ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are defendants in various routine litigation incident to its business, none of which is expected to have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual shareholder meeting on June 26, 1995. The only matter presented for a vote was the re-election of Jim J. Shoemake as a director. Mr. Shoemake was re-elected with 1,579,225 votes cast in favor and no votes cast against, withheld or abstaining. The term of office of the following directors continued after the meeting: Paul S. Lindsey, Jr., Douglas A. Brown, Kristin L. Lindsey, and Bruce M. Withers, Jr.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of September 15, 1995, the Company's Common Stock was held of record by 9 shareholders. There is currently no active trading market in the Company's Common Stock.
As of September 15, 1995, there are outstanding warrants to purchase 175,536 shares of the Company's Common Stock.
No dividends on the Common Stock of the Company were paid during the Company's 1994 or 1995 fiscal years. The indenture relating to the 12 7/8% Senior Secured Notes due 2004 and the terms of the Company's revolving credit facility each contain dividend restrictions that prohibit the Company from paying common stock cash dividends. As a result, the Company has no current intention of paying cash dividends on the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected consolidated operating and balance sheet data of Empire Gas as of and for each of the years in the five-year period ended June 30, 1995. The financial data of the Company as of and for each of the years in the five-year period ended June 30, 1995 were derived from the Company's audited consolidated financial statements. The financial and other data set forth below should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, included with this report. Because the operating data for the period ending June 30, 1994 do not take into account the effects of the Transaction on the Company, the data for that period are not comparable to the data for the year ended June 30, 1995.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the Company's results of operations, financial condition and liquidity should be read in conjunction with the historical consolidated financial statements of Empire Gas and the notes thereto included in this Report.
Results of Operations
General
Empire Gas' primary source of revenue is retail propane sales, which accounted for approximately 89% of its revenue in fiscal year 1995. Other sources of revenue include sales of gas appliances and rental of customer tanks.
The Company's operating revenue is subject to both price and volume fluctuations. Price fluctuations are generally caused by changes in the wholesale cost of propane. The Company is not materially affected by these price fluctuations, inasmuch as it can generally recover any cost increase through a corresponding increase in retail prices. Consequently, the Company's gross profit per retail gallon is relatively stable from year to year within each customer class. Volume fluctuations from year to year are generally caused by variations in the winter weather from year to year. Because a substantial amount of the propane sold by the Company to residential and commercial customers is used for heating, the severity of the weather will affect the volume sold. Volume fluctuations do materially affect the Company's operations because lower volume produces less revenue to cover the Company's fixed costs, including any debt service costs.
The Company's expenses consist primarily of cost of products sold, general and administrative expenses and, to a much lesser extent, depreciation and amortization and interest expense. Purchases of propane inventory account for the vast majority of the cost of products sold. The Company's general and administrative expenses consist mainly of salaries and related employee benefits, vehicle expenses, and insurance. The Company's interest expense consists primarily of interest on its existing credit facility and the 12 7/8% Senior Secured Notes due 2004 (the "Senior Secured Notes"). Interest expense increased significantly between 1994 and 1995 as a result of issuance of the Senior Secured Notes at the end of June, 1994. Through 1999 a significant portion of the increase will be non-cash interest expense.
Historical financial data for years ended prior to June 30, 1994 do not reflect either the transfer of Energy or the acquisition of the assets of PSNC in the Transaction and therefore historical data for those periods are not comparable to results for the periods subsequent to June 30, 1994. In general, these transactions have resulted in a net reduction in the number of gallons sold, and thus in results (including operating revenue, cost of products sold, gross profit, and provisions for doubtful accounts) that are related to the number of gallons sold. General and administrative expenses have also declined as a result of the elimination of salaries and related expenses of departing officers, the termination of certain agreements between the Company and its former principal shareholder or entities controlled by him, and the elimination of costs related to service centers that are no longer part of the Company.
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Fiscal Years Ended June 30, 1995 and June 30, 1994
Operating revenue. Operating revenue decreased $49.9 million to $74.6 million in fiscal year 1995 as compared to $124.5 million in fiscal year 1994. The decrease was primarily due to the disposition of service centers in the Transaction, offset by increases due to the acquisition of service centers from PSNC in the Transaction. Operating revenue from service centers retained in the Transaction and acquired from PSNC was $74.8 million in fiscal year 1994. The decrease of $200,000, or .3%, in fiscal year 1995 was due to a $1.9 million decrease in gas sales offset by increases of $1.0 million in gas systems and appliances, $400,000 in miscellaneous income, and $300,000 in service labor. The decrease in gas sales was due to an approximately $.06 per gallon decrease in the average net sales price of propane created by competitive pressures resulting from decreased demand due to warm weather. The decrease was partially offset by a 3.9 million gallons volume increase due to the addition of retail service centers through five acquisitions and ten new startups during fiscal year 1995. The increase in miscellaneous income was due primarily to the gain on assets sold including six retail service centers. The increase in service labor is due to the increased installations from greater appliance sales and the increased service market created by the acquisitions discussed above.
Cost of products sold. Cost of products sold decreased $22.3 million to $35.6 million in fiscal year 1995 as compared to $57.9 million in fiscal year 1994, primarily as a result of the Transaction. Cost of product sold from service centers retained in the Transaction and acquired from PSNC was $35.1 million in fiscal year 1994. The increase of $500,000, or 1.4%, is the result of the 3.9 million gallon volume increase, partially offset by a $.01 reduction in the cost of propane and an increase in gas systems and appliances cost due to the volume of sales.
Gross profit. The Company's gross profit for the year decreased $27.6 million to $39.0 million in fiscal year 1995 as compared to $66.6 million in fiscal year 1994, primarily as a result of the Transaction. Gross profit from service centers retained in the Transaction and acquired from PSNC was $39.7 million in fiscal year 1994. The decrease of $700,000, or 1.8%, was caused by the .3% decrease in operating revenue and the 1.4% increase in cost of products sold. The Company's gross profit per gallon decreased from $.43 in 1994 for service centers retained in the Transaction and acquired from PSNC to $.38 in fiscal year 1995, as a result of the decrease in sales price of $.06 per gallon offset by the $.01 reduction in the cost of propane.
