of the Company have entered into a Shareholders' Agreement
(the "Shareholders' Agreement") which provides that they will vote their shares
to elect as directors of the Company up to five persons designated by a group
consisting of Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman, Phillip Ean
Cohen and Margot Gordon (the "Sevin Group") and three persons designated by
certain other Shareholders party to the agreement (the "Traber Group"). Each
group may designate its directors by action of the holders of a majority of the
Common Stock held by that group. The by-laws of the Company provide for the
election of not less than six and not more than 20 directors. The Board of
Directors has fixed the number of directors at seven. Of the present directors,
Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman, Phillip Ean Cohen and Paul
Biddelman have been designated by the Sevin Group and Wolfgang Traber and
Stephen Russell have been designated by the Traber Group. All such obligations
to vote for directors shall lapse if Irik P. Sevin and/or Audrey L. Sevin no
longer own, directly or indirectly, and/or have sole voting power over at least
51% of the shares of Class C Common Stock held by all members of the Sevin
Group.
The Shareholders' Agreement provides that the consideration per share which may
be received by a holder of Class C Common Stock upon a sale of shares of Class C
Common Stock may not exceed the average of the last reported sales prices per
share of the Class A Common Stock for the 90 trading days preceding the date of
such sale as reported on the Nasdaq National Market, and that any premium above
such consideration will inure to the benefit of the Company. In addition, the
Shareholders' Agreement provides that such provisions may not be modified
without the consent of the holders of 80% of the issued and outstanding shares
of Class A Common Stock. The Restated Articles of Incorporation of the Company
provide that any transfer of a share of Class C Common Stock (i) to any person
who is not a signatory to the Shareholders' Agreement or (ii) to any person
after the date on which the Shareholders' Agreement is for any reason no longer
in effect will automatically result in the conversion of such share into a share
of Class A Common Stock.
The Shareholders' Agreement (and the Company's Restated and Amended Articles of
Incorporation) provides that certain actions may not be taken without the
affirmative vote of a super-majority of 80% of the entire Board of Directors
(irrespective of vacancies) including at least one director who has been
designated by the Traber Group. These matters include (i) engaging in any
business other than the fuel oil distribution business, (ii) the merger or
consolidation of the Company with a non-subsidiary corporation, (iii) investment
of Company funds other than in specified securities, (iv) the sale, lease,
transfer or other disposition of a significant portion of the Company's assets
in any fiscal year other than the sale of petroleum products in the ordinary
course of business and those investments described in clause (iii) above, (v)
the liquidation, dissolution or winding up of the business of the Company, (vi)
payment of any compensation to directors, (vii) the incurrence of more than a
specified level of long-term debt, (viii) any issuance or repurchase of
securities or any right or option to purchase Common Stock or any security
convertible into capital stock, except in connection with the Company's dividend
policy and (ix) the making of, or any commitment for, any capital expenditures
or purchase of assets at more than specified levels. Action by Shareholders on
matters involving the sale of all or substantially all the Company's assets, the
32
Company's merger or consolidation (except the merger of a subsidiary into the
Company), the liquidation or dissolution of the Company, or any amendment to the
articles of incorporation does not require a super-majority vote of the
directors; however, the parties to the Shareholders' Agreement have agreed to
vote all of their Class C Common Stock against any proposal for such items
unless approved by a vote of at least 85% of the Class C Common Stock.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain Relationships and Related Transactions
Set forth below is information concerning certain transactions between the
Company and its Chairman and Chief Executive Officer and its other directors and
affiliates.
Sevin Note. 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 (the fair market value of such shares
established by the Pricing Committee pursuant to the Shareholders' Agreement).
Mr. Sevin paid for such shares by issuing a note (the "Sevin Note") to the
Company in the amount of the purchase price. Mr. Sevin has agreed not to sell or
otherwise transfer to a third party any of such shares until the Sevin Note is
paid in full. The Sevin Note was amended annually to defer the payment of
interest and to increase the amount of principal by the amount of interest
deferred each year. As of December 31, 1995, the principal amount due on the
Sevin Note would have been $1,751,468. In December 1995, Mr. Sevin agreed to pay
the principal amount thereof in five equal annual installments of $328,012
together with interest at the LIBOR rate in effect for each month plus 0.75%.
Payment may be made in cash or shares of Class A Common Stock valued at the
greater of $6.3479 per share or the Current Market Price thereof (as defined).
Mr. Sevin paid the first four installments in December 1995, 1996, 1997, and
1998 by delivering 59,078, 61,251, 61,689 and 58,268 shares, respectively, to
the Company for cancellation, thereby reducing the balance due under the Sevin
Note to $328,008. In connection with the agreement to repay the Sevin Note,
certain rights of Mr. Sevin to cause the Company to repurchase such shares at
$6.3479 per share, and to grant him an option to purchase a like number of
shares upon any such repurchase, were terminated.
Indemnification Agreements with Directors. The Company has entered into
Indemnification Agreements with each of its directors. The Agreements generally
provide that the Company will indemnify the directors against certain
liabilities arising out of legal actions brought or threatened against them for
their conduct on behalf of the Company to the fullest extent permitted by
applicable law. The Agreements contain provisions implementing the director's
rights thereunder with respect to, among other things: (i) indemnification of
expenses to a party who is wholly or partly successful, (ii) indemnification of
expenses of a witness, (iii) advancement of expenses, (iv) procedure for
determination of entitlement to indemnification, (v) certain presumptions, (vi)
remedies of an indemnitee, (vii) subrogation, (viii) establishment of a trust
and the funding thereof by the Company, upon the indemnitee's request, in the
event of Change in Control or Potential Change in Control (as defined therein),
and (ix) contribution in the event indemnification may be unavailable.
Star Gas Transaction. As of December 31, 1998, the Company, through its wholly
owned subsidiary Star Gas Corporation ("Star Gas"), has a 40.5% equity interest
in Star Gas, L.P. (the "Partnership") and is its general partner. On October 23,
1998, the Partnership and Petro jointly announced that they have signed a
definitive merger agreement pursuant to which Petro would be acquired by the
Partnership and would become a wholly-owned subsidiary of the Partnership ("the
Star Gas/Petro transaction"). It is anticipated that this acquisition will be
accounted for using the purchase method of accounting. This transaction would be
effected through Petro shareholders exchanging their approximate 26.5 million
shares of Petro Common Stock for an approximate 3.2 million limited partnership
units and General Partnership units of the Partnership which will be
subordinated to the existing Common Units of the Partnership.
Of the 3.2 million subordinated Partnership units anticipated to be distributed
to Petro shareholders, 2.5 million will be Senior Subordinated Units and 0.7
million will be Junior Subordinated Units and General Partnership Units. The
Senior Subordinated Units will be publicly registered and tradable (they are
expected to be listed on the New York Stock Exchange) and will be subordinated
in distributions to the Partnership's Common Units. The Junior Subordinated
Units and General Partnership Units will not be registered nor publicly tradable
and will be subordinated to both the Common Units and the Senior Subordinated
Units. The Senior Subordinated Units will be exchanged with holders of Petro's
Class A and Class C Common Stock, other then shares held by Audrey Sevin, Irik
Sevin, and two corporations controlled by Wolfgang Traber, whose shares will be
exchanged for Junior Subordinated Units and General Partnership Units.
34
Pursuant to the partnership subordination provision, distributions on the
Partnership's Senior Subordinated Units may be made only after distributions of
Available Cash on Common Units meet the Minimum Quarterly Distribution ("MQD")
requirement. Distributions on the Partnership's Junior Subordinated Units and
General Partner Units may be made only after distributions of Available Cash on
Common Units and Senior Subordinated Units meet the MQD requirement. The
Subordination Period will generally extend until the Partnership earns and pays
its MQD for three years. As a condition of the Star Gas/Petro transaction, the
Partnership agreement will be amended so that no distribution will be paid on
the Senior Subordinated Units, Junior Subordinated Units, or the General Partner
Units except to the extent Available Cash is earned from operations beginning
with the quarter ending December 31, 1999. The first possible distribution is
February 2000.
Like many other publicly traded master limited partnerships, the Partnership
contains a provision which provides the General Partner with incentive
distributions in excess of certain targeted amounts. This provision will be
modified so that should there be any such incentive distributions, they will be
made pro rata to the holders of Senior Subordinated Units, Junior Subordinated
Units, and General Partner Units. In connection with the Star Gas/Petro
transaction, the Senior Subordinated Units, Junior Subordinated Units and
General Partnership Units can earn, pro rata, 0.3 million additional Senior
Subordinated Units each year that Petro meets certain financial goals to a
maximum of 0.9 million additional Senior Subordinated Units.
Petro currently has a 40.5% equity interest in the Partnership. Prior to the
transaction, Petro owns 2.4 million Subordinated Units and a 2.0% interest in
the Partnership or the equivalent of 0.1 million units. As part of the
Transaction, these units will be contributed to the Partnership by Petro in
exchange for forty-two thousand Common Units and approximately 1.7 million
Senior Subordinated Units. The Common Units will be exchanged by Petro with the
holders of Petro Junior Convertible Preferred Stock and the Senior Subordinated
Units ultimately be exchanged with a portion of the holders of Petro's Common
Stock. After completion of the Star Gas/Petro transaction, the Petro
shareholders will own approximately 20% of the Partnership's equity through
Subordinated Units and General Partnership Units. The holders of the
Partnership's Common Units (including an estimated 9.1 million Common Units that
will be sold in the Partnership's $130 million public offering) will own an
approximate aggregate 80% equity interest in the Partnership following the
completion of the transaction. The General Partner of the Partnership will be a
newly organized Delaware limited liability company that will be owned by certain
officers and directors of Petro consisting of Irik Sevin, Audrey Sevin and two
entities affiliated with Wolfgang Traber.
Paul Biddelman, Thomas Edelman, Audrey L. Sevin, Irik P. Sevin and Wolfgang
Traber are directors of both the Company and of the general partner of the
Partnership.
Compensation to Mr. Sevin from the Partnership. In an attempt to recognize Mr.
Sevin's potential to assist the Partnership in its own growth through
acquisitions, as of October 1997 the Partnership entered into an arrangement
with Mr. Sevin pursuant to which he will receive compensation at the rate of
$150,000 per annum plus potential incentives based upon performance. This
arrangement replaces that part of the continuing reimbursement agreement between
the Company and the Partnership which covers Mr. Sevin's services so as to more
closely relate the amounts paid by the Partnership to the services rendered on
its behalf by Mr. Sevin. In addition, the Company has continued to be reimbursed
for all direct and indirect expenses incurred in connection with certain
administrative services performed for the Partnership.
