1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): JULY 23, 2001 ------------------------------ HERITAGE PROPANE PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 1-11727 73-1493906 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 8801 SOUTH YALE AVENUE, SUITE 310 TULSA, OKLAHOMA 74137 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 492-7272 ------------------------------ ================================================================================
2 ITEM 5. OTHER EVENTS. Heritage Propane Partners, L.P., is filing as exhibits to this current report on Form 8-K (i) Unaudited Pro Forma Combined Financial Statements for the Nine Months Ended May 31, 2001 and the Year Ended August 31, 2000 and related notes and (ii) Proflame, Inc. and Subsidiaries and Affiliates Consolidated and Combined Financial Statements for the Years Ended August 31, 2000 and 1999 and related notes and for the Nine Months Ended May 31, 2001 and 2000 (unaudited). ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits. EXHIBIT NUMBER DESCRIPTION -------------- ----------- 23 Consent of Arthur Andersen LLP. 99.1 Unaudited Pro Forma Combined Financial Statements for the Nine Months Ended May 31, 2001 and the Year Ended August 31, 2000 and related notes. 99.2 ProFlame, Inc. and Subsidiaries and Affiliates Consolidated and Combined Financial Statements for the Years Ended August 31, 2000 and 1999 and related notes and for the Nine Months Ended May 31, 2001 and 2000 (unaudited). 2
3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HERITAGE PROPANE PARTNERS, L.P. By: Heritage Holdings, Inc., General Partner Date: July 23, 2001 By: /s/ LARRY J. DAGLEY --------------------------------------- Larry J. Dagley Vice President, Chief Financial Officer and officer duly authorized to sign on behalf of the registrant
4 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION -------------- ----------- 23 Consent of Arthur Andersen LLP. 99.1 Unaudited Pro Forma Combined Financial Statements for the Nine Months Ended May 31, 2001 and the Year Ended August 31, 2000 and related notes. 99.2 ProFlame, Inc. and Subsidiaries and Affiliates Consolidated and Combined Financial Statements for the Years Ended August 31, 2000 and 1999 and related notes and for the Nine Months Ended May 31, 2001 and 2000 (unaudited).
1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 8-K, into Heritage Propane Partners, L.P.'s previously filed Registration Statements File No. 333-40407 and File No. 333-86057. /s/ ARTHUR ANDERSEN LLP Tulsa, Oklahoma July 20, 2001
1 EXHIBIT 99.1 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements present (i) unaudited pro forma combined balance sheet at May 31, 2001, giving effect to the acquisition of ProFlame, Inc. and subsidiaries and affiliates (ProFlame) as if the acquisition had been consummated on that date, and (ii) unaudited pro forma combined statements of operations for the nine months ended May 31, 2001 and the year ended August 31, 2000, giving effect to the acquisition of ProFlame as if the acquisition had been consummated on September 1, 1999. Please read note 3 regarding the assumptions made in the preparation of these unaudited pro forma combined financial statements. The unaudited pro forma combined balance sheet at May 31, 2001 combines balance sheets of Heritage Propane Partners, L.P. and subsidiaries (Heritage) as of May 31, 2001 and ProFlame as of May 31, 2001, after giving effect to pro forma adjustments. The unaudited pro forma combined statement of operations for the nine month period ended May 31, 2001 combines the results of operations of Heritage for the nine month period ended May 31, 2001 with the results of operations for ProFlame for the nine month period ended May 31, 2001. The unaudited pro forma combined statement of operations for the year ended August 31, 2000 combines the results of operations of Heritage (formerly Peoples Gas Company) for the eight month period ended August 31, 2000 and the results of operations of Peoples Gas Company for the three month period ended December 31, 1999 with the results of operations for ProFlame for the year ended August 31, 2000, after giving effect to pro forma adjustments. The unaudited pro forma combined statement of operations for the year ended August 31, 2000 omits the results of operations of Peoples Gas for the month ended September 30, 1999; however, such omission is not material to the unaudited pro forma combined statement of operations. On July 5, 2001, Heritage signed definitive agreements to acquire directly and indirectly through Heritage Holdings, Inc. (Heritage's general partner) the propane operations of ProFlame, Inc. and subsidiaries and affiliates in a series of mergers and stock and asset purchases. Upon closing, Heritage will complete the asset purchases and Heritage Holdings, Inc. (HHI) will complete the stock purchases and mergers. HHI will then transfer the assets acquired and liabilities assumed to Heritage. HHI will retain any income tax liability associated with the assets transferred and will be compensated by Heritage through the issuance of common units by Heritage to HHI. The purchases of stock and assets will be accounted for as an acquisition using the purchase method of accounting. On July 20, 2001, the Financial Accounting Standards Board approved the issuance of Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Please read "Recently Issued Accounting Standards" below. Statements No. 141 