General and administrative expense. General and administrative expenses decreased $15.4 million to $28.6 million in fiscal year 1995 from $43.9 million in fiscal year 1994, primarily as a result of savings resulting from the reduction of personnel in connection with the Transaction. As a percentage of total revenues, general and administrative expenses increased to 38.3% in fiscal year 1995 from 35.3% in fiscal year 1994. The increase is due primarily to increases as a percent of total revenues of 2.2% in salaries and commissions, .6% in professional fees, .3% in both rent and maintenance and taxes and licenses, and .4% in office expenses. These increases were partially offset by a decrease of .5% in vehicle fuel and maintenance and .4% in insurance and liability claims. Other smaller increases were incurred in miscellaneous expenses and travel and entertainment and advertising.
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The increase in salaries and commissions was due to several factors including 1) increased retail salary expense due primarily to additional employees as a result of acquisitions and startups and increased commissions as a result of increased emphasis on new customers and tank sets and 2) increased home office salary expense as a result primarily of additional operational employees due to acquisitions and additional marketing employees as a result of the Company's emphasis on enhanced sales efforts. The increase in professional fees is due to fees related to the formation of a 401k plan, fees resulting from a state income tax audit, and fees for a supply purchase consulting agreement. The increase in rent and maintenance of buildings is primarily due to increased tank painting, building and maintenance in converting certain rental facilities to a new identity in connection with the restructuring and an increase in the rental of facilities primarily related to the six retail service centers acquired in June 1994. The increase in taxes and licenses relates primarily to property taxes paid for six retail service centers acquired in June 1994. The increase in office expenses is primarily due to additional spending required for the change of identity for several retail sites and additional mailings to customers. The decrease in insurance and liability claims is due to a reduction in liability claims expense as a result of reduced claims. The decrease in vehicle fuel and maintenance is due to the replacement of older vehicles occurring at the end of fiscal year 1994 and in early fiscal year 1995 resulting in lower maintenance expenses.
Provision for doubtful accounts. The provision for doubtful accounts increased approximately $80,000 to a little over $1.1 million in fiscal year 1995 from a little under $1.1 million in 1994. The increase is due to the final determination of management regarding the aged balances of accounts after substantial collection efforts during fiscal year 1995 offset in part by a reduction in the level of accounts receivable as a result of the transfer of Energy.
Depreciation and amortization. Depreciation and amortization costs decreased by $4.0 million to $6.2 million from $10.2 million primarily as a result of the reduction in assets as a result of the Transaction. Depreciation and amortization on assets retained in the Transaction or acquired from PSNC increased by $700,000, or 12.7%, from $5.5 million for the year ended June 30, 1994 due to amortization of noncompete agreements acquired with new service centers and depreciation of the related assets purchased in June 1994 and fiscal 1995.
Interest expense. Interest expense increased by approximately $2.4 million, or 25.9%, to $10.7 million in fiscal year 1995 as compared to $8.5 million in 1994, due to the approximately $45 million face value of additional long-term debt outstanding as compared to the same period of the prior year, partially offset by an overall lower rate of interest, principally on the new senior secured notes issued in June 1994, as compared to the higher rates on debt repaid with the June 1994 offering.
Fiscal Years Ended June 30, 1994 and June 30, 1993
Operating revenue. Operating revenue decreased $3.8 million or 3.0%, from $128.4 million in fiscal year 1993 to $124.6 million in fiscal year 1994. This decrease was the result of a $4.0 million decrease in propane sales and a $300,000 decrease in other revenue, offset by a $500,000 increase in sales of parts and gas appliances. The decrease in propane sales was caused by a 1.9% decrease in gallons sold and a 1.1% decrease in
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the average gross sales price per gallon. The decreased volume reflects the results of slightly warmer winter weather.
Cost of products sold. Cost of products sold decreased $2.3 million, or 3.8%, from $60.2 million in fiscal year 1993 to $57.9 million in fiscal year 1994. The decrease resulted from the 1.9% decrease in gallons sold, which reflects the slightly warmer winter weather, and a 3.7% decrease in the wholesale cost of propane.
Gross profit. The Company's gross profit for the year decreased $1.6 million, or 2.3%. The decrease was caused by the 3.0% decrease in operating revenue partially offset by the 3.8% decrease in cost of products sold. The Company's gross profit per gallon was relatively constant at $.430 in fiscal year 1994 and $.429 in fiscal year 1993.
General and administrative expense. General and administrative expenses increased $3.0 million, or 7.5% from $40.4 million in fiscal year 1993 to $43.5 million in fiscal year 1994. The increase was due primarily to increases of $1.0 million in insurance and liability claims, $800,000 in salaries and commissions, and $400,000 in professional fees. The increase in insurance and liability claims was due primarily to increased claims. The increase in salaries and commissions was due to annual pay increases combined with a slight decrease in the total number of employees. The increase in professional fees was due to increased litigation fees relating to liability claims and increased accounting and other fees related to the Transaction that were not capitalized. Other smaller increases were incurred in transportation, office expenses, taxes and licenses, rent and maintenance, payroll taxes and employee benefits, travel and entertainment, and advertising.
Provision for doubtful accounts. The provision for doubtful accounts increased $100,000 from $960,000 in fiscal year 1993 to $1.1 million in fiscal year 1994. This increase was the result of a slightly older aging of accounts receivable at June 30, 1994, compared to June 30, 1993.
Depreciation and amortization. Depreciation and amortization remained relatively constant, decreasing by $200,000, or 1.9%, from $10.4 million in fiscal year 1993 to $10.2 million in fiscal year 1994.
Interest expense. Cash interest expense decreased by approximately $1.3 million, or 13.1%, from $9.8 million in fiscal year 1993 to $8.5 million in fiscal year 1994. This decrease was the result of lower interest rates and reduced borrowing levels as compared to the prior year. Amortization of debt discount and expense increased $300,000, or 19.6%, from $1.7 million in 1993 to $2.0 million in 1994. This increase related to increased amortization of the discounts on the Company's 1998 9% Subordinated Debentures, 2007 9% Subordinated Debentures, and 12% Senior Subordinated Debentures, as well as amortization of expenses related to the Company's credit facility.
Recapitalization costs. During fiscal years 1994 and 1993, the Company incurred $398,000 and $223,000, respectively, in expenses relating to proposed recapitalizations that the Company later decided not to pursue.
Income taxes. The effective tax rate for the fiscal year
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ended June 30, 1994, was approximately 41.7% compared to 47.8% for the fiscal year ended June 30, 1993. The Company had a positive effective tax rate in 1994 despite its reported loss primarily because of the amortization of the excess of cost over fair value of assets sold and state income taxes imposed on operations that were profitable in individual states.
Liquidity and Capital Resources
The Company's liquidity requirements have arisen primarily from funding its working capital needs, capital expenditures and debt service obligations. Historically, the Company has met these requirements from cash flows generated by operations and from borrowings under its working capital facility.