Review of Transactions between the Company and its Affiliates. The Company's
Board of Directors reviews, at least once each year, the terms of all material
transactions and arrangements between the Company and its affiliates.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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, 1997 and 1998
Consolidated Statements of Operations, years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows, years ended
December 31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
2. The following financial schedule is submitted herewith:
Schedule II - Valuation and Qualifying Accounts - Years Ended
December 31, 1996, 1997 and 1998
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
3. (a) Exhibits
The Exhibits which are listed on the Exhibit Index attached hereto.
4. Reports on Form 8-K
None.
36
(a) 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.(7)
4.7 - Certificate of Designation creating a series of Preferred Stock
designated as Cumulative Redeemable Exchangeable 1993 Preferred
stock.(7)
4.8 - Certificate of Designation, as amended, creating a series of Preferred
Stock designated as 12 7/8% Exchangeable Preferred Stock due 2009. (6)
4.9 - Registration Rights Agreement, dated as of February 18, 1997, by and
between the registrant and Donaldson, Lufkin & Jenrette Securities
Corporation. (6)
4.10 - Certificate of Designation setting forth resolution creating a series
of preferred stock designated as 1998 Junior Convertible Preferred
Stock. (8)
4.11 - Certificate of Designation setting forth resolution creating a series
of preferred stock designated as Series C Exchangeable Preferred
Stock. (8)
4.12 - Fourth Amendment to Indenture with respect to the 10 1/8% Subordinated
Notes due 2003. (8)
4.13 - Second Amendment to Indenture with respect to 9 3/8% Subordinated
Debenture due 2006. (8)
4.14 - Second Amendment to Indenture with respect to the 12 1/4% Subordinated
Debenture due 2005. (8)
9.1 - Shareholders' Agreement dated as of July 1992, among the Company and
certain of its stockholders.(2)
10.1 - Fourth Amended and Restated Credit Agreement dated as of September 27,
1996 among the Company, certain banks party thereto and Chase
Manhattan Bank, as Agent. (8)
10.2 - Pension Plan, of Petroleum Heat and Power Co., Inc. (2)
10.3 - Amendment No. 1 to Pension Plans. (6)
10.4 - Supplemental Executive Retirement Plan of Petroleum Heat and Power
Co., Inc.(2)
10.5 - Amendment No. 1 to Supplemental Executive Retirement Plan. (6)
10.6 - Lease dated December 1, 1985 with respect to office and garage located
at 3600-3620 19th Avenue, Astoria, New York. (3)
10.7 - Lease dated October 26, 1990 with respect to office and garage located
at 1 Coffey Street, Brooklyn, New York. (2)
10.8 - Lease dated February 6, 1990 with respect to office and garage located
at 62 Oakland Avenue and 64 Oakland Avenue, East Hartford,
Connecticut.(2)
10.9 - 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)
10.10 - Lease dated December 1, 1990 with respect to garage located at 10
Coffey Street, Brooklyn, New York.(2)
10.11 - Lease dated November 8, 1996 with respect to office located at 467
Creamery Way, Exton, Pennsylvania. (6)
10.12 - 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)
10.13 - Agreement dated October 22, 1986 relating to purchase of 64,000 shares
of Class A Common Stock by Irik P. Sevin.(5)
10.14 - Agreement dated December 2, 1986 relating to stock options granted to
Irik P. Sevin.(5)
10.15 - Agreements dated December 28, 1987 and March 6, 1989 relating to stock
options granted to Irik P. Sevin and Malvin P. Sevin.(2)
10.16 - Lease dated June 17, 1993 with respect to office facilities located at
2187 Atlantic Street in Stamford, Connecticut. (7)
10.17 - First Amendment to the Company's 10 1/8% Subordinated Notes Indenture
dated as of January 12, 1994.(7)
37
10.18 - Employment Agreement dated July 21, 1994 with Thomas Isola.(8)
10.19 - Agreement dated April 4, 1994 relating to stock options granted to
Irik P. Sevin.(9)
10.20 - Employment Agreement dated June 2, 1994 with Alex Szabo. (6)
10.21 - Agreement dated December 31, 1995, in the amount of $1,751,468 due
December 31, 1999 from Irik P. Sevin to the Company. (6)
10.22 - Lease dated January 25, 1996 with respect to regional office located
at 48 Harbor Park Drive, Port Washington, New York. (8)
10.23 - Note Purchase Agreement dated as of February 1, 1997 re: 60,000,000 in
Senior Notes due October 1, 2002. (6)
10.24 - Third Amendment and Restatements of Purchase Agreements dated as of
February 1, 1997 re: 250,000 shares of 1989 Preferred Stock. (6)
10.25 - Sixth Amendment and Restatements of Note Agreement dated as of
February 1, 1997 re: 14.10% Senior and Subordinated Notes due January
15, 2001. (6)
10.26 - Consent Number 2 and Second Amendment dated as of October 15, 1997 to
the Fourth Amended and Restated Credit Agreement, dated as of
September 27, 1996, among Petroleum Heat and Power Co., Inc., the
several banks and financial institutions from time to time parties
thereto and The Chase Manhattan Bank, as agent for such Banks. (8)
10.27 - Lease Agreement by and between Capital Distributors Corp. a New York
Corporation and Petroleum Heat and Power Co., Inc. dated as of
February 7, 1997 for 55-60 58th Street, Maspeth, New York 11378. (8)
10.28 - Fifth Amendment dated as of July 15, 1998 to the Fourth Amended and
Restated Credit Agreement, dated as of September 27, 1996, among
Petroleum Heat and Power Co., Inc., the several banks and financial
institutions from time to time parties thereto and The Chase Manhattan
Bank, as agent for such Banks. (8)
11.0 - Computation of Per Share Earnings.(10)
21.0 - Subsidiaries of Registrant.(10)
23.1 - Consent of KPMG LLP (10)
27.0 - Financial Data Schedule (10)
(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 an Exhibit to the Company's Periodic Annual Report on Form 10-K
File No. 1-9358, and incorporated herein by reference.
(7) Filed as Exhibits to the Registration Statement on Form S-2, File No.
33-72354, and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Periodic Report on Form 10-Q and
incorporated herein by reference.
(9) Filed as Exhibits to the Registration Statement on Form S-2, File
No.33-57059, and incorporated herein by reference.
(10) Filed herein.
38
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 25, 1999
PETROLEUM HEAT AND POWER CO., INC.
(Registrant)
By: Irik P. Sevin
Irik P. Sevin
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 Chairman of the Board March 25, 1999
------------------------ Chief Executive Officer,
Irik P. Sevin Chief Financial and
Accounting Officer
and Director
Audrey L. Sevin Secretary and Director March 25, 1999
------------------------
Audrey L. Sevin
Paul Biddelman Director March 25, 1999
------------------------
Paul Biddelman
Phillip Ean Cohen Director March 25, 1999
------------------------
Phillip Ean Cohen
Thomas J. Edelman Director March 25, 1999
------------------------
Thomas J. Edelman
Stephen Russell Director March 25, 1999
------------------------
Stephen Russell
Wolfgang Traber Director March 25, 1999
------------------------
Wolfgang Traber
39
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, 1997 and 1998 F-3
Consolidated Statements of Operations, Years ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency),
Years ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Schedule for the years ended December 31, 1996, 1997 and 1998:
II - Valuation and Qualifying Accounts F-28
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
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, 1997 and
1998, 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, 1998. In connection with our audits 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, 1997 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 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, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Stamford, Connecticut
February 16, 1999
F-2
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
----------------------
1997 1998
--------- ---------
Assets
Current assets:
Cash $ 2,390 $ 2,004
Restricted cash -- 4,900
Accounts receivable (net of allowance of $980 and $944) 78,987 56,845
Inventories 16,285 17,534
Prepaid expenses 6,203 5,978
Notes receivable and other current assets 1,259 1,045
--------- ---------
Total current assets 105,124 88,306
--------- ---------
Property, plant and equipment - net 30,615 28,124
Intangible assets (net of accumulated amortization
of $285,850 and $306,822)
Customer lists 69,265 52,596
Deferred charges 24,924 21,849
--------- ---------
94,189 74,445
--------- ---------
Investment in and advances to the Star Gas Partnership 27,499 20,755
Deferred gain on Star Gas Transaction (19,964) (19,964)
--------- ---------
7,535 791
--------- ---------
Restricted cash 9,350 6,900
Other assets 1,033 965
--------- ---------
$ 247,846 $ 199,531
========= =========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Working capital borrowings $ 3,000 $ --
Current debt 2,391 8,021
Current maturities of redeemable preferred stock 4,167 4,167
Accounts payable 14,759 10,129
Customer credit balances 20,767 27,884
Unearned service contract revenue 15,321 15,430
Accrued expenses and other liabilities 32,283 31,652
--------- ---------
Total current liabilities 92,688 97,283
--------- ---------
Supplemental benefits and other long-term liabilities 5,043 4,984
Pension plan obligation 5,702 5,780
Notes payable and other long-term debt 16,507 8,381
Senior notes payable 63,100 62,050
Senior subordinated and subordinated notes payable 209,350 208,300
Redeemable and exchangeable preferred stock 32,489 28,578
Common stock redeemable at option of stockholder (83 Class A
and 21 Class C shares and 41 Class A and 10 Class C shares) 656 328
Note receivable from stockholder (656) (328)
Stockholders' equity (deficiency):
Preferred stock-no par value; 1,000 shares authorized,
0 and 787 shares issued and outstanding -- --
Class A common stock-par value $.10 per share; 60,000 shares
authorized, 23,606 and 23,865 shares issued and outstanding 2,361 2,387
Class B common stock-par value $.10 per share; 6,500 shares
authorized, 11 and 11 shares issued and outstanding 1 1
Class C common stock-par value $.10 per share; 5,000 shares
authorized, 2,577 and 2,587 shares issued and outstanding 258 259
Additional paid-in capital 81,358 83,024
Deficit (256,365) (296,759)
Accumulated other comprehensive income (4,646) (4,737)
--------- ---------
Total stockholders' equity (deficiency) (177,033) (215,825)
--------- ---------
$ 247,846 $ 199,531
========= =========
See accompanying notes to consolidated financial statements.