and 142 will impact the purchase allocations for the acquisition of ProFlame and the amortization of certain intangibles, including goodwill. Management has not completed an analysis or appraisal of the additional intangible assets that must be identified and valued. Accordingly, for purposes of the unaudited pro forma financial statements, management has recognized intangible assets for customer lists and covenants not-to-compete, consistent with Heritage's past application of Accounting Principles Board Opinion No. 16, Business Combinations. Accordingly, the following pro forma combined financial statements do not reflect any impact of Statements No. 141 or 142. A final determination of purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not been made. Accordingly, the purchase accounting adjustments made in connection with the development of the following unaudited pro forma combined financial statements are preliminary and have been made solely for purposes of developing such pro forma financial information. The pro forma adjustments are based upon currently available information and certain estimates and assumptions, and therefore, the actual adjustments may differ from the unaudited pro forma adjustments. However, management does not believe that final adjustments will be materially different from the amounts presented herein, except for the impact of Statements No. 141 and 142. 1
2 The following unaudited pro forma combined financial statements are provided for informational purposes only and should be read in conjunction with the separate audited consolidated financial statements and related notes of Heritage (which are filed with Heritage's Annual Report filed on Form 10-K with the Securities and Exchange Commission on November 29, 2000) and the consolidated and combined financial statements of ProFlame (which are included as Exhibit 99.2 to this current report on Form 8-K). The following unaudited pro forma combined financial statements are based on certain assumptions and do not purport to be indicative of the results which actually would have been achieved if the acquisition of ProFlame had been consummated on the dates indicated or which may be achieved in the future. Recently Issued Accounting Standards On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. Under Statement 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. There will be more recognized intangible assets, such as unpatented technology and database content, being separated from goodwill. Those assets will be amortized over their useful lives, other than assets that have an indefinite life. Statement No. 142 is required to be applied starting with fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. Statement No. 141 will apply to the accounting for Heritage's acquisition of ProFlame, although management has not completed an analysis or appraisal of the additional intangible assets that must be identified and valued. Accordingly, for purposes of the unaudited pro forma financial statements, management has recognized intangible assets for customer lists and covenants not-to-compete, consistent with Heritage's past application of Accounting Principles Board Opinion No. 16, Business Combinations. Management has not determined the method or timing of adopting Statement No. 142. Management has also not determined the impact of adopting Statement No. 142, although goodwill amortization for the nine months ended May 31, 2001 was $5.2 million. 2
3 HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET MAY 31, 2001 (IN THOUSANDS) HERITAGE PROPANE PROFLAME, PARTNERS, L.P. INC. PRO FORMA AS HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED -------------- ---------- ----------- ----------- ASSETS CURRENT ASSETS: Cash................................ $ 4,471 $ 914 $ (914)(a) $ 4,570 43,938(g) (43,938)(h) 99(f) Marketable securities............... 6,980 -- -- 6,980 Accounts receivable................. 44,398 3,501 -- 47,899 Inventories......................... 45,403 1,411 -- 46,814 Assets from trading activities...... 2,746 -- -- 2,746 Current portion of notes receivable from related parties.............. -- 2,883 (2,883)(a) -- Prepaid expenses and other.......... 1,594 687 (351)(a) 1,930 -------- ------- -------- -------- Total current assets.......... 105,592 9,396 (4,049) 110,939 PROPERTY, PLANT AND EQUIPMENT, net.... 371,499 7,174 18,756(b) 397,429 INVESTMENT IN AFFILIATES.............. 7,232 -- -- 7,232 INTANGIBLES AND OTHER ASSETS, net..... 192,080 144 3,414(c) 220,844 7,020(d) 18,186(e) -------- ------- -------- -------- Total assets.................. $676,403 $16,714 $ 43,327 $736,444 ======== ======= ======== ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accounts payable.................... $ 37,044 $ 1,601 $ -- $ 38,645 Accounts payable to related companies......................... 9,028 1,487 (1,487)(a) 9,028 Accrued and other current liabilities....................... 25,729 3,574 (1,233)(a) 28,070 Liabilities from trading activities........................ 2,438 -- -- 2,438 Current maturities of long-term debt.............................. 3,577 461 (374)(a) 3,664 -------- ------- -------- -------- Total current liabilities..... 77,816 7,123 (3,094) 81,845 LONG-TERM DEBT, less current maturities.......................... 430,828 143 43,938(g) 481,929 7,020(d) MINORITY INTERESTS.................... 5,203 -- 50(f) 5,253 NOTES PAYABLE TO RELATED PARTIES...... -- 210 (210)(a) -- DEFERRED