Cash flow provided from operating activities was $1.4 million in fiscal year 1995 as compared to $12.9 million in fiscal year 1994. This reduction in cash flow resulted from the $8.3 million decrease in operating income which was caused by the Transaction occurring at June 30, 1994 and the negative sales impact of warmer winter weather in fiscal 1995. In addition to the reduction in operating income, cash flow provided by operations was affected by the following factors: (i) inventories and accounts receivable decreased $700,000 in 1995 and (ii) accounts payable and accrued expenses increased by $5.0 million, primarily due to accrued interest on the senior secured notes, offset by (iii) a decrease in checks in process of collection of $1.7 million and (iv) an increase in refundable income taxes and prepaid expenses of $2.3 million. The working capital items noted above that increased cash flow by $1.7 million in 1995 contributed to an increase in cash flow of $3.8 million in 1994.
Pursuant to the indenture for the 12 7/8% Senior Secured Notes, the Company was required to make a $4.5 million, semi-annual interest payment on July 15, 1995. (The July 15 payment was not required in 1994 because the Senior Secured Notes were not issued until shortly before that date.) The Company met this interest payment requirement and funding for its acquisition program through operating cash flows, the proceeds of previously planned sales of marginally profitable retail service centers and properties pursuant to its long-range business plan, expanding its customer advance purchase program for future retail propane deliveries and scheduling its payments for equipment purchases in the fall of 1995. After the interest payment was made the Company continued its long-range plan by divesting an additional five marginally profitable retail service centers for approximately $1.6 million.
In August 1995, the Company acquired a minority interest in another propane retailer, SYN, Inc. As part of this acquisition, the Company contracted to provide administrative and related services to the retail operations of SYN, Inc. in exchange for an annual management fee payment of $500,000 and overhead cost reimbursement of $3.25 million.
The Company's high degree of leverage makes it vulnerable to adverse changes in the weather and could limit its ability to respond to market conditions, to capitalize on business opportunities, and to meet its contractual and financial obligations. Fluctuations in interest rates will affect the Company's financial condition inasmuch as the Company's working capital facility bears interest at a floating rate. The Company believes that, based on current levels of operations and assuming winter weather that is not substantially warmer in the various regions in which it operates than 15 of 55
the historical average of winter temperatures for those regions, it will be able to fund its debt service obligations from funds generated from operations including the additional funds from the SYN, Inc. Management Agreement discussed above, proceeds of potential sales of service centers and funds available under its working capital facility.
The seasonal nature of the Company's business will require it to rely on borrowings under its $15.0 million credit facility as well as cash from operations, particularly during the summer and fall months when the Company is building its inventory in preparation for the winter heating season. While approximately two-thirds of the Company's operating revenue is earned in the second and third quarters of its fiscal year, certain expense items such as general and administrative expense are recognized on a more annualized basis. Interest expense also tends to be higher during the summer and fall months because the Company relies in part on increased borrowings on its revolving credit line to finance inventory purchases in preparation for the Company's winter heating season.
The Company's capital expenditures consist of routine expenditures for existing operations as well as non-recurring expenditures, purchases of assets for the start-up of new retail service centers, and acquisition costs (including costs of acquiring retail service centers). Routine expenditures usually consist of expenditures relating to the Company's bulk delivery trucks, customer tanks, and costs associated with the installation of new tanks.
The Company's capital expenditures in fiscal year 1995, were $11.9 million which decreased approximately $8.1 million from the preceding year. The decrease was due primarily to a decrease of $4.6 million, from $12.3 million in fiscal year 1994 to $7.7 million in fiscal year 1995, in acquisitions of retail service centers resulting from the 1994 purchases of PSNC Propane Corporation and an additional service center in Colorado compared to the 1995 purchases of four service centers and the addition of several new start-ups. The remaining decrease of $3.5 million is due primarily to the reduced size of the Company as a result of the Transaction and the large amount of new transportation equipment purchased in 1994. During fiscal year 1995, the Company raised $3.0 million from the planned sale of marginally profitable service centers, and raised an additional $4.5 million since June 30, 1995.
The Company intends to fund its routine capital expenditures and the purchase of assets for new retail service centers with cash from operations, borrowings under its credit facility, or other bank financing. The Company intends to fund acquisitions with seller financing, to the extent feasible, and with cash from operations or bank financing. The Company is exploring the possibility of making modifications to its underground storage facility, and has obtained from an engineering and construction company a study of the costs of rehabilitating and opening the facilities, which range from $500,000 to $3,000,000. The Company is currently exploring options for financing these modifications, and there is no assurance that such financing will be available. If the rehabilitation work is not performed and the facilities cannot be sold, then the Company would be required to close the facilities at a cost which the Company believes will not exceed $500,000.
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The Company's credit facility and the indenture for the Senior Secured Notes impose restrictions on the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged position of the Company, could restrict the ability of the Company to acquire financing for capital expenditures and other corporate activities. These restrictions permit additional indebtedness of $6 million for the current fiscal year for the purpose of financing acquisitions but allow additional indebtedness to be incurred by subsidiaries formed for the purpose of making acquisitions as long as the Company does not transfer over $3,000,000 (in the aggregate) of assets to such subsidiaries. The credit facility also contains tangible net worth, capital expenditures, interest coverage and debt restrictions. At June 30, 1995, the Company was not in compliance with the original capital expenditures and interest coverage ratio covenants. The bank has amended the covenants, and the company is now in compliance with the amended covenants.
The Company's $15.0 million credit facility will mature on or about July, 1997, at which time the Company will have to refinance or replace some portion of the facility and may be required to pay some portion of any outstanding balance. There can be no assurance that the Company will be able to refinance or replace the credit facility, or the terms upon which any such financing may occur. Beginning in fiscal year 1999, the cash interest rate on the Senior Secured Notes will increase to 12 7/8%. The Company believes cash from operations will be sufficient to meet the increased interest payments.
