STAR GROUP, L.P. — Audit Report / Information 1997

Nov 24, 1997

SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------------------ FORM 8-K / A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) November 24, 1997 STAR GAS PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware -------- (State or other jurisdiction of incorporation) 33-98490 -------- (Commission File Number) 06-1437793 ---------- (I.R.S. Employer Identification No.) 2187 Atlantic Street Stamford, Connecticut, 06902 (Address of principal executive office) (203) 328-7300 (Registrant's telephone number, including area code) ITEM 1. CHANGE IN CONTROL OF REGISTRANT None. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS Star Gas Partners, L.P. ("the Partnership") is a Master Limited Partnership and through its subsidiary, Star Gas Propane ("the OLP"), markets and distributes propane in the Midwest and Northeast sections of the United States. Star Gas Corporation, a Delaware Corporation, ("Star Gas") is the general partner of both the Partnership and the OLP. On October 22, 1997, pursuant to a purchase agreement ("Stock Purchase Agreement") dated as of October 20, 1997, Star Gas purchased 240 shares of Common Stock ($100 par value) of Pearl Gas Co. ("Pearl"), an Ohio Corporation, representing all of the issued and outstanding capital stock of Pearl. Pearl markets and distributes propane in Ohio and Michigan through a storage and distribution system consisting of five offices, fifteen bulk storage plants, fifty employees and over forty-five vehicles. For the twelve months ended September 30, 1997, Pearl sold 14.3 million gallons of propane, primarily to higher margin residential customers. Pearl currently serves over 12 thousand active customers. The purchase price for said stock was $22.6 million and was paid in cash. The purchase price included estimated working capital of $1.9 million. This amount will be adjusted upward or downward based on actual working capital as of October 21, 1997. The amount of consideration for the Pearl Common Stock was determined by arms length bargaining between Star Gas and the Sellers. Funding for the stock purchase and related transaction expenses of $0.4 million was provided by a $23.0 million bank acquisition facility. Subsequent to the acquisition of the common stock of Pearl, Pearl was merged into Star Gas in a tax-free liquidation. On October 22, 1997, a Conveyance and Contribution Agreement was entered into by, and among, the Partnership, the OLP and Star Gas. Star Gas contributed to the OLP all of the Pearl assets it obtained in the stock purchase of Pearl Gas and the subsequent merger of Pearl into Star Gas. In exchange, Star Gas received a 2.7 percent limited partnership interest in the OLP and a 0.00028 percent general partnership interest in the OLP. In addition, the OLP assumed all of the liabilities associated with the Pearl stock purchase prior and subsequent to the merger, including the $23.0 million of bank debt. The aggregate value of the interests transferred to Star Gas from the OLP is $3.5 million. The issuance of the additional partnership interests to Star Gas is intended to compensate Star Gas for additional significant income tax liabilities which would be reflected in the consolidated federal income tax return of Star Gas' parent corporation, Petroleum Heat and Power Co., Inc. ("Petro"). The issuance of such partnership interests was approved by the Audit Committee of Star Gas and the Executive Committee of Petro. Star Gas then exchanged the above described interest in the OLP for a 0.00027 percent general partnership interest in the Partnership and 147,727 common units in the Partnership, at a per unit price based upon the average closing price of the Partnership's common units ten days prior to the execution of the Stock Purchase Agreement. The OLP then repaid the $23.0 million acquisition facility with $2.0 million of available cash and $21.0 million borrowed under the OLP's own acquisition facility. The OLP intends to utilize the conveyed assets in the conduct of its propane business. ITEM 3. BANKRUPTCY OR RECEIVERSHIP None. ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT None. ITEM 5. OTHER EVENTS None. ITEM 6. REGISTRATION OF REGISTRANT'S DIRECTORS None. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS Item 7 is amended from the prior filing of October 23, 1997 to include the financial statements of the Pearl Gas Co. ITEM 8. CHANGES IN FISCAL YEAR None. PEARL GAS CO. Financial Statements December 31, 1995 and 1996 (With Independent Auditors' Report Thereon) PEARL GAS CO. INDEX TO FINANCIAL STATEMENTS

INDEPENDENT AUDITOR'S REPORT The Board of Directors Pearl Gas Co.: We have audited the accompanying balance sheets of Pearl Gas Co. as of December 31, 1995 and 1996, and the related statements of income, shareholders' equity, and cash flows for the years then ended. 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 financial statements referred to above present fairly, in all material respects, the financial position of Pearl Gas Co. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Detroit, Michigan October 22, 1997 2 PEARL GAS CO. BALANCE SHEETS DECEMBER 31, 1995 AND 1996

See accompanying notes to financial statements. 3 PEARL GAS CO. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995 AND 1996

See accompanying notes to financial statements. 4 PEARL GAS CO. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1996

See accompanying notes to financial statements. 5 PEARL GAS CO. STATEMENTS OF CASH FLOWS DECEMBER 31, 1995 AND 1996