F-3
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
Years Ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
Net sales $ 608,161 $ 548,141 $ 408,019
Costs and expenses
Cost of sales 427,388 379,748 265,526
Selling, general and administrative expenses 105,601 102,377 87,268
Direct delivery expense 33,102 30,006 24,613
Restructuring charges 1,150 2,850 535
Corporate identity expenses 2,659 4,136 152
Star Gas transaction expenses -- -- 4,823
Pension curtailment expense 557 654 --
Amortization of customer lists 18,611 17,903 16,669
Depreciation of plant and equipment 6,574 7,204 6,969
Amortization of deferred charges 2,888 3,175 2,899
Provision for supplemental benefits 873 565 358
--------- --------- ---------
Operating income (loss) 8,758 (477) (1,793)
Other income (expense):
Interest expense (34,669) (33,813) (33,037)
Amortization of debt issuance cost (1,872) (1,464) (1,404)
Interest income 2,257 2,145 2,305
Other 1,842 11,445 112
--------- --------- ---------
Loss before income taxes, equity interest
and extraordinary item (23,684) (22,164) (33,817)
Income taxes 500 500 400
--------- --------- ---------
Loss before equity interest
and extraordinary item (24,184) (22,664) (34,217)
--------- --------- ---------
Share of income (loss) of Star Gas
Partnership 2,283 (235) (1,120)
--------- --------- ---------
Loss before extraordinary item (21,901) (22,899) (35,337)
--------- --------- ---------
Extraordinary item-loss on early
extinguishment of debt (6,414) -- --
--------- --------- ---------
Net loss $ (28,315) $ (22,899) $ (35,337)
========= ========= =========
Preferred Stock dividends (2,389) (4,644) (5,057)
--------- --------- ---------
Net loss applicable to common stock $ (30,704) $ (27,543) $ (40,394)
========= ========= =========
Basic and Diluted losses per common
share before extraordinary item:
Class A and C Common Stock $ (0.95) $ (1.06) $ (1.52)
Extraordinary loss per common share:
Class A and C Common Stock (0.25) -- --
Basic and Diluted losses per common share:
Class A and C Common Stock $ (1.20) $ (1.06) $ (1.52)
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, 1996, 1997 and 1998
(In thousands)
Common Stock
---------------------------------------------------------
Class A Class B Class C Accumulated
--------------------------------------------------------- Additional Other
No. of No. of No. of Paid-In Comprehensive
Shares Amount Shares Amount Shares Amount Capital Deficit Income Total
------ ------ ------ ------ ------ ------ ------- ------- ------ -----
------------------------------------------------------------------------------------------------------------
Balance at 12/31/95 22,653 $2,266 14 $1 2,558 $256 $76,418 $(174,972) $(4,872) $(100,903)
Net loss (28,315) (28,315)
Other comprehensive
income:
Minimum pension
liability adj. (1,193) (1,193)
----------
Comprehensive income (29,508)
Cash dividends
declared and paid
(See notes 7 & 8) (13,880) (13,880)
Cash div. payable
(See notes 7 & 8) (3,857) (3,857)
Class A Common Stock
issued under the
Div. Reinvest. Plan 302 30 2,034 2,064
Other (24) (2) (3) -- 9 1 352 351
------------------------------------------------------------------------------------------------------------
Balance at 12/31/96 22,931 2,294 11 1 2,567 257 78,804 (221,024) (6,065) (145,733)
Net loss (22,899) (22,899)
Other comprehensive
income:
Minimum pension
liability adj. 1,419 1,419
----------
Comprehensive income (21,480)
Cash dividends
declared and paid
(See notes 7 & 8) (10,479) (10,479)
Cash div. payable
(See notes 7 & 8) (1,963) (1,963)
Class A Common Stock
issued under the
Div. Reinvest. Plan 691 69 2,331 2,400
Other (16) (2) 10 1 223 222
------------------------------------------------------------------------------------------------------------
Balance at 12/31/97 23,606 2,361 11 1 2,577 258 81,358 (256,365) (4,646) (177,033)
Net loss (35,337) (35,337)
Other comprehensive
income:
Minimum pension
liability adj. (91) (91)
----------
Comprehensive income (35,428)
Cash dividends
declared and paid
(See notes 7 & 8) (5,057) (5,057)
Class A Common Stock
issued under the
Div. Reinvest. Plan 271 27 583 610
Jr. Convertible
preferred stock
issued in connection
with exchange offer 1,216 1,216
Other (12) (1) 10 1 (133) (133)
------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 23,865 $2,387 11 $1 2,587 $259 $83,024 $(296,759) $(4,737) $(215,825)
============================================================================================================
See accompanying notes to consolidated financial statements.
F - 5
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands) Years Ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
Cash flows from (used in) operating activities:
Net loss $(28,315) $(22,899) $(35,337)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Amortization of customer lists 18,611 17,903 16,669
Depreciation of plant and equipment 6,574 7,204 6,969
Amortization of deferred charges 2,888 3,175 2,899
Amortization of debt issuance costs 1,872 1,464 1,404
Share of (income)loss of Star Gas (2,283) 235 1,120
Provision for losses on accounts receivable 1,882 1,853 1,419
Provision for supplemental benefits 873 565 358
Loss on early extinguishment of debt 6,414 -- --
Gain on sale of business (1,781) (11,284) --
Other 105 (186) (126)
Change in Operating Assets and Liabilities, net of
effects of acquisitions and dispositions:
Decrease in accounts receivable 117 12,522 20,723
Decrease (increase) in inventory (1,671) 5,799 (1,249)
Decrease (increase) in other current assets (575) 845 439
Decrease (increase) in other assets (86) (123) 68
Decrease in accounts payable (3,836) (4,229) (4,630)
Increase (decrease) in customer credit balances (2,142) 3,299 7,117
Increase (decrease) in unearned service contract revenue (147) (67) 109
Increase (decrease) in accrued expenses (2,352) 2,568 1,332
-------- -------- --------
Net cash provided by (used in) operating activities (3,852) 18,644 19,284
-------- -------- --------
Cash flows from (used in) investing activities:
Minimum quarterly distributions from Star Gas Partnership 4,313 5,507 4,367
Acquisitions (28,493) (16,252) --
Capital expenditures (6,874) (6,980) (4,584)
Proceeds from sale of business 4,073 15,571 --
Net proceeds from sales of fixed assets 788 1,174 218
-------- -------- --------
Net cash provided by (used in) investing activities (26,193) (980) 1
-------- -------- --------
Cash flows from (used in) financing activities:
Net proceeds from sale of Star Gas Partnership units -- -- 1,271
Net proceeds from issuance of common stock 2,064 2,400 610
Net proceeds from issuance of preferred stock -- 28,323 --
Repayment of senior notes payable (1,050) (1,050) (1,050)
Repurchase of subordinated notes (49,612) (1,050) (1,050)
Redemption of preferred stock (4,167) (4,167) (4,167)
Repurchase of common stock (39) -- --
Credit facility borrowings 51,000 16,000 5,000
Credit facility repayments (29,000) (35,000) (8,000)
Net decrease (increase) in restricted cash 3,000 (6,350) (2,450)
Cash dividends paid (17,702) (14,336) (7,020)
Other 523 (3,301) (2,815)
-------- -------- --------
Net cash provided by (used in) financing activities (44,983) (18,531) (19,671)
-------- -------- --------
Net (decrease) in cash (75,028) (867) (386)
Cash at beginning of year 78,285 3,257 2,390
-------- -------- --------
Cash at end of year $ 3,257 $ 2,390 $ 2,004
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 37,007 $ 33,879 $ 33,304
Income taxes 215 140 162
Noncash investing and financing activities:
Issuance of notes payable -- -- --
Acquisitions -- (26,467) --
Asset conveyance to Star Gas Partnership -- 26,467 --
Star Gas Partnership units received pursuant to asset conveyance -- (3,467) --
Increase in tax liability from asset conveyance -- 3,467 --
Issuance of junior preferred stock pursuant to subordinated
bond and cumulative redeemable preferred stock exchange -- -- 1,216
Increase in deferred charges -- -- (1,216)
See accompanying notes to consolidated financial statements.
F-6
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(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 currently operates in twenty-six major markets in the
Northeast, including the metropolitan areas of Boston, New York City, Baltimore,
Providence, and Washington DC serving approximately three hundred and forty
thousand customers in those areas. Credit is granted to substantially all of
these customers with no individual account comprising a concentrated credit
risk.
The Company is primarily engaged in the retail distribution of #2 home heating
oil, related equipment services, and equipment sales to residential and
commercial customers. It operates from twenty-four branches / depots and
thirteen satellites primarily in the Northeast United States. #2 home heating
oil is principally used by the Company's residential and commercial customers to
heat their homes and buildings, and as a result, weather conditions have a
significant impact on the demand for the product. Actual weather conditions can
vary substantially from year to year, and accordingly can significantly affect
the Company's performance.
In addition, the Company through its wholly owned subsidiary Star Gas
Corporation ("Star Gas"), has a 40.5% equity interest in Star Gas, L.P. (the
"Partnership") which is being accounted for by the equity method. Additionally,
Star Gas is the general partner of the Partnership. The Partnership is primarily
engaged in the retail distribution of propane and related equipment and supplies
to residential, commercial, industrial, agricultural and motor fuel customers.
The Partnership believes that it is the eighth largest retail propane
distributor in the United States, serving approximately one hundred and
sixty-six thousand customers from fifty-five branch locations and thirty-two
satellite storage facilities in the Midwest and nineteen branch locations and
fourteen satellite storage facilities in the Northeast. The Partnership also
serves approximately thirty wholesale customers from its wholesale operation in
southern Indiana (see note 2 and 3).
Comprehensive Income
The Company's comprehensive income consists of net income and other
comprehensive income, the sole component of which is the minimum pension
liability adjustment.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
Sales of fuel oil and heating equipment 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.
F-7
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies (Continued)
Equity Accounting for Star Gas Investment
The Company has accounted for its investment in the Partnership using the equity
method of accounting since the Partnership's initial public offering in December
1995 (see note 2 and 3). The Company believes that the equity method is
appropriate due to the Partnership Agreement which places significant
restrictions on the General Partner's authority to make Partnership decisions
such as possessing or assigning specific partnership property, admitting a new
partner, or transferring its interest as General Partner. The Partnership
Agreement also allows for the removal of the General Partner by a 2/3 vote of
the common unitholders. In addition, Petro has no voting rights, except to the
extent that the Company holds Common Units, which are minimal.
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,
---------------------
1997 1998
---- ----
Fuel oil $ 9,246 $ 11,158
Parts and equipment 7,039 6,376
========= =========
$ 16,285 $ 17,534
========= =========
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.
Deferred charges include goodwill and payments related to covenants not to
compete. The covenants are amortized using the straight-line method over the
terms of the related contracts 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.
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 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.
Advertising Expenses
Advertising costs are expensed as they are incurred. Advertising expenses were
$2,947, $3,294 and $2,503 for 1996, 1997 and 1998 respectively.
Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to an unrelated party a gain is
recognized only if there are no significant uncertainties regarding realization.
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.
F-8
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies - (Continued)
Concentration of Revenue with Guaranteed Maximum Price Customers
Approximately 25% of the Company's heating oil volume is sold to individual
customers under an agreement pre-establishing the maximum sales price of oil
over a twelve month period. The maximum price at which oil is sold to these
capped-price customers is renegotiated in the Spring of each year in light of
then current market conditions. The Company currently enters into forward
purchase contracts and futures contracts for a substantial majority of the oil
it sells to these capped-price customers in advance and at a fixed cost. Should
events occur after a capped-sales price is established that increases the cost
of oil above the amount anticipated, margins for the capped-price customers
whose oil was not purchased in advance would be lower than expected, while those
customers whose oil was purchased in advance would be unaffected. Conversely,
should events occur during this period that decrease the cost of oil below the
amount anticipated, margins for the capped-price customers whose oil was
purchased in advance could be lower than expected, while those customers whose
oil was not purchased in advance would be unaffected or higher than expected.