Change in Accounting Principle
Effective July 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As a result of this change, there was no material effect upon the Company's financial statements. SFAS 109 requires recognition of deferred tax liabilities and assets for the difference between the financial statement and tax basis of assets and liabilities. Under this new standard, a valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. Prior to fiscal year 1994, deferred taxes were determined using the Statement of Financial Accounting Standards No. 96.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements included elsewhere herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
Name Age Position Held with the Company ____ ___ ______________________________ and Principal Occupation ________________________
Paul S. Lindsey, Jr. 50 Chairman of the Board, Chief Executive Officer, and President since June 1994; previously Vice Chairman of the Board (since February 1987) and Chief Operating Officer (since March 1988); term as director expires 1997
Douglas A. Brown 35 Director since July 1994; member Holding Capital Group, Inc. (since 1989); term as director expires 1997
Kristin L. Lindsey 47 Director/Vice President since June 1994; previously pursued charitable and other personal interests; term as director expires 1996
Bruce M. Withers, Jr. 68 Director since July 1994; Chairman and Chief Executive Officer of Trident NGL Holding, Inc. (since August 1991) and President of the Transmission and Processing Division of Mitchell Energy Corporation (1979 to 1991); term as director expires 1996
Jim J. Shoemake 57 Director since July 1994; partner of Guilfoil, Petzall & Shoemake (since 1970); term as director expires 1998
Valeria Schall 41 Vice President since 1992; Corporate Secretary since 1985 and Assistant to the Chairman (Assistant to the Vice Chairman prior to June 1994) since 1987
Mark Castaneda 31 Vice President Finance and Administration since August 1995; previously Controller of Skelgas Propane since 1991 and an accountant at Deloitte & Touche since 1986.
Willis D. Green 58 Controller since 1989
After expiration of the initial terms of directors as set forth above, each director will serve for a term of three years. Officers of the Company are elected by the Board of Directors of the Company and will 18 of 55
serve at the discretion of the Board, except for Mr. Lindsey who is employed pursuant to an employment agreement that expires June 24, 1999 (subject to extension).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation
The following table provides compensation information for each of the years ended June 30, 1995, 1994, and 1993 for (i) the Chief Executive Officer of the Company, (ii) the four other executive officers of the Company who are most highly compensated and whose total compensation exceeded $100,000 for the most recent fiscal year (of which there were none) and (iii) those persons who are no longer executive officers of the Company but were among the four most highly compensated and whose total compensation exceeded $100,000 for the most recent year (of which there were none).
Employment Agreements
On June 24, 1994, the Company entered into an employment agreement with Mr. Lindsey. The agreement has a five-year term and provides for the payment of an annual salary of $350,000 and reimbursement for reasonable travel and business expenses. The agreement requires Mr. Lindsey to devote substantially all of his time to the Company's business. The agreement is for a term of five years, but is automatically renewed for one year unless either party elects to terminate the agreement at least four 19 of 55
months prior to the end of the term or any extension. The agreement may be terminated by Mr. Lindsey or the Company, but if the agreement is terminated by the Company and without cause, the Company must pay one year's salary as severance pay.
Incentive Stock Option Plan
There were no options granted to the named officer nor exercised by him during fiscal year 1995 and no unexercised options held by him as of the end of the 1995 fiscal year.
Compensation Committee Interlocks and Insider Participation
A compensation committee was formed in July 1994, consisting of Messrs. Withers, Shoemake and Brown. Mr. Lindsey makes the initial recommendation concerning executive compensation for the executive officers of the Company, other than recommendations concerning his own and his wife's compensation, which are then approved by the compensation committee. The compensation committee determines the compensation of Mr. Lindsey's wife and, subject to the employment agreement described above, Mr. Lindsey.
Director Compensation
During the last completed fiscal year, the directors of Empire Gas received an annual fee of $25,000, payable quarterly, for their services. In addition, directors other than Mr. Lindsey and Kristin L. Lindsey received options pursuant to the Company's stock option plan, with Mr. Brown receiving options for 122,830 shares and Messrs. Shoemake and Withers each receiving options for 17,548 shares. Each of the options is exercisable at a price of $7.00 per share, and the options are exercisable until January 23, 2005.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth information with respect to the beneficial ownership of shares of Common Stock of the Company as of September 15, 1995, by persons owning more than five percent of any class, by all directors of the Company, by the individuals named in the Summary Compensation Table owning shares, and by all directors and executive officers of the Company as a group.
Number of Shares Name of Beneficial Owner Beneficially Owned Percent ____________________________ __________________ _______ Paul S. Lindsey, Jr. 1,507,610 95.5% Kristin L. Lindsey 753,805 47.7 Douglas A. Brown 122,830 7.2 Bruce M. Withers, Jr. 17,548 1.1 Jim J. Shoemake 17,548 1.1 All directors and executive officers as a group (8 persons) 1,689,939 97.3
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_________________
[FN]
The address of each of the beneficial owners is c/o Empire Gas Corporation, P. O. Box 303, 1700 South Jefferson Street, Lebanon, Missouri 65536.
Mr. Lindsey's shares consist of 753,805 shares owned by the Paul S. Lindsey, Jr. Trust established January 24, 1992 and 753,805 shares owned by the Kristin L. Lindsey Trust established January 24, 1992. Mr. Lindsey has the power to vote and to dispose of the shares held in the Kristin L. Lindsey Trust. Mrs. Lindsey's shares consist of the shares owned by the Kristin L. Lindsey Trust. Mrs. Lindsey disclaims ownership of the shares held by her husband in the Paul S. Lindsey, Jr. Trust.
The amounts shown include the shares beneficially owned by Mr. Lindsey and Acreman, and Mrs. Lindsey as set forth above, and 30,132 shares owned by other executive officers.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mrs. Kristin L. Lindsey, who beneficially owns approximately 47.7% of the Company's outstanding Common Stock and became a director of the Company upon consummation of the Transaction, is the majority stockholder in a company that supplies paint to the Company. The Company's purchases of paint from this company totalled $157,842 in Fiscal year 1995 and $210,400 in fiscal year 1994.