Non-cash disclosure: - ------------------- On September 1, 1996, the remaining balance of notes receivable shareholders of $821,926 were converted into new notes. See accompanying notes to financial statements. 6 PEARL GAS CO. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 (1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Description of Business ----------------------- The primary business of Pearl Gas Co. (the Company), is the sale and distribution of propane gas. The Company's primary customers are businesses and individuals in the Northwest Ohio, Southeast Michigan and Northeast Indiana areas. Accounts Receivable ------------------- The Company enters into "budget payment plans" with several, principally residential customers, which allow for pre-established set monthly payments regardless of actual usage. This may result with a customer in a pre-payment situation in low usage months. It is the Company's practice to net the pre- payments with accounts receivable for financial statement presentation. Inventories ----------- Inventories are stated at the lower of cost determined by first-in, first-out method or market value (net realizable value). Property and Equipment ---------------------- Property and equipment are carried at cost. Expenditures for additions and improvements that add materially to productive capacity or extend the life of an asset are capitalized, and expenditures for maintenance and repairs are charged to operations. When machinery and equipment items are retired or otherwise disposed of, the related accounts for cost and depreciation are relieved. The Company provides depreciation on property and equipment for reporting purposes by the straight-line method over their estimated useful lives, which range from 10 to 25 years for buildings, building components and land improvements, 5 to 10 years for automotive vehicles, and 10 to 20 years for office and operating equipment and tanks. Cash Equivalents ---------------- For purposes of the statement of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Environmental ------------- Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. (continued) 7 PEARL GAS CO. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 Contract Payable ---------------- In order to guarantee the supply of propane, the Company enters into take or pay supply contracts with certain propane suppliers. At the time the Contract is entered into, a prepaid asset and corresponding contract payable is recorded on the balance sheet. The asset and liability are reduced as the Company takes delivery of the propane. Deferred Revenue ---------------- The Company bills customers annually for propane tank rental. The rental revenue is deferred and recognized ratably over the twelve month period of the rental agreement. Use of Estimates ---------------- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosures of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) NOTES RECEIVABLES - SHAREHOLDERS Notes receivable from shareholders, which is reflected as a reduction to shareholders' equity on the accompanying balance sheet, consists of the following:

(3) INVENTORIES Inventories consist of the following:

(continued) 8 PEARL GAS CO. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (4) PROPERTY AND EQUIPMENT Property and equipment consist of the following:

(5) CONTRACT PAYABLE At December 31, 1995 and 1996, the Company had two outstanding purchase commitments with a supplier under take or pay contracts, for terms of three months. The outstanding contracts at December 31, 1995 and 1996 were $375,501 and $437,000, respectively, with interest payable monthly at prime plus 1%. Interest paid for the period ended December 31, 1995 and 1996, respectively, was $12,319 and $12,497. The December 31, 1995 and 1996 interest rate was 9.50% and 9.25%, respectively. (6) LONG-TERM DEBT The Company has a $500,000 line of credit agreement with its bank under a year-to-year agreement. There were no borrowings under the line of credit agreement at December 31, 1995 and 1996. The Company's long-term debt at December 31, 1995 consisted of:

(continued) 9 PEARL GAS CO. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 (7) FEDERAL INCOME TAXES An election has been filed by the Company to be treated as an S Corporation effective July 1, 1994. As a result of this election, Pearl Gas Co. changed its fiscal year end of June 30 to a calendar year end. In lieu of corporation income taxes, the shareholder of an S Corporation is taxed on a proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements for the years ended December 31, 1995 and 1996. Income that has been taxed to the shareholders but not distributed (Accumulated Adjustments Account) was $1,790,652 and $3,262,548 as of December 31, 1995 and 1996, respectively. The Company records depreciation on property and equipment for tax purposes using the accelerated cost recovery system and the modified accelerated cost recovery system. Deferred income taxes have been recorded for the excess of tax depreciation over book depreciation for the period prior to S-election. (8) RELATED PARTY TRANSACTIONS The Company entered into a lease with an officer of the Company for the use of a fleet garage. The lease is renewable on a year-to-year basis and currently provides for a payment of $14,400 per year. (9) LEASES The Company has several non-cancelable operating leases primarily for land for bulk plants that expires May 21, 2002. Rental expense for these operating leases (excluding the fleet garage lease noted in footnote 8) was $6,100 for 1995 and 1996, respectively. Future minimum lease payments under non-cancelable leases as of December 31, 1996 are: 1997, $6,100; 1998, $3,600; 1999, $3,600; 2000, $3,600; 2001, $3,600. (10) PROFIT SHARING PLAN The Board of Directors annually determines the contribution to the Company's profit-sharing plan. All employees who work in excess of 1,000 hours per year are eligible to participate and receive allocations based on total payroll excluding bonuses. The amounts contributed in the years ended December 31, 1995 and 1996 were $125,000 and $140,000, respectively. (continued) 10 PEARL GAS CO. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 (11) SUBSEQUENT EVENTS On October 22, 1997, pursuant to a purchase agreement dated as of October 20, 1997, all of the issued and outstanding capital stock of the Company was sold by the holders of such stock to Star Gas Corporation ("Star Gas"). The purchase price for said stock was $22,552,000 and was paid in cash. Subsequent to the acquisition of the common stock of Pearl, Pearl was merged into Star Gas in a tax-free liquidation. 11 PEARL GAS CO. BALANCE SHEETS DECEMBER 31, 1996 AND SEPTEMBER 30, 1997