For the year ended December 31, 1997 the Company purchased put options to hedge
the risk associated with a decrease in heating oil prices in situations where
forward purchase contracts and futures contracts had been entered into to match
capped-price customer commitments. The cost of acquiring these options was
recognized in cost of goods sold over the life of each option agreement. For the
year ended December 31, 1998 the Company did not purchase similar put options.
In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
contracts are classified as a hedge when the item to be hedged exposes the
company to price risk and the futures contract reduces that risk exposure.
Future contracts that relate to transactions that are expected to occur are
accounted for as a hedge when the significant characteristics and expected terms
of the anticipated transactions are identified and it is probable that the
anticipated transaction will occur. If a transaction does not meet the criteria
to qualify as a hedge, it is considered to be speculative. Any gains or losses
associated with futures contracts which are classified as speculative are
recognized in the current period. If a futures contract that has been accounted
for as a hedge is closed or matures before the date of the anticipated
transaction, the accumulated change in value of the contract is carried forward
and included in the measurement of the related transaction. Option contracts are
accounted for in the same manner as futures contracts. At December 31, 1997 and
1998 the Company had futures contracts to buy #2 home heating oil with notional
amounts totaling $11,925 and $17,406, and futures contracts to sell #2 home
heating oil with notional amounts totaling $5,061 and $0 respectively.
At December 31, 1997 the Company had put options outstanding with an aggregate
notional value of $14,438 to hedge the risk associated with approximately 50% of
the 33.8 million gallons of heating oil forward purchase contracts and 20.6
million gallons under futures contracts, that expired at various times with no
contract expiring later than April 1998. At December 31, 1998 the Company did
not have similar put options, but did have 15.7 million gallons of heating oil
forward purchase contracts and 38.8 million gallons of futures contracts, which
expire at various times with no contract expiring later than May 1999. The
unrealized losses on the Company's hedging activity was ($2.7) million and
($6.0) million at December 31, 1997 and 1998 respectively. This hedging activity
is designed to help the Company achieve its planned margins and represents
approximately 23% and 24% of the expected total #2 oil volume for the
corresponding 1997 and 1998 period.
The carrying amount of all hedging financial instruments at December 31, 1997
and 1998 was $488 and $3,009 respectively, and were included in Prepaid Expenses
on the Consolidated Balance Sheet. The risk that counterparties to such
instruments may be unable to perform is minimized by limiting the counterparties
to major oil companies and major financial institutions, including the New York
Mercantile Exchange. The Company does not expect any losses due to such
counterparty default.
Corporate Identity Expenses
Corporate identity expenses represent the costs associated with the Company's
brand identity program, implemented first in Long Island in 1996 and in the
Company's Metro New York and Mid Atlantic regions in 1997. These expenses
include the cost of repainting all delivery and service vehicles to reflect the
Company's new identity, and are expensed as they are incurred.
F-9
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies - (Continued)
Star Gas Transaction Expenses
Star Gas transaction expenses represent costs incurred in association with the
Company's previously announced business combination with the Partnership (see
note 3). These expenses include legal, printing, advisory, and other
professional charges incurred to accomplish this business combination, and are
expensed as they are incurred. The Company estimates that it will incur a total
of $7.5 million to $8.5 million of costs associated with this transaction. If
this transaction is successfully completed, the Partnership will reimburse the
Company approximately $7.0 million for these expenses.
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 reasonably estimated.
Income Taxes
The Company files a consolidated Federal Income Tax return with its
subsidiaries. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Basic and Diluted Earnings (Losses) per Common Share
The company computes basic and diluted earnings per share in accordance with the
requirements of the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128 - "Earnings Per Share". When the
impact of converting dilutive securities are antidilutive, the computation
treats such conversions as having no effect and presents basic and diluted
earnings per share as the same amount during periods with losses (see note 17).
Accounting Changes
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130 - "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying changes
in equity that results from non-owner transactions and events. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 130 and has made the appropriate disclosures.
In June 1997 the FASB issued SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires disclosures about
segments of an enterprise and related information such as the different types of
business activities and economic environments in which a business operates. This
statement is effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS No. 131 and in accordance with the Statement has disclosed
its only reportable segment.
In February 1998 the FASB issued SFAS No. 132 - "Employer's Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 attempts to
standardize the disclosure requirements for pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted SFAS No. 132 and has made the appropriate
disclosures.
In June 1998 the FASB issued SFAS No. 133 - "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company is assessing the impact and disclosure
requirements of SFAS No. 133.
F-10
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(2) Star Gas Investment
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. 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. 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 was accounted for as a purchase and accordingly
the purchase price was allocated to the underlying assets and liabilities based
upon the Company's 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 was being amortized over a period of
twenty-five years.
The Company's investment in Star Gas was accounted for using the equity method
from December 23, 1993 to December 7, 1994, at which time the Company exercised
its right to purchase the remaining outstanding common equity of Star Gas (the
"Star Gas Acquisition"). From December 8, 1994 to December 19, 1995 while Star
Gas was a wholly owned subsidiary of Petro, Star Gas operations, assets and
liabilities were included in the consolidated financial statements of the
Company.
In November 1995, Star Gas organized Star Gas Partners, L.P. a Delaware limited
partnership (the "Partnership") and Star Gas and the Partnership together
organized Star Gas Propane, L.P., a Delaware limited partnership ("Operating
Partnership"). In December 1995, Petro transferred substantially all of its
propane assets and liabilities to Star Gas, and Star Gas transferred ("Star Gas
Conveyance") substantially all of its assets (including the propane assets
transferred by Petro) in exchange for a general partnership interest in the
Operating Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of Star Gas. The total value of the assets
conveyed to the Operating Partnership was $156.5 million. Concurrently with the
Star Gas Conveyance, Star Gas issued approximately $85.0 million in First
Mortgage Notes to certain institutional investors. In connection with the Star
Gas Conveyance, the Operating Partnership assumed $91.5 million of Star Gas
liabilities including the $85.0 million of First Mortgage Notes; however, Star
Gas retained approximately $83.7 million in cash from the proceeds of the First
Mortgage Notes. As a result of the foregoing transactions ("1995 Star Gas
Transaction"), Star Gas received a 46.5% equity interest in the Partnership, and
Petro received distributions from the public sale of 2.6 million Master Limited
Partnership units at $20.46 per share for $51.0 million in cash. In order for
the Partnership to begin operations with $6.2 million of working capital, Star
Gas and the Operating Partnership agreed that the amount of debt assumed by the
Operating Partnership would be adjusted upward or downwards to the extent that
the working capital of the Operating Partnership at closing was more or less
than $6.2 million. At closing, the net working capital of the Operating
Partnership was $9.2 million and as a result, $3.0 million was paid to Petro in
January 1996.
In accordance with the Company's accounting policies, the Company deferred the
gain of approximately $20.0 million for this transaction because the Company
holds subordinate units which do not have a readily ascertainable market price
creating an uncertainty regarding realization, and due to the fact that Star Gas
as general partner had a $6.0 million additional capital contribution obligation
to enhance the Partnership's ability to make quarterly distributions on the
common units (at December 31, 1998, these funds were no longer restricted at the
Star Gas level and had been released to Petro since the quarterly guarantee
provisions were fulfilled). The Company will recognize the gain from this
transaction when the Company's subordinated units convert into common units in
accordance with the terms of the partnership agreement. In general, full
conversion of subordinated units to common units will take place no earlier than
the first day of any quarter beginning on or after January 1, 2001, based upon
the satisfaction of certain performance criteria for a period of at least three
non-overlapping consecutive four-quarter periods immediately preceding the
conversion date.
In October 1997, Star Gas acquired the outstanding stock of an unaffiliated Ohio
propane company ("1997 Star Gas Transaction") and in an equal exchange
subsequently transferred all of such assets to the Partnership for the
assumption of $23 million of debt incurred by Star Gas in connection with this
acquisition, a 0.00027% general partnership interest in the Partnership along
with one hundred and forty-eight thousand Partnership common units, and the
assumption by Star Gas of approximately $3.5 million of future income tax
liabilities resulting from this asset conveyance. Subsequently in December 1997,
the Company sold twenty-four thousand common units and in January 1998 sold
sixty-three thousand common units.
F-11
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(2) Star Gas Investment (Continued)
As a result of the Partnership's secondary public offering in December 1997 a
difference of $2.4 million between the Company's carrying value of its
investment in the Partnership and its ownership percentage of the underlying net
assets of the Partnership, is being amortized to income over twenty-five years.
As of December 31, 1998 Petro has, through Star Gas, a 40.5% equity interest in
the Partnership and Star Gas is its general partner.
(3) Star Gas / Petro Transaction
On October 23, 1998, the Partnership and Petro jointly announced that they have
signed a definitive merger agreement pursuant to which Petro would be acquired
by the Partnership and would become a wholly-owned subsidiary of the Partnership
("the Star Gas/Petro transaction"). It is anticipated that this acquisition will
be accounted for using the purchase method of accounting. This transaction would
be effected through Petro shareholders exchanging their approximate 26.5 million
shares of Petro Common Stock for an approximate 3.2 million limited partnership
units and General Partnership units of the Partnership which will be
subordinated to the existing Common Units of the Partnership.
Of the 3.2 million subordinated Partnership units anticipated to be distributed
to Petro shareholders, 2.5 million will be Senior Subordinated Units and 0.7
million will be Junior Subordinated Units and General Partnership Units. The
Senior Subordinated Units will be publicly registered and tradable (they are
expected to be listed on the New York Stock Exchange) and will be subordinated
in distributions to the Partnership's Common Units. The Junior Subordinated
Units and General Partnership Units will not be registered nor publicly tradable
and will be subordinated to both the Common Units and the Senior Subordinated
Units. The Senior Subordinated Units will be exchanged with holders of Petro's
Class A and Class C Common Stock, other then shares held by Audrey Sevin, Irik
Sevin, and two corporations controlled by Wolfgang Traber, whose shares will be
exchanged for Junior Subordinated Units and General Partnership Units.
Pursuant to the partnership subordination provision, distributions on the
Partnership's Senior Subordinated Units may be made only after distributions of
Available Cash on Common Units meet the Minimum Quarterly Distribution ("MQD")
requirement. Distributions on the Partnership's Junior Subordinated Units and
General Partner Units may be made only after distributions of Available Cash on
Common Units and Senior Subordinated Units meet the MQD requirement. The
Subordination Period will generally extend until the Partnership earns and pays
its MQD for three years. As a condition of the Star Gas/Petro transaction, the
Partnership agreement will be amended so that no distribution will be paid on
the Senior Subordinated Units, Junior Subordinated Units, or the General Partner
Units except to the extent Available Cash is earned from operations beginning
with the quarter ending December 31, 1999. The first possible distribution is
February 2000.