The Company has entered into an agreement with each shareholder (all of whom are directors or employees of the Company) providing the Company with a right of first refusal with respect to the sale of any shares by such shareholders. In addition, the Company has the right to purchase from such shareholders all shares they hold at the time of their termination of employment with the Company at the then current fair market value of the shares. The fair market value is determined in the first instance by the Board of Directors and by an independent appraisal (the cost of which is split between the Company and the departing shareholder) if the departing shareholder disputes the board's determination.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(i) Financial Statements
Report of Independent Accountants Consolidated Balance Sheets as of June 30, 1995 and 1994 Consolidated Statement of Operations for the Years Ended June 30, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1994 and 1993
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(a)(2) Financial Statement Schedules
Schedule II Valuation and qualifying accounts
(a)(3) Exhibits
Exhibit No. Description ___ ___________
3.1 Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 33-53343))
3.2 Certificate of Amendment of the Certificate of Incorporation of the Company, dated April 26, 1994, relating to the change of name (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (No. 33- 53343))
3.3 By-laws of the Company (incorporated herein by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1 (No. 33-53343))
4.1 Indenture between Empire Gas Corporation and J. Henry Schroder Bank & Trust Company, Trustee, relating to the 9% Subordinated Debentures due December 31, 2007 and the form of 9% Subordinated Debentures due December 31, 2007 (incorporated herein by reference to Exhibit 4(a) to the Empire Incorporated and Exco Acquisition Corp. (Commission File No. 2-83683) Registration Statement on Form S-14 filed with the Commission on May 11, 1983); and First Supplemental Indenture thereto between Empire Gas Corporation (now known as EGOC) and IBJ Schroder Bank & Trust Co., dated as of December 13, 1989 (incorporated herein by reference to Exhibit 4(c) to Empire Gas Corporation (now known as EGOC) Registration Statement on Form 8-B filed with the Commission on February 1, 1990)
4.2 Indenture between the Company and Shawmut Bank Connecticut, National Association, Trustee, relating to the 12 7/8% Senior Secured Notes due 2004, including the 12 7/8% Senior Secured Notes due 2004, the Guarantee and the Pledge Agreement (incorporated herein by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994)
4.3 Warrant Agreement (incorporated herein by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994)
10.1 Shareholder Agreement, dated as of October 28, 1988, by and among Empire Gas Acquisition Corporation and Robert W. Plaster Trust, Robert W. Plaster, Trustee; Paul S. Lindsey, Jr.; Stephen R. Plaster Trust, Lynn C. Hoover, Trustee; Cheryl Plaster Schaefer Trust, Lynn C. Hoover, Trustee;
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Robert L. Wooldridge; Gwendolyn B. VanDerhoef; Dwight Gilpin; Luther Henry Gill; Valeria Schall; Floyd J. Waterman; Larry W. Bisig; Larry Weis; Robert Heagerty; Murl J. Waterman; Earl L. Noe; Thomas Flak; Michael Kent St. John; James E. Acreman; Carolyn S. Rein; Dan Weatherly; Nina Irene Craighead; Joyce Sue Kinnett; Edwin H. McMahon; Paul Stahlman; Ralph Wilson; Alan Simer; Ferrell Stamper; and Empire Gas Corporation Employee Stock Ownership Plan, Robert W. Plaster, Trustee (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-53343))
10.2 1995 Stock Option Plan of Empire Gas Company
10.3 Credit Agreement between the Company and Continental Bank, as agent (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994)
10.4 Lease Agreement, dated May 7, 1994, between the Company and Evergreen National Corporation (incorporated herein by reference to Exhibit F of Exhibit 10.1 to the Empire Gas Operating Corporation (Commission File No. 1-6537-3) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994)
10.5 Services Agreement, dated May 7, 1994, between the Company and Empire Service Corporation (incorporated herein by reference to Exhibit G of Exhibit 10.1 to the Empire Gas Operating Corporation (Commission File No. 1-6537-3) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994)
10.6 Non-Competition Agreement, dated May 7, 1994, by and among the Company, Energy, Robert W. Plaster, Stephen R. Plaster, Joseph L. Schaefer, Paul S. Lindsey, Jr. (incorporated herein by reference to Exhibit E of Exhibit 10.1 to the Empire Gas Operating Corporation (Commission File No. 1-6537-3) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994)
10.7 Employment Agreement between the Company and Paul S. Lindsey, Jr. (incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (No. 33-53343))
10.8 Asset Purchase Agreement by and among the Company, Empire Gas, Inc. of North Carolina, PSNC Propane Corporation, and Public Service Company of North Carolina, Incorporated (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (No. 33-53343))
10.9 Indemnification Agreement between the Company and Douglas A. Brown (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 33- 53343))
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10.10 Tax Indemnification Agreement between the Company and Energy (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (No. 33-53343))
10.11 Supply Contract No. 1, dated June 1, 1993, between EGOC and Warren Petroleum Company (incorporated herein by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (No. 33-53343))
10.12 Supply Contract No. 2, dated June 1, 1993, between EGOC and Warren Petroleum Company (incorporated herein by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (No. 33-53343))
10.13 Management Agreement between Empire Gas Company, Northwestern Growth Corporation and SYN, Inc. dated May 17,
10.14 Agreement Among Initial Stockholders and SYN, Inc. dated May 17, 1995
10.15 Waiver Agreement dated April 29, 1995 by and among Empire Gas Corporation, SYN, Inc., Paul S. Lindsey, Jr., Northwestern Growth Corporation, Empire Energy Corporation, Robert W. Plaster and Stephen R. Plaster
10.16+ Propane Sales Agreement dated August 24, 1995 between Empire Gas Corporation and Warren Petroleum Company
10.17+ Supply Contract dated April 27, 1995 between Empire Gas Corporation and Phillips 66 Company
10.18+ Dealer Sale Contract dated January 20, 1995 between Empire Gas Corporation and Conoco Inc.
10.19+ Supply Contract dated April 24, 1995 between Empire Gas Corporation and Enron Gas Liquids, Inc.
10.20 Amendment No. 1 to Supplement A to Loan and Securities Agreement dated June 29, 1995 between Empire Gas Corporation and Bank of America Illinois
21.1 Subsidiaries of the Company
27.1 Financial Data Schedules
(b) Reports on Form 8-K
None
(c) Exhibits
See (a)(2) above.
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(d) Financial Statements
See (a)(2) above.
+ Confidential treatment has been requested. The copy filed as an exhibit omits the information subject to the confidentially request.
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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.
Empire Gas Corporation
By: /s/ Paul S. Lindsey, Jr. _________________________ Paul S. Lindsey, Jr.
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.
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FINANCIAL STATEMENT INDEX _________________________
Empire Gas Corporation - Consolidated Financial Statements for June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Balance Sheets as of June 30, 1995 and 1994. . . . . . . . . 28
Consolidated Statements of Operations - Years Ended June 30, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Stockholder's Equity - Years Ended June 30, 1995, 1994, and 1993 . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows - Years Ended June 30, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENT SCHEDULE INDEX __________________________________
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . 54
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . 55
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Independent Accountants' Report _______________________________
Board of Directors and Stockholders Empire Gas Corporation Lebanon, Missouri
We have audited the accompanying consolidated balance sheets of EMPIRE GAS CORPORATION as of June 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 EMPIRE GAS CORPORATION as of June 30, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 5, the Company changed its method of accounting for income taxes in 1994.