See accompanying notes to financial statements. 12 PEARL GAS CO. STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)

See accompanying notes to financial statements. 13 PEARL GAS CO. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)

Non-cash disclosure: ------------------- On September 1, 1996, the remaining balance of notes receivable shareholders of $821,926 were converted into new notes. See accompanying notes to financial statements. 14 PEARL GAS CO. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying financial statements have been prepared by management, and in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of December 31, 1996 and September 30, 1997, and the results of its operations and cash flows for the nine months ended September 30, 1996 and 1997. The financial statements should be read in conjunction with the financial statements and notes thereto included elsewhere herein. Results for interim periods are not necessarily indicative of those to be expected for the entire year. (2) INVENTORIES The major classes of inventory are as follows:

(3) SUBSEQUENT EVENTS On October 22, 1997, pursuant to a purchase agreement dated as of October 20, 1997, all of the issued and outstanding capital stock of the Company was sold by the holders of such stock to Star Gas Corporation ("Star Gas"). The purchase price for said stock was $22,552,000 and was paid in cash. Subsequent to the acquisition of the common stock of Pearl, Pearl was merged into Star Gas in a tax-free liquidation. 15 STAR GAS PARTNERS, L.P. PRO FORMA FINANCIAL STATEMENTS The following Pro Forma Condensed Statement of Operations for the year ended September 30, 1997 is derived from the Partnership's audited consolidated financial statements for the year ended September 30, 1997. The Pro Forma Condensed Balance Sheet as of September 30, 1997 is derived from the audited financial statements of the Company which include all adjustments (consisting of only normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of such data. The Pro Forma Financial Statements do not purport to represent what the Company's financial position or results of operations would have been if the events described therein had occurred on the dates specified, nor are they intended to project the Company's financial position or results of operations for any future period. The Pro Forma Financial Statements should be read in conjunction with the Consolidated Financial Statements of Star Gas Partners, L.P. as filed on Report 10-K for the year ended September 30, 1997, and the Notes thereto. The unaudited pro forma financial information gives effect to the Pearl Gas Conveyance which was effected as part of the Pearl Gas acquisition. The acquisition is being accounted for as a purchase. The unaudited pro financial information has been prepared on the following basis: . The unaudited pro forma combined statement of income assumes that the acquisition was completed as of the beginning of the period presented. . The unaudited pro forma combined balance sheet assumes that the acquisition was completed as of the balance sheet date. STAR GAS PARTNERS, L.P. AND SUBSIDIARY PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1997 (IN THOUSANDS)

/(a)/ Reflects the Conveyance of assets and liabilities to the Partnership by Star Gas Corporation, including $23.0 million in long-term debt, in exchange for 148 Common Units valued at $3.4 million and an aggregate general partner interest of .00055 percent valued at $70 thousand. Upon purchase of Pearl Gas by Star Gas, the assets were written up to the fair market value through an adjustment to property, plant and equipment of $11.2 million and an adjustment to intangible assets of $11.0 million. In addition, cash and accrued expenses have been increased by $1.0 million and $0.3 million to reflect the estimated working capital as of October 21, 1997. /(b)/ Reflects the net proceeds to the Partnership of $21.0 million borrowed under its bank Acquisition Facility. /(c)/ Reflects the use of $23.0 million in cash to retire $23.0 million of debt assumed in the Star Gas Conveyance. /(d)/ The partnership intends to file a registration statement to issue and sell 0.7 million of Common Units to the public. A portion of the proceeds, estimated at $13.8 million, will be used to repay $10.0 million of the Bank Acquisition Facility and the balance will be used for general partnership purposes. 17 STAR GAS PARTNERS, L.P. AND SUBSIDIARY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) YEAR ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)

/(a)/ Adjustment for certain cost savings primarily salary and benefit expenses of certain selling shareholders. /(b)/ Reflects the incremental depreciation and amortization expense attributable to the Pearl assets conveyed. /(c)/ Reflects the adjustment to interest expense resulting from $21.0 million in bank borrowings at 7.27%, and the elimination of $48 thousand of interest income generated on cash balances during the twelve months ended September 30, 1997. /(d)/ Reflects the additional units issued to Star Gas Corporation as described in the Conveyance Agreement. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized: Star Gas Partners, L.P. By: Star Gas Corporation (General Partner) William G. Powers, Jr. ---------------------- By: /s/ William G. Powers, Jr. William G. Powers, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated:

19