Like many other publicly traded master limited partnerships, the Partnership
contains a provision which provides the General Partner with incentive
distributions in excess of certain targeted amounts. This provision will be
modified so that should there be any such incentive distributions, they will be
made pro rata to the holders of Senior Subordinated Units, Junior Subordinated
Units, and General Partner Units. In connection with the Star Gas/Petro
transaction, the Senior Subordinated Units, Junior Subordinated Units and
General Partnership Units can earn, pro rata, 0.3 million additional Senior
Subordinated Units each year that Petro meets certain financial goals to a
maximum of 0.9 million additional Senior Subordinated Units.
F-12
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(3) Star Gas / Petro Transaction (Continued)
In connection with the Star Gas/Petro transaction, the Partnership intends to
raise approximately $170 million through a public offering of Common Units and
$90 million through a private offering of debt securities. The net proceeds from
these offerings will be used primarily to redeem approximately $240 million in
Petro public and private debt and preferred stock. Any such offering will be
made only by means of a prospectus or in transactions not requiring registration
under securities laws.
In October 1998, Petro completed an exchange offer with the holders of its 10
1/8% notes, 9 3/8% debentures, and 12 1/4% debentures and entered into
individually negotiated agreements with the holders of its 12 7/8% preferred
stock. In the debt exchange offer and preferred stock agreements, the holders of
approximately 98.5% in aggregate principal amount and liquidation preference of
Petro's public debt and preferred stock exchanged those securities for a like
principal amount and liquidation preference of new securities, the terms of
which are in all material respects the same as the terms of the old securities,
except that (1) the new debt securities are senior to the old debt securities,
and (2) the terms of the new debt securities and the new preferred stock (i)
give Petro the right to redeem these securities at the closing of the Star Gas /
Petro transaction but not later than April 1, 1999 at; 103.5% of face value for
the new 12 1/4% debentures; 100% of face value for the new 10 1/8% notes; 100%
of face value for the new 9 3/8% debentures; and $23.00 per share for the new 12
7/8% preferred stock; and (ii) eliminate substantially all covenants from the
indentures under which the old debt securities were issued. The tendering
holders of the old 12 7/8% preferred stock have also granted Petro an
irrevocable proxy to vote all their shares of preferred stock in favor of the
acquisition proposal at the special meeting.
In the debt exchange offer, Petro issued an aggregate 0.8 million shares of
junior convertible preferred stock (convertible to Petro Class A Common Stock on
a share for share basis) to the tendering holders. At the completion of the
transaction, those shares will be exchanged into an aggregate 0.1 million
Partnership Common Units in the merger. Holders of these shares have also
granted Petro an irrevocable proxy or have agreed to vote these shares in favor
of the acquisition proposal.
Petro currently has a 40.5% equity interest in the Partnership representing its
2.4 million Subordinated Units and a 2.0% interest in the Partnership or the
equivalent of 0.1 million units. As part of the Transaction, these units will be
contributed to the Partnership by Petro in exchange for one hundred and three
thousand Common Units and approximately 2.0 million Senior Subordinated Units.
The Common Units will be exchanged by Petro with the holders of Petro Junior
Convertible Preferred Stock and the Senior Subordinated Units ultimately be
exchanged with a portion of the holders of Petro's Common Stock. After
completion of the Star Gas/Petro transaction, the Petro shareholders will own
approximately 20% of the Partnership's equity through Subordinated Units and
General Partnership Units. The holders of the Partnership's Common Units
(including an estimated 8.9 million Common Units that will be sold in the
Partnership's $170 million public offering) will own an approximate aggregate
80% equity interest in the Partnership following the completion of the
transaction. The General Partner of the Partnership will be a newly organized
Delaware limited liability company that will be owned by certain officers and
directors of Petro consisting of Irik Sevin, Audrey Sevin and two entities
affiliated with Wolfgang Traber.
The completion of the Star Gas/Petro Transaction is subject to the receipt of
regulatory approvals, the approval of Star's non-affiliated Common unitholders
and non-affiliated Petro shareholders and other necessary partnership and
corporate approvals, as well as the successful completion of the debt and equity
offerings.
F-13
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(4) Property, Plant and Equipment
The components of property, plant and equipment and their estimated useful lives
were as follows at the indicated dates:
December
----------------- Estimated
1997 1998 Useful Lives
-------- ------- --------------
Land $ 2,088 2,088
Buildings 5,641 6,672 20-45 years
Fleet and other equipment 38,065 38,811 3-7 years
Tanks and equipment 1,460 1,932 8-20 years
Furniture and fixtures 18,678 19,757 5-7 years
Leasehold improvements 7,465 7,719 Term of leases
-------- -------
73,397 76,979
Less accumulated depreciation 42,782 48,855
-------- -------
$ 30,615 $28,124
======== =======
(5) 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,
-----------------
1997 1998
---- ----
Notes payable to banks under credit facility (a) $ 3,000 $ --
Notes payable in connection with the purchase of fuel oil dealers and
other notes payable, due in monthly, quarterly and annual installments
with interest at various rates ranging from 8% to 15% per annum,
maturing at various dates through the year 2004 16,798 14,302
------- -------
19,798 14,302
Less current maturities, including working capital borrowings 3,291 5,921
------- -------
$16,507 $ 8,381
======= =======
a) Pursuant to the July 1998 extension of the Credit Agreement as restated
and amended (Credit Agreement), the Company may borrow up to $47.0 million
under a working capital revolving credit facility with a sublimit under a
borrowing base established weekly. Amounts borrowed under the working
capital revolving credit facility are subject to a 60 day clean-up
requirement during the period April 1 to September 30 of each year, and
this portion of the Credit Agreement expires on June 29, 1999. The Company
pays a facility fee of 0.5% on the unused portion of this facility. At
December 31, 1998, no amount was outstanding under the working capital
revolving credit facility.
The Credit Agreement also includes a $14.1 million acquisition letter of
credit facility all of which has been used to support notes given to
certain sellers of heating oil companies. The Credit Agreement provides
that on June 30, 1998 and June 29, 1999 that 83.3% and 100% respectively,
of the facility outstanding be cash collateralized. As of December 31,
1998 $11.8 million (83.3%) of this facility has been cash collateralized
in accordance with the agreement.
Interest under the Credit Agreement is payable monthly on the working
capital revolving credit facility and is based upon a floating rate
selected by the Company of either the Eurodollar Loan Rate or the
Alternate Base Rate, plus 50 to 125 basis points on Alternate Base Rate
Loans and 175 to 250 basis points on Eurodollar Loans, based upon the
Interest Coverage Ratio (as defined in the Credit Agreement). Eurodollar
Loan Rate means the prevailing rate in the interbank Eurodollar market
adjusted for reserve requirements. Alternate Base Rate means the greater
of (i) the prime or base rate of The Chase Manhattan Bank in effect or
(ii) the Federal funds rate in effect plus 1/2 of 1%. The weighted average
rate for 1997 and 1998 was 7.75% and 7.62% respectively.
The fees for the Credit Agreement acquisition letters of credit range from
225 to 300 basis points based upon the same ratio as that used for the
working capital revolving credit facility. To the extent that the letters
of credit are cash collateralized the fee is reduced to 25 basis points.
F-14
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(5) Notes Payable and Other Long-Term Debt - (Continued)
Under the terms of the Credit Agreement, the Company is restricted from
incurring any indebtedness except subordinated debt and certain other
indebtedness specifically authorized, if certain ratios of EBITDA to
interest are met. The Company is also restricted from amongst other
things, in paying common cash dividends and making acquisitions of other
companies, as well as not selling, transferring, or conveying customer
lists except, among other exceptions, from a sale where the net cash
proceeds are used to cash collateralize the acquisition letters of credit.
The Credit Agreement also provides that the Company is required to
maintain certain minimum levels of cash flow and EBITDA, as well as
certain ratios of EBITDA to net interest expense, and limits the total
amount of capital expenditures to $4.0 million per four consecutive
quarters. In the event of noncompliance with certain of the covenants, the
bank has the right to declare all amounts outstanding to be due and
payable immediately.
As collateral for the Credit Agreement the Company granted to the lenders
a security interest in its receivables which at December 31, 1998 was
$56,845.
The Company expects to renew or replace the working capital revolving
credit facility prior to June 29, 1999. Based on this expected renewal and
the Company's working capital position and expected net cash to be
provided by operating activities, the Company expects to be able to meet
all of its obligations in 1999.
Aggregate annual maturities including working capital borrowings, but excluding
the requisite $2.5 million acquisition letter of credit facility cash
collateralization due in June 1999 are as follows as of December 31, 1998:
(6) Senior, Senior Subordinated, and Subordinated Notes Payable
Senior, Senior Subordinated, and Subordinated Notes Payable at the dates
indicated, consisted of:
December 31,
-------------------
1997 1998
---- ----
10.90% Senior Notes (a) $ 60,000 $ 60,000
14.10% Senior Subordinated and Senior Notes (b) 8,300 6,200
10 1/8% Senior Subordinated and Subordinated Notes (c) 50,000 50,000
9 3/8% Senior Subordinated and Subordinated Debentures (d) 75,000 75,000
12 1/4% Senior Subordinated and Subordinated Debentures (e) 81,250 81,250
-------- --------
Total Senior, Senior Subordinated, and Subordinated Notes Payable 274,550 272,450
Less short-term Senior Subordinated Notes (b) 1,050 1,050
Less short-term Senior Notes (b) 1,050 1,050
Less long-term Senior Notes (a)(b) 63,100 62,050
-------- --------
Total long-term Senior Subordinated and Subordinated Notes Payable $209,350 $208,300
======== ========
In October 1998, Petro completed an exchange offer with the holders of its 10
1/8% notes, 9 3/8% debentures, and 12 1/4% debentures. In the debt exchange
offer the holders of approximately 98.5% in aggregate principal amount of
Petro's public debt exchanged those securities for a like principal amount of
new securities, the terms of which are in all material respects the same as the
terms of the old securities, except that (1) the new debt securities are senior
to the old debt securities, and (2) the terms of the new debt securities (i)
give Petro the right to redeem these securities at the closing of the Star Gas /
Petro transaction but not later than April 1, 1999 at; 103.5% of face value for
the new 12 1/4% debentures; 100% of face value for the new 10 1/8% notes; and
100% of face value for the new 9 3/8% debentures; and (ii) eliminate
substantially all covenants from the indentures under which the old debt
securities were issued.
F-15
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(6) Senior, Senior Subordinated, and Subordinated Notes Payable - (Continued)
a) On September 1, 1988, the Company authorized the issuance of $60.0 million
of Subordinated Notes originally due October 1, 1998 bearing interest
payable semiannually at an average rate of 11.96% ("11.96% Notes"). In
connection with the Company's 9 3/8% Subordinated Debenture offering in
February 1994 (see note 6d) $30.0 million of the 11.96% Notes became
ranked as senior debt. In February 1997 the Company entered into
agreements ("Private Debt Modification") to among other things, exchange
$30.0 million of the 11.96% Notes then ranked as subordinated debt for
senior debt, and to extend the maturity date of the 11.96% Notes from
October 1, 1998 to October 1, 2002 with $15.0 million sinking fund
payments due on October 1, 2000 and October 1, 2001 and the remaining
$30.0 million balance due on October 1, 2002. The Company paid
approximately $1.1 million in fees and expenses to obtain such
modifications. In addition, effective October 1, 1998, the interest on
these notes were lowered to 10.9%. The debt instruments were not
considered to be substantially different since the cash flow effect on a
present value basis was less than 10 percent. Accordingly, the
modification was not accounted for as an extinguishment of debt. All such
notes are redeemable at the option of the Company, in whole or in part
upon payment of a premium rate as defined.
b) On January 15, 1991, the Company authorized the issuance of $12.5 million
of 14.10% Subordinated Notes due January 15, 2001 bearing interest payable
quarterly. In connection with the Company's 9 3/8% Subordinated Debenture
offering in February 1994 (see note 6d) $6.25 million of these notes
became ranked as senior debt. The notes are redeemable at the option of
the Company, in whole or in part upon payment of a premium rate as
defined. On each January 15th commencing 1996 and ending January 15, 2000,
the Company is required to repay $2.1 million of these Notes. The
remaining principal of $2.0 million is due on January 15, 2001. No premium
is payable in connection with these required payments.
c) On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated
Notes due April 1, 2003 which 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.
d) On February 3, 1994, the Company issued $75.0 million of 9 3/8%
Subordinated Debentures due February 1, 2006 which are redeemable at the
Company's option, in whole or in part, at any time on or after February 1,
1999 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 8) to certain
amendments to the respective agreements. In consideration for the
consents, the Company paid holders of certain subordinated debt a cash
payment of $0.6 million and caused approximately $42.6 million of the
subordinated debt at December 31, 1994 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.
e) On February 3, 1995, the Company issued $125.0 million of 12 1/4%
Subordinated Debentures due February 1, 2005 which 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. On February 5, 1996, a
portion of the proceeds received as a result of the Star Gas MLP Offering
(see note 2) were used to retire $43.8 million of the $125.0 million 12
1/4% Subordinated Debentures. The Company paid $4.8 million, representing
an 11% premium to retire this portion of the debt. Interest on these
debentures is payable semi-annually.
Expenses connected with the above outstanding offerings, and amendments thereto,
amounted to approximately $15.8 million, which includes $1.2 million paid in
debt consents permitting the Star Gas MLP Offering (see note 2). At December 31,
1997 and 1998, the unamortized balances relating to notes still outstanding
amounted to approximately $8.4 million and $7.0 million respectively, and such
balances are included in Deferred Charges and Pension Costs on the Consolidated
Balance Sheet.
F-16
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(6) Senior, Senior Subordinated, and Subordinated Notes Payable - (Continued)
Aggregate annual maturities including sinking fund payments at December 31, 1998
are as follows:
The Company has substantial repayment obligations on indebtedness that become
due beginning in the year 2000. If the proposed Star Gas / Petro Transaction
(see note 3) is completed, these obligations are expected to be refinanced on or
before their maturities. In the event that such transaction does not occur, the
Company will explore alternatives including the repayment or refinancing of such
maturities. If such alternatives cannot be effected, it could have a material
adverse affect on the Company.
Total accrued interest on notes payable, and senior and subordinated notes which
were included in accrued expenses and other liabilities were $10,664 and $10,160
at December 31, 1997 and 1998 respectively.
(7) 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.
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.
The following table summarizes the cash dividends declared on Common Stock and
the cash dividends declared per common share for the years indicated:
Years Ended December 31,
----------------------------
Cash dividends declared 1996 1997 1998
---- ---- ----
Class A $ 13,789 $ 7,019 $ --
Class C 1,559 779 --
Cash dividends declared per share
Class A $ .60 $ .30 $ --
Class C .60 .30 --
Under the Company's most restrictive dividend limitation imposed by certain debt
covenants, $31.6 million was available at December 31, 1998 for the payment of
dividends on all classes of Capital Stock. Under these covenants the amount
available for dividends is increased each quarter by 50% of the cash flow, as
defined, for the previous fiscal quarter, and by the new issuance of capital
stock. Notwithstanding these covenants, the Company is however currently
restricted from paying common stock dividends under its bank credit agreement.
On October 1, 1995 the Company began offering a Dividend Reinvestment and Stock
Purchase Plan which provides holders of the Company's Class A Common Stock and
Class C Common Stock a vehicle to reinvest their dividends and purchase
additional shares of Class A Common Stock at a 5% discount from the current
market price without incurring any fees. In addition, optional cash deposits
receive a 3% discount from the market price. Pursuant to the plan offering,
three hundred and two thousand, six hundred and ninety-one thousand, and two
hundred and seventy-one thousand additional Class A Common Shares were issued in
1996, 1997, and 1998 respectively.
F-17
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(8) Preferred Stock, Redeemable Preferred Stock and Exchangeable 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 two hundred and fifty thousand shares of its Redeemable Preferred
Stock, par value $0.10 per share, at a price of one hundred dollars per share,
which shares are exchangeable into Subordinated Notes due August 1, 1999 ("1999
Notes").
On August 1 of each year, 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
one hundred dollars per share plus all accrued and unpaid dividends to such
August 1. As of December 31, 1997 and 1998, eighty-three thousand shares and
forty-two thousand shares respectively were outstanding of which forty-two
thousand shares were reflected as current.
In February 1997 the Company issued one million two hundred thousand shares of
its 12 7/8% Exchangeable Preferred Stock ("Exchangeable Preferred Stock") due
February 15, 2009, par value $0.10 per share, at a price of twenty-five dollars
per share. The Company incurred $1,678 of offering costs in connection with this
preferred stock issuance. Dividends are payable on these shares on February 15,
May 15, August 15 and November 15 of each year. These shares are callable at
twenty-three dollars per share at the closing of the Star Gas / Petro
transaction but not later than April 1, 1999 otherwise, the liquidation
preference on the Exchangeable Preferred Stock is twenty-five dollars per share,
and they are redeemable at the option of the Company in whole or in part, at any
time on or after February 15, 2002 upon payment of a premium rate as defined.
Subject to certain conditions the Company may also issue an additional eight
hundred thousand shares of Exchangeable Preferred Stock. Also, on any scheduled
dividend payment date on or after February 15, 2000 at the Company's option
these Exchangeable Preferred Stock may be exchanged into 12 7/8% Junior
Subordinated Exchangeable Debentures due 2009. At December 31, 1997 and 1998
$30.0 million of Exchangeable Preferred Stock was outstanding.
In August and September of 1998 the Company issued seven hundred and
eighty-seven thousand of no par value preferred stock ("Junior Convertible
Preferred Stock") in connection with the Star Gas / Petro transaction. These
shares were issued in addition to other consideration, for the early redemption
rights of its 9 3/8% Subordinated Debentures, 10 1/8% Subordinated Notes, 12
1/4% Subordinated Debentures and 12 7/8% Exchangeable Preferred Stock (see note
3). The Company issued such holders three and thirty-seven one-hundredths shares
of Junior Convertible Preferred Stock for each thousand dollars in principal
amount or liquidation preference of such securities. Each share of Junior
Convertible Preferred Stock will be exchangeable into thirteen one-hundredths of
a Partnership Common Unit at the conclusion of the Star Gas/Petro transaction
representing a maximum of approximately one hundred and three Common Units.
Should the transaction not be consummated, the Junior Convertible Preferred
Stock will be convertible into a like number of Class A Common Stock (see note
3).
Preferred dividends of $2,389, $4,644 and $5,057 were declared on all classes of
preferred stock in 1996, 1997, and 1998 respectively.
Aggregate annual maturities of Redeemable Preferred Stock and Exchangeable
Preferred Stock are as follows as of December 31, 1998:
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(9) Pension Plans
Effective December 31, 1996 the Company consolidated all of its defined
contribution pension plans and froze the benefits for nonunion personnel covered
under defined benefit pension plans. In the third quarter of 1997 the Company
froze the benefits of its New York City union defined benefit pension plan as a
result of operation consolidations. In freezing the defined benefit pension
plans and the New York City union defined benefit pension plan the Company
incurred $557 and $654 of expenses in 1996 and 1997 respectively, for pension
curtailment costs relating to the amortization of certain previously
unrecognized pension expenses.
The defined benefit and defined contribution plans covered substantially all of
the Company's nonunion employees. Benefits under the frozen defined benefit
plans were generally based on years of service and each employee's compensation.
Benefits under the consolidated defined contribution plan are based on an
employees compensation. Pension expense under all non-union plans for the years
ended December 31, 1996, 1997 and 1998 was $4,350, $4,036 and $4,428
respectively, net of amortization of the pension obligation acquired.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations, fair value of assets, and a statement of the funded status
at the indicated dates:
December 31,
--------------------
Reconciliation of Benefit Obligations 1997 1998
---- ----
Benefit obligations at beginning of year $ 29,323 $ 29,258
Service cost 116 --
Interest cost 1,895 1,930
Actuarial (gain) loss 977 (63)
Benefit payments (1,384) (1,547)
Settlements (1,669) (2,201)
-------- --------
Benefit obligation at end of year $ 29,258 $ 27,377
======== ========
Reconciliation of Fair Value of Plan Assets
Fair value of plan assets at beginning of year $ 20,367 $ 22,292
Actual return on plan assets 2,780 2,561
Employer contributions 2,458 615
Benefit payments (1,384) (1,547)
Settlements (1,929) (2,883)
-------- --------
Fair value of plan assets at end of year $ 22,292 $ 21,038
======== ========
Funded Status 1996 1997 1998
---- ---- ----
Benefit obligation $ 29,323 $ 29,258 $ 27,377
Fair value of plan assets 20,367 22,292 21,038
Unrecognized transition (asset) obligation (65) (52) (39)
Unrecognized prior service cost 453 -- --
Unrecognized net actuarial (gain) loss 6,812 5,807 4,776
-------- -------- --------
Prepaid (accrued) benefit cost prior to additional
liability (1,756) (1,211) (1,602)
Amount included in comprehensive income 6,065 4,646 4,737
-------- -------- --------
Prepaid (accrued) benefit cost $ (7,821) $ (5,857) $ (6,339)
======== ======== ========
Components of Net Periodic Benefit Cost
Service cost $ 1,630 $ 116 $ --
Interest cost 1,974 1,895 1,930
Expected return on plan assets 1,573 1,787 1,846
Amortization of unrecognized transition (asset)
obligation 60 (13) (13)
Amortization of prior service cost 76 49 --
Recognized net (gains) losses 678 369 160
Settlement (gain) loss -- 344 572
Curtailment (gain) loss 557 404 --
-------- -------- --------
Net periodic benefit cost after curtailments
and settlements $ 3,402 $ 1,377 $ 803
======== ======== ========
Weighted-Average Assumptions Used in the Measurement of
the Company's Benefit Obligation as of December 31,
Discount rate 6.5% 6.5% 6.5%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.0% N/A N/A
F-19
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(9) Pension Plans - (Continued)
In addition, the Company made contributions to union-administered pension plans
during the years ended December 31, 1996, 1997 and 1998 of $2,996, $2,508, and
$1,991 respectively.