Baird, Kurtz & Dobson
Springfield, Missouri August 25, 1995 28 of 55
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business __________________
The Company's principal operations are the sale of LP gas at retail and wholesale. Most of the Company's customers are owners of residential single or multi-family dwellings who make periodic purchases on credit. Such customers are located throughout the United States with the larger number concentrated in the central and western states and along the Pacific coast. At acquisition date, asset and liability values were recorded at their market values with respect to the purchase price. At June 30, 1994, the Company's ownership and management was changed. See Note 2 for a description of this restructuring transaction.
Principles of Consolidation ___________________________
The consolidated financial statements include the accounts of Empire Gas Corporation and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Revenue Recognition Policy __________________________
Sales and related cost of product sold are recognized upon delivery of the product or service.
Inventories ___________
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for retail operations and specific identification method for wholesale operations. At June 30 the inventories were:
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 3: RELATED-PARTY TRANSACTIONS
During 1995, 1994 and 1993, the Company has purchased $157,842, $210,400, and $68,900, respectively, of paint from a corporation owned by the spouse of the Principal Shareholder of the Company.
During fiscal year 1994, the Company paid an investment banking firm affiliated with a director of the Company $400,000 in return for services rendered in connection with the negotiation of the Company's revolving credit facility and with the Restructuring Transaction.
Beginning July 1, 1994, the Company entered into a seven-year services agreement with a subsidiary of Energy to provide data processing and management information services. The services agreement provides for payments by the Company to be based on an allocation of the subsidiary's actual costs based on the gallons of LP gas sold by the Company as a percentage of the gallons of LP gas sold by the Company and Energy. For the year ended June 30, 1995, total expenses related to this services agreement were $1.1 million.
Beginning July 1, 1994, the Company entered into a new lease agreement with a corporation owned principally by the Former Shareholder to lease its corporate office space. The new lease requires annual rent payments of $75,000 for a period of seven years, with two three-year renewal options.
Prior to the Restructuring described in Note 2, the Company had various related party transactions with its Former Shareholder as described below.
The Company leased the corporate home office, land, buildings and equipment from a corporation principally owned by the Former Shareholder. The Company paid $200,000 during each of the years ended June 30, 1994 and 1993, related to this lease. This lease was terminated effective June 30, 1994, at no additional expense to the Company.
In connection with the stock purchase described in Note 2, the Company repurchased, at face value, $4.7 million principal amount of the Company's 2007 9% Subordinated Debentures from the Former Shareholder and purchased, at face value, $285,000 principal amount of the Company's 2007 9% Subordinated Debentures from certain departing officers and employees of the Company.
During 1994 and 1993, the Company provided data processing, office rent and other clerical services to two corporations owned principally by the Former Shareholder and was being reimbursed $7,000 per month for these services. The Company has discontinued providing these services as of June 30, 1994.
In 1994 and 1993, the Company leased a jet aircraft and an airport hanger from a corporation owned by the Former Shareholder. The 41 of 55
lease required annual rent payments of $100,000 beginning April 1, 1992. In addition to direct lease payments, the Company was also responsible for the
EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
NOTE 3: RELATED-PARTY TRANSACTIONS (Continued)
operating costs of the aircraft and the hanger. During the years ended June 30, 1994 and 1993, the Company paid direct rent of $75,000 and $100,000, respectively. This lease was terminated effective June 30, 1994, at no additional expense to the Company.
The Company paid $150,000 in each of the years ended June 30, 1994 and 1993, to a corporation owned by the Former Shareholder pursuant to an agreement providing the Company the right to use business guest facilities owned by the corporation. This agreement was terminated effective June 30, 1994, at no additional expense to the Company.
The Company borrowed funds from its Former Shareholder and from individuals and corporations related to the Former Shareholder during the year ended June 30, 1994. The maximum amounts borrowed during this period was $3,000,000. The interest rate on this borrowing was equal to or below the rates available through the working capital facility. Interest expense incurred on this related-party borrowing was $200,000. During November 1992 the Former Shareholder loaned under a separate agreement $13.25 million to the Company to repay the acquisition credit facility. Interest expense incurred on this related-party borrowing for the year ended June 30, 1993, was $749,000. In June 1993, all outstanding borrowings from the Former Shareholder were repaid using the proceeds from the term credit facility.
NOTE 4: LONG-TERM DEBT
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 4: LONG-TERM DEBT (Continued)
(A) The working capital facility was provided to the Company in June 1994 in conjunction with the offering of the 12 7/8% Senior Secured Notes, due 2004. All of the Company's receivables and inventories are pledged to the agreement,which contains tangible net worth, capital expenditures, interest coverage ratio, debt and certain dividend restrictions. These dividend restrictions prohibit the Company from paying common stock cash dividends. At June 30, 1995, the Company was not in compliance with the original capital expenditures and interest coverage ratio covenants. The bank has amended the covenants, and the Company is in compliance with the amended covenants.
The facility provides for borrowings up to $15 million, subject to a sufficient borrowing base. The borrowing base generally limits the Company's total borrowings to 85% of eligible accounts receivable and 55% of eligible inventory. In addition, the Company can borrow an additional $1.5 million during the period July 1, 1995, to January 31, 1996 (overadvance option). The facility bears interest at either 1% over prime or 2.5% over the LIBOR rate. The agreement provides for a commitment fee of .375% per annum of the unadvanced portion of the commitment. The Company's available revolving credit line amounted to $334,000 at June 30, 1995, after considering $1,501,000 of outstanding letters of credit. The letters of credit are principally related to the Company's self-insurance program (Note 6).
(B) The notes were issued June 1994 at a discount and bear interest at 7% through July 15, 1999, and at 12 7/8% thereafter. The notes are redeemable at the Company's option. Prior to July 15, 1999, only 35% of the original principal issued may be redeemed, as a whole or in part, at 110% of the principal amount through July 15, 1997, and at declining percentages thereafter. The notes are guaranteed by the subsidiaries of the Company and secured by the common stock of the subsidiaries of the Company.
The original principal amount of the notes issued ($127,200,000) was adjusted ($27,980,000) to give effect for the original issue discount and the common stock purchase warrants (effective interest rate of 13.0%). The discount on these notes is being amortized over the remaining life of the notes using the effective interest, bonds outstanding method. The face value of notes outstanding at June 30, 1995 and 1994, is $127,200,000.
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The proceeds from this new offering were used to repay existing debt; fund an acquisition; repurchase Company stock and for working capital (Note 2).
Separate financial statements of the guarantor subsidiaries are not included because such subsidiaries have jointly and severally guaranteed the notes on a full and unconditional basis, the aggregate assets and liabilities of the guarantor
EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 4: LONG-TERM DEBT (Continued)
subsidiaries are substantially equivalent to the assets and liabilities of the parent on a consolidated basis and the separate financial statements and other disclosures concerning the subsidiary guarantors are not deemed to be material.
The guarantor subsidiaries are restricted from paying dividends to the Company during any periods of default under the respective debt agreements or in periods where the Company has borrowed under the overadvance option described above.
(C) The debentures, issued June 1983, are redeemable at the Company's option, as a whole or in part, at par value. A sinking fund payment sufficient to retire $191,000 of principal outstanding is required on December 31, 2005. In June 1994, the Company used proceeds from the issuance of the 12 7/8% Senior Secured Notes, due 2004, to repurchase $16,201,200 face value of these debentures at a discount which resulted in an extraordinary charge (Note 2).
The original principal amount of debentures issued ($27,313,000) was adjusted to market at issuance (effective interest rate of 16.5%). The remaining discount on these debentures is being amortized over the remaining life of the debentures using the effective interest, bonds outstanding method. The face value of debentures outstanding at June 30, 1995 and 1994, is $9,745,800.
(D) Purchase contract obligations arise from the purchase of operating businesses and are collateralized by the equipment and real estate acquired in the respective acquisitions. At June 30, 1995 and 1994, these obligations carried interest rates from 7% to 10% and are due periodically through 1999.
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 4: LONG-TERM DEBT (Continued)
Aggregate annual maturities and sinking fund requirements (in thousands) of the long-term debt outstanding at June 30, 1995, are:
1996 $ 504 1997 5,568 1998 658 1999 357 2000 83 Thereafter 108,477 ________ $115,647 ________ ________
NOTE 5: INCOME TAXES
Effective July 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). As a result of the change, there was no effect on income tax expense, and the effect on current-noncurrent classification of deferred tax assets and liabilities was not material.
SFAS 109 requires recognition of deferred tax liabilities and assets for the difference between the financial statement and tax basis of assets and liabilities. Under this new standard, a valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
Prior to July 1, 1993, deferred taxes were determined using the Statement of Financial Accounting Standards No. 96.
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 5: INCOME TAXES (Continued)
The above net deferred tax asset (liability) is presented on the June 30 balance sheet as follows:
1995 1994 ____ ____ (In Thousands)
Deferred Tax Assets ___________________ Deferred tax asset - current $ 1,350 $ 631 Deferred tax liability - long-term (13,140) (15,421) ________ ________
Net deferred tax liability $ (11,790) $ (14,790) ________ ________
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
NOTE 6: SELF INSURANCE AND RELATED CONTINGENCIES
Under the Company's current insurance program, coverage for comprehensive general liability and vehicle liability is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. The Company retains a significant portion of certain expected losses related primarily to comprehensive general and vehicle liability. Under these
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current insurance programs, the Company self-insures the first $500,000 of coverage (per incident). Effective July 1994, the Company reduced its EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 6: SELF INSURANCE AND RELATED CONTINGENCIES (Continued)
self-insured retention for vehicle liability to $250,000 per incident. Effective July 1995, the Company returned its self-insured retention for vehicle liability to $500,000 per incident. The Company obtains excess coverage from carriers for these programs on occurrence and claims-made basis policies. The excess coverage for comprehensive general liability provides a loss limitation that limits the Company's aggregate of self- insured losses to $1 million per policy period. The aggregate cost of obtaining this excess coverage from carriers for the years ended June 30, 1995, 1994 and 1993, was $1,237,000, $1,634,000 and $1,441,000, respectively.
For the policy periods prior to July 1, 1991, July 1, 1992, through June 30, 1993, and July 1, 1993, through June 30, 1994, the Company has provided for aggregate comprehensive general liability losses through the policies' $1 million loss limit. Additional losses, if any, are insured by the excess carrier and should not result in additional expense to the Company. As of June 30, 1995, the Company estimates losses for the comprehensive general liability policy periods July 1, 1991, through June 30, 1992, and July 1, 1994, through June 30, 1995, will not reach the $1 million loss limits and has provided accordingly.
During the year ended June 30, 1993, the Company had obtained workers' compensation coverage from carriers and state insurance pools at an annual cost of $1,743,000. Effective July 1, 1993, the Company changed its policy to self-insure the first $500,000 of workers' compensation coverage (per incident). The Company purchased excess coverage from carriers for workers' compensation claims in excess of the self-insured coverage. Provisions for losses expected under this program were recorded based upon the Company's estimates of the aggregate liability for claims incurred. The Company provided letters of credit aggregating approximately $2.3 million in connection with this program of which $1,141,400 is outstanding at June 30, 1995. Effective July 16, 1994, the Company changed its policy so that it will obtain workers' compensation coverage from carriers and state insurance pools.
Provisions for self-insured losses are recorded based upon the Company's estimates of the aggregate self-insured liability for claims incurred. A summary of the self-insurance liability, general, vehicle and workers' compensation liabilities (in thousands) for the years ended June 30, 1995, 1994 and 1993, are:
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The ending accrued liability includes $400,000 for incurred but not reported claims at June 30, 1995, $125,000 at June 30, 1994, and $500,000 at June 30, 1993. The current portion of the ending liability of $500,000, $500,000, and $460,000 at June 30, 1995, 1994 and 1993, respectively, is included in accrued expenses in the consolidated balance sheets. The noncurrent portion at the end of each period is included in accrued self- insurance liability.
The Company and its subsidiaries are also defendants in various lawsuits related to the self-insurance program which are not expected to have a material adverse effect on the Company's financial position or results of operations.
The Company currently self insures health benefits provided to the employees of the Company and its subsidiaries. Provisions for losses expected under this program are recorded based upon the Company's estimate of the aggregate liability for claims incurred. The aggregate cost of providing the health benefits was $240,000, $979,000 and $873,000 for the years ended June 30, 1995, 1994 and 1993, respectively.
In conjunction with the restructuring transaction (Note 2) the Company and Energy have agreed to share on a percentage basis the self-insured liabilities incurred prior to June 30, 1994, including both reported and unreported claims. The self-insured liabilities included under this agreement include general, vehicle, workers' compensation and health insurance liabilities. Under the agreement, the Company assumed 52.3% of the liability with Energy assuming the remaining 47.7%.
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 7: LITIGATION CONTINGENCIES
The Company's federal income tax returns have been settled through June 30, 1991. The Company has no federal income tax audits in process at June 30, 1995.