The Company recorded an additional minimum pension liability for underfunded
plans of $4,698 as of December 31, 1998, representing the excess of unfunded
accumulated benefit obligations over plan assets. A corresponding amount is
recognized as an 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 $4,737 as of December 31, 1998.
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 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 $1,108 and $1,082 at December 31,
1997 and 1998 is being amortized over 40 years and is included in supplemental
benefits and other long-term liabilities at those dates.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's then
Chairman and Co-Chief Executive Officer, was entitled to receive $25 per month
for a period of one hundred twenty 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 amounts
accrued for such benefit payable net of payments made at December 31, 1997 and
1998 were $1,204, and $1,005 respectively and are included in supplemental
benefits and other long-term liabilities on the balance sheets at those dates.
(10) Leases
The Company leases office space and other equipment under noncancelable
operating leases which expire at various times through 2017. 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, 1998 for all operating
leases having an initial or remaining noncancelable term of one year or more are
as follows:
The sources of deferred income tax expense (benefit) and the tax effects of each
were as follows:
Years Ended December 31,
-----------------------------
1996 1997 1998
------- ------- -------
Excess of book over tax (tax over book) depreciation $ (81) $ (227) $ (432)
Excess of book over tax amortization expense (2,051) (2,490) (2,727)
Excess of book over tax vacation expense (180) (107) (12)
Excess of book over tax restructuring expense (206) (618) 254
(Excess of book over tax) tax over book bad debt expense (41) 37 12
(Excess of book over tax) tax over book supplemental benefit expense (14) 14 20
Equity in income (loss) of Star Gas Partnership 2,597 1,037 (1,048)
Other, net (228) 5 197
Recognition of tax benefit of net operating loss to the
extent of current and previous recognized temporary differences (9,114) (4,491) (8,130)
Change in valuation allowance 9,318 6,840 11,866
------- ------- -------
$ -- $ -- $ --
======= ======= =======
The components of the net deferred tax assets and the related valuation
allowance for 1997 and 1998 using current rates were as follows:
Years Ended December 31,
-----------------------
1997 1998
-------- --------
Net operating loss carryforwards $ 39,690 $ 47,820
Excess of tax over book depreciation (4,814) (4,382)
Excess of book over tax amortization 6,114 8,841
Excess of book over tax vacation expense 1,600 1,612
Excess of book over tax restructuring expense 824 570
Excess of book over tax bad debt expense 333 321
Excess of book over tax supplemental benefit expense 666 646
Equity in loss (income) of Star Gas Partnership (2,775) (1,727)
Other, net 360 163
-------- --------
41,998 53,864
Valuation allowance (41,998) (53,864)
-------- --------
$ -- $ --
======== ========
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, 1998, the Company had the following income tax loss
carryforwards for Federal Income Tax reporting purposes:
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(12) Related Party Transactions
In October 1986, Irik P. Sevin purchased one hundred sixty-one thousand shares
of Class A Common Stock and forty thousand shares of Class C Common Stock of the
Company for $1,280 (which was the fair market value as established by the
Pricing Committee pursuant to the Stockholders' Agreement). The purchase price
was financed by a note due December 31, 1999. The note requires annual payments
of interest and principal, payable in cash or Class A Common Stock of the
Company, until complete satisfaction. In accordance with the note repayment
schedule and the criteria for stock payment valuation, Mr. Sevin surrendered
sixty-one thousand Class A Common Shares representing $411 of value, sixty-two
thousand Class A Common Shares representing $392 of value, and fifty-eight
thousand Class A Common Shares representing $370 of value in December 1996, 1997
and 1998 respectively. The criteria agreed upon for valuing stock payment for
this transaction is the average market price ten days prior to payment or
$6.3479 per share, whichever is greater. The outstanding balance of the note was
$984, $656, and $328 at December 31, 1996, 1997, and 1998 respectively. Interest
accrues on the outstanding balance of the note at the LIBOR rate in effect for
each month plus 0.75%. 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.
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.
(13) Restructuring Charges
Late in 1995 the Company completed a study with a leading consulting firm to
help provide a structure for superior customer service, a brand image, and
reduced operating costs. Over the last few years the Company has dedicated a
large amount of effort toward defining the best organizational structure, and
has implemented various initiatives toward achieving this objective.
As part of the initial implementation of this program, Petro undertook certain
business improvement strategies in its Long Island, New York region. These steps
included the consolidation of the region's five home heating oil branches into
one central customer service center and three depots. The regional customer
service center consolidated accounting, credit, customer service and the sales
function into a single new facility in Port Washington, Long Island. All
external communications and marketing previously undertaken in the five branches
were centralized into this one location freeing the three newly configured
depots to focus on oil delivery and heating equipment repair, maintenance and
installation, in mutually exclusive operating territories. The Company incurred
$1.2 million in restructuring expenses in 1996, for costs associated with the
initial implementation of the restructuring program and reported such expenses
in restructuring charges. This cost was comprised of $0.5 million in termination
benefit arrangements for the twenty-three servicemen and drivers, twenty-eight
credit and customer service personnel, and eight sales, general, and
administrative personnel displaced by the program; and $0.7 million for
continuing lease obligations for an unused, non-cancelable, non-strategic
facility.
In 1997 the Company continued with its restructuring program and combined its
three New York City branches into one new central depot that specializes in
delivery, installation, maintenance, and service functions, and like the Long
Island depots, is supported by the Port Washington facility. The Company also
proceeded with its commitment to define the best possible organizational
structure, by restructuring select branch and corporate responsibilities to
eliminate redundant functions and locate responsibilities where they can best
serve customers and the Company. Toward achieving these strategic intentions the
Company incurred $2.9 million in restructuring expenses in 1997, and reported
such expenses in restructuring charges. This cost was comprised of $2.0 million
in termination benefit arrangements for twenty-three servicemen and drivers, ten
credit and customer service personnel, and twenty-two sales, general, and
administrative personnel displaced by the program; and $0.9 million for
continuing lease obligations for three unused, non-cancelable, non-strategic
facilities. The Company continued its restructuring and cost reduction
initiative in the first quarter of 1998, incurring $0.5 million in termination
benefit arrangements with four sales, general, and administrative personnel.
The total unpaid amounts included in accrued expenses and other liabilities are
$2.4 million and $1.7 million respectively at December 31, 1997 and 1998. These
amounts predominately represent continuing lease obligations as all the
termination benefit arrangements have been paid.
F-22
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(13) Restructuring Charges - (Continued)
This liability is expected to be paid and relieved as follows:
In March 1994 the Company issued stock options to Irik P. Sevin to purchase one
hundred thousand 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 vested upon issuance are non-transferable and expire on
March 31, 2004.
In June 1994, the Board of Directors and shareholders adopted the Petroleum Heat
and Power Co., Inc. 1994 Stock Option Plan, which authorized one million shares
of the Company's Class A Common Stock to be granted from time to time, and to
vest at various times, to key employees, officers, directors, consultants,
advisers, or agents, who help contribute to the long-term success and growth of
the firm, at prices not less than the fair market value at the date of grant and
at terms not to exceed ten years.
As allowable by SFAS No. 123, the Company will continue to apply APB Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock compensation plan, and does not recognize compensation
expense for its stock-based compensation plan.
Had compensation cost for this plan been determined based upon the fair value at
the grant date for awards under this plan consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss and loss per share for
1997 and 1998 would have been increased by approximately nineteen thousand
dollars, or $0.0007 per share, and one hundred twenty-eight thousand dollars, or
$0.0048 per share respectively. All options were granted at an amount equal to
the quoted market price of the Company's stock at the date of the grants and
vest at various times with no vesting period exceeding five years. The proforma
costs charged against income for options granted are based on the following
assumptions calculated on a straight line basis over the vesting period of the
grants for options granted prior to 1998, and calculated as a period expense for
those granted in 1998. The average fair value of the options granted during 1997
was $0.21 per option on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 12.97%, volatility of
35%, risk-free interest rate of 6.19%, assumed forfeiture rate of 0%, and an
average expected life of 10 years. The fair value of the options granted during
1998 was $1.27 per option on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%,
volatility of 52%, risk-free interest rate of 5.83%, assumed forfeiture rate of
50%, and an expected life of 10 years.
F-23
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(14) Stock Options - (Continued)
Information relating to stock options during 1996, 1997 and 1998 are summarized
as follows:
Number of Shares Weighted-Average
Range of -------------------- Exercise Price
Exercise Prices Class A Class C Per Share Total
--------------- ------- ------- --------- -----
Shares under option at
December 31, 1995 $ 4.10 to $11.25 1,393 103 $ 7.66 $11,447
Granted $ 6.87 to $ 7.38 132 -- 7.21 955
Exercised -- -- -- -- --
Expired / Forfeited $ 7.50 to $ 7.50 24 6 7.50 225
-------------------------------------------------------------------------
Shares under option at
December 31, 1996 $ 4.10 to $11.25 1,501 97 7.62 12,177
Granted $ 3.00 to $ 3.13 40 -- 3.05 122
Exercised -- -- -- -- --
Expired / Forfeited $ 4.10 to $ 8.77 1,097 79 7.16 8,410
-------------------------------------------------------------------------
Shares under option at
December 31, 1997 $ 3.00 to $11.25 444 18 8.41 3,889
Granted $ 1.81 to $ 1.81 200 -- 1.81 362
Exercised -- -- -- -- --
Expired / Forfeited $ 3.13 to $11.25 319 18 8.78 2,964
-------------------------------------------------------------------------
Shares under option at
December 31, 1998 $ 1.81 to $ 8.50 325 -- $ 3.96 $ 1,287
=========================================================================
Shares exercisable from $ 1.81 to $ 3.00 225 -- $ 1.94 $ 437
Shares exercisable $ 8.50 100 -- 8.50 850
-------------------------------------------------------------------------
Total shares exercisable
at December 31, 1998 $ 1.81 to $ 8.50 325 -- $ 3.96 $ 1,287
=========================================================================
The weighted average life of the shares exercisable from $1.81 to $3.00 is 8.8
years, and the weighted average life of the shares exercisable at $8.50 is 5.3
years.
F-24
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(15) Acquisitions
During 1996, the Company acquired the customer lists and equipment of thirteen
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $28,500;
and approximately 90% of this consideration was for customer lists, goodwill,
and covenants not to compete.
In June 1996, the Company sold its Springfield Massachusetts operations to an
unaffiliated fuel oil dealer. The Company received proceeds of approximately
$4,100 and realized a gain on this transaction of approximately $1,800.
During 1997, the Company acquired the customer lists and equipment of eleven
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $16,300;
and approximately 90% of this consideration was for customer lists, goodwill,
and covenants not to compete.
In November 1997, the Company sold its Hartford Connecticut operation to an
unaffiliated fuel oil dealer. The Company received proceeds of approximately
$15,600 and recognized a gain on this transaction of approximately $11,400.
The Company did not make any acquisitions nor sell any branches in 1998.
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 and disposed businesses,
as if they had been acquired on January 1 of the year preceding the year of
purchase and disposal, with adjustments, primarily for amortization of
intangibles are as follows:
1996 1997
---- ----
Net sales $ 607,240 $ 538,988
Loss before extraordinary item $ (23,029) $ (22,397)
Net loss $ (29,443) $ (22,397)
Preferred stock dividends (2,389) (4,644)
--------- ---------
Net loss applicable to common stockholders (Numerator) $ (31,832) $ (27,041)
========= =========
Class A Common Stock 22,983 23,441
Class B Common Stock 12 11
Class C Common Stock 2,598 2,598
--------- ---------
Weighted average number of shares outstanding (Denominator) 25,593 26,050
========= =========
Basic and Diluted losses per common share
before extraordinary item:
Class A and C Common Stock $ (0.99) $ (1.04)
Extraordinary loss per common share:
Class A and C Common Stock $ (0.25) $ --
Basic and Diluted losses per common share:
Class A and C Common Stock $ (1.24) $ (1.04)
(16) Litigation
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.
F-25
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(17) Disclosures About the Fair Value of Financial Instruments
Cash, Restricted Cash, Accounts Receivable, Notes Receivable and Other Current
Assets, Working Capital Borrowings, Accounts Payable and Accrued Expenses
The carrying amount approximates fair value because of the short maturity of
these instruments.
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, 1997 At December 31, 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Long-term debt $ 16,798 $ 15,853 $ 14,302 $ 13,488
Senior Subordinated and
Subordinated notes payable 210,400 197,883 209,350 198,394
Senior notes payable 64,150 64,343 63,100 61,408
Preferred stock 36,656 39,722 32,745 33,894
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.
(18) Earnings Per Share
December 31,
------------------------------
1996 1997 1998
---- ---- ----
Basic Earnings Per Share:
Net loss $(28,315) $(22,899) $(35,337)
Less: Preferred stock dividends (2,389) (4,644) (5,057)
-------- -------- --------
Loss available to common stockholders
(Numerator) $(30,704) $(27,543) $(40,394)
======== ======== ========
Class A Common Stock 22,983 23,441 23,962
Class B Common Stock 12 11 11
Class C Common Stock 2,598 2,598 2,598
-------- -------- --------
Weighted average number of shares outstanding
(Denominator) 25,593 26,050 26,571
======== ======== ========
Basic losses per share $ (1.20) $ (1.06) $ (1.52)
======== ======== ========
Diluted Earnings Per Share:
Effect of dilutive securities $ -- $ -- $ --
-------- -------- --------
Loss available to common stockholders
(Numerator) $(30,704) $(27,543) $(40,394)
======== ======== ========
Effect of dilutive securities -- -- --
-------- -------- --------
Weighted average number of shares outstanding
(Denominator) 25,593 26,050 26,571
======== ======== ========
Diluted losses per share $ (1.20) $ (1.06) $ (1.52)
======== ======== ========
Certain potentially dilutive securities issued (i.e. options) are not considered
in the above calculation due to the fact that they would be anti-dilutive.
F-26
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
(19) Selected Quarterly Financial Data - (Unaudited)
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
------------------------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97 Total
------- ------- ------- -------- -----
Net sales $ 248,095 $ 87,972 $ 50,788 $ 161,286 $ 548,141
Income (loss) before income taxes and
equity interest $ 31,285 $ (25,550) $ (37,959) $ 10,060 $ (22,164)
Net income (loss) $ 33,388 $ (27,454) $ (40,316) $ 11,483 $ (22,899)
Preferred dividends (896) (921) (1,861) (966) (4,644)
--------- ---------- ---------- ---------- ----------
Net income (loss) available to common
stockholders $ 32,492 $ (28,375) $ (42,177) $ 10,517 $ (27,543)
========= ========== ========== ========== ==========
Basic earnings (losses) per common share:
Class A and C Common Stock $ 1.26 $ (1.09) $ (1.61) $ 0.40 $ (1.06)
Diluted earnings (losses) per common share:
Class A and C Common Stock $ 1.26 $ (1.09) $ (1.61) $ 0.40 $ (1.06)
Weighted average number of common
shares outstanding:
Class A Common Stock 23,150 23,326 23,538 23,751 23,441
Class B Common Stock 11 11 11 11 11
Class C Common Stock 2,598 2,598 2,598 2,598 2,598
Three Months Ended
------------------------------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98 Total
------- ------- ------- -------- -----
Net sales $ 183,139 $ 66,227 $ 42,113 $ 116,540 $ 408,019
Income (loss) before income taxes and
equity interest $ 24,761 $ (20,897) $ (31,860) $ (5,821) $ (33,817)
Net income (loss) $ 26,978 $ (22,974) $ (34,215) $ (5,126) $ (35,337)
Preferred dividends (1,563) (965) (1,562) (967) (5,057)
--------- ---------- ---------- ---------- ----------
Net income (loss) available to common
stockholders $ 25,415 $ (23,939) $ (35,777) $ (6,093) $ (40,394)
========= ========== ========== ========== ==========
Basic earnings (losses) per common share:
Class A and C Common Stock $ .96 $ (.90) $ (1.35) $ (.23) $ (1.52)
Diluted earnings (losses) per common share:
Class A and C Common Stock $ .95 $ (.90) $ (1.35) $ (.23) $ (1.52)
Basic weighted average number of common
shares outstanding:
Class A Common Stock 23,955 23,962 23,965 23,965 23,962
Class B Common Stock 11 11 11 11 11
Class C Common Stock 2,598 2,598 2,598 2,598 2,598
Diluted weighted average number of common
shares outstanding:
Class A Common Stock 24,155 23,962* 23,965* 23,965* 23,962*
Class B Common Stock 11 11 11 11 11
Class C Common Stock 2,598 2,598 2,598 2,598 2,598
* 0 shares included for the effects of stock grants and convertible
securities due to the loss in the period.
F-27
SCHEDULE II
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(1) Valuation and qualifying accounts conveyed through the disposition of the
Springfield Massachusetts branch location
(2) Bad debts written off net of any recoveries
(3) Valuation and qualifying accounts conveyed through the disposition of the
Hartford Connecticut branch location
F-28
Exhibit 11.0
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Computation of Net Income (Loss) Per Share
(In thousands except per share data)
Year Ended December 31,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
Net Loss $ (28,315) $ (22,899) $ (35,337)
Preferred Dividends (2,389) (4,644) (5,057)
------------ ------------ ------------
Net loss applicable to common
stock (30,704) (27,543) (40,394)
------------ ------------ ------------
Common stock dividends
Class A Common Stock 13,789 7,019 -
Class B Common Stock - - -
Class C Common Stock 1,559 779 -
------------ ------------ ------------
15,348 7,798 -
------------ ------------ ------------
Undistributed net loss(1) $ (46,052) $ (35,341) $ (40,394)
============ ============ ============
Weighted average number of
common shares outstanding
Class A Common Stock 22,983 23,441 23,962
Class B Common Stock 12 11 11
Class C Common Stock 2,598 2,598 2,598
------------ ------------ ------------
25,593 26,050 26,571
============ ============ ============
Basic and Diluted earnings
(losses) per common share:
Class A Common stock
Distributed $ 0.60 $ 0.30 $ -
Undistributed(1) (1.80) (1.36) (1.52)
------------ ------------ ------------
$ (1.20) $ (1.06) $ (1.52)
============ ============ ===========
Class B Common Stock
Distributed $ - $ - $ -
============ ============ ============
Class C Common Stock
Distributed $ 0.60 $ 0.30 $ -
Undistributed (1.80) (1.36) (1.52)
------------ ------------ ------------
$ (1.20) $ (1.06) $ (1.52)
============ ============ ============
----------
(1) All of the undistributed net loss has been allocated to the Class A Common
Stock and Class C Common Stock since 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 had 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, 1998, 206 shares of
Class B Common Stock were repurchased for approximately $3.6 million.
Prior to the termination of the Special Dividends, the Class B Common Stock
could not participate in any additional dividends until the aggregate amount of
dividends paid on Class A Common Stock and Class C Common Stock exceeded the
Common Stock Allocation as defined. In 1994 an additional $112.3 million had to
be paid as dividends on the Class A Common Stock and Class C Common Stock to
reach the Common Stock Allocation.
EXHIBIT 21.0
Ortep of New Jersey, Inc. - New Jersey
Ortep of Pennsylvania, Inc. - Pennsylvania
Ortep of Connecticut, Inc. - Connecticut
Petro/Crystal Corp. - New York
Maxwhale Corp. - Minnesota
Petro, Inc. - Delaware
CBW Realty Corp. of Connecticut - Connecticut
Marex Corporation - Maryland
A.P. Woodson Co., Inc. - District of Columbia
Star Gas Corporation - Delaware
Silgas, Inc. - Indiana
Star Gas Holdings - Delaware
EXHIBIT 23.1
The Board of Directors
Petroleum Heat and Power Co., Inc.
We consent to incorporation by reference in the registration statements (No.
33-54053 and No. 333-30171) on Form S-8 and (No. 33-60741) on Form S-3, of
Petroleum Heat and Power Co., Inc. and subsidiaries of our report dated February
16, 1999, relating to the consolidated balance sheets of Petroleum Heat and
Power Co., Inc. and subsidiaries as of December 31, 1997 and 1998, 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, 1998, and the related schedule, which report appears in the
December 31, 1998, annual report on Form 10-K of Petroleum Heat and Power Co.,
Inc.
/s/ KPMG LLP
Stamford, CT
March 17, 1999
ARTICLE 5
This schedule contains summary financial information (in thousands except
per share data) extracted from Petroleum Heat and Power Co., Inc. and
Subsidiaries financial statements as of December 31, 1998 and is qualified in
its entirety by reference to such financial statements.
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