The Company and its subsidiaries are presently involved in two state income tax audits and are also defendants in other business-related lawsuits which are not expected to have a material adverse effect on the Company's financial position or results of operations.
In conjunction with the restructuring transaction (Note 2) the Company and Energy have agreed to share on a percentage basis amounts incurred related to federal and state audits and other business related lawsuits incurred prior to June 30, 1994. The liability recorded at June 30, 1995 and 1994, in the Company's financial statements related to these contingencies represents its 52.3% portion of the total liability as of that date.
NOTE 8: STOCK OPTIONS AND WARRANTS
Stock Options _____________
The table below summarizes transactions under the Company's stock option plan:
Number of Shares Option Price _________ _____________
Balance June 30, 1992 467,929 $ .377 - 1.50 Exercised (338,679) .377 - 1.50 _________
Balance June 30, 1993 129,250 1.12 - 1.50 Exercised (129,250) 1.12 - 1.50 _________
Balance June 30, 1994 -0- Issued 377,926 $ 7.00 _______
Balance June 30, 1995 377,926 _______ _______
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 8: STOCK OPTIONS AND WARRANTS (Continued)
At June 30, 1994, all outstanding stock options were exercised in connection with the restructuring transaction (see Note 2). During the year ended June 30, 1995, a new stock option plan was approved resulting in the issuance of additional options. These options consist of 220,000 shares issued to employees, of which one-fifth become exercisable in January 1996 and each year thereafter. The remaining 157,926 shares were issued to directors of the Company and are exercisable at June 30, 1995.
Common Stock Purchase Warrants ______________________________
In connection with the Company's restructuring, the Company attached warrants to purchase common stock to the new issuance of 12 7/8% Senior Secured Notes, due 2004. Each warrant represents the right to purchase one share of the Company's common stock for $.01 per warrant. The warrants are exercisable after January 15, 1995, and will expire on July 15, 2004.
The table below summarizes warrant activity of the Company:
Number of Shares Exercise Price _________ ______________
Issued 175,536 $.01 _______
Balance at June 30, 1995 175,536 $.01 _______ _______
NOTE 9: ADDITIONAL CASH FLOW INFORMATION (In Thousands)
1995 1994 ____ ____
Noncash Investing and Financing Activities __________________________________________
Purchase contract obligations incurred $ 1,433 $ 1,015 Debt acquisition costs in accounts payable -- $ 746 Purchase of treasury stock, net of option exercise price, in accounts payable -- $ 180
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 9: ADDITIONAL CASH FLOW INFORMATION (In Thousands) (Continued)
Distribution of operating assets other than cash with Empire Energy Corporation:
____
Current assets 8,185 Fixed assets, net 51,620 Other assets 3,822 Current liabilities (2,697) Long-term liabilities (15,926) ________ $ 45,004 ________ ________
1995 1994 1993 ____ ____ ____
Additional Cash Payment Information ___________________________________
Interest paid $ 7,196 $ 9,191 $ 12,185 Income taxes paid (net of refunds) $ -- $ 2,620 $ 3,434
NOTE 10: EMPLOYEE BENEFIT PLAN
The Company formed in fiscal year 1995 a defined contribution retirement plan eligible to substantially all employees. Employees who elect to participate may contribute a percentage of their salaries to the plan. The Company may make contributions to the plan at the discretion of its Board of Directors. No contributions to the plan were made by the Company during the year ended June 30, 1995.
NOTE 11: RESTRUCTURING PROPOSAL COSTS
During the years ended June 30, 1994 and 1993, the Company was considering proposals to restructure the debt and equity of the Company. The Company abandoned the proposals and expensed the related costs of $398,000 and $223,000 in 1994 and 1993, respectively.
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 12: UNDERGROUND STORAGE FACILITY
The Company owns salt cavern LPG underground storage facilities which are not in use and are subject to a consent agreement with the state of Kansas. Under the agreement, the Company was to submit a plan to the state for resuming use of the facilities or permanently closing them. The due date of the plan was initially January 1, 1994. The state has granted a final extension to December 1, 1995.
The Company has obtained from an engineering and construction company a study of the costs of rehabilitating and opening the facilities, which range from $500,000 to $3.0 million.
Management is presently evaluating several options after rehabilitation of the facility, including use as expanded storage for company inventories, use as leased storage to customers and other distributors and the sale of the facility. If the rehabilitation work is not performed and the facilities cannot be sold, then the Company would be required to close the facilities at a cost which the Company believes will not exceed $500,000.
Due to the uncertainties outlined above, the Company has taken a charge of $924,000 and $1.4 million against 1995 and 1994 earnings, respectively, thereby eliminating the carrying value of the facilities.
NOTE 13: SUBSEQUENT SALES OF SUBSIDIARIES
Subsequent to year end, the Company sold eleven retail service centers for sales prices totaling approximately $4.5 million. Fiscal year 1995 summary data of the facilities sold were as follows:
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EMPIRE GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 13: SUBSEQUENT SALES OF SUBSIDIARIES (Continued)
In Thousands ____________
Operating revenue $ 3,268 Cost of sales 1,811 Gross profit $ 1,457 _____
Working capital $ 391 ___
Net property, plant and equipment $ 2,494 _____ _____
NOTE 14: SUBSEQUENT EVENT
On August 15, 1995, the Company entered into a joint venture with Northwestern Growth Corporation, a subsidiary of Northwestern Public Service Corporation, to acquire the assets of Synergy Group Incorporated, the nation's fifth largest LP gas distributor. The Company has acquired for $10,000 10% of the common stock of SYN, Inc., the acquisition entity, and has an option to acquire an additional 20% of the common stock of SYN, Inc. for $20,000. The Company has entered into a Management Agreement pursuant to which the Company manages the joint entity. Under the terms of the Management Agreement, the Company provides all management of the retail facilities and accounting services at the central office. In exchange for those services, the Company receives a $500,000 annual management fee and $3.25 million annual overhead cost reimbursement, both paid on a monthly basis.
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Independent Accountants' Report on Financial Statement Schedules ________________________________________________________________
Board of Directors and Stockholders Empire Gas Corporation Lebanon, Missouri
In connection with our audit of the financial statements of EMPIRE GAS CORPORATION for each of the three years in the period ended June 30, 1995, we have also audited the following financial statement schedules. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits of the basic financial statements. The schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and are not a required part of the consolidated financial statements.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Baird, Kurtz & Dobson
Springfield, Missouri August 25, 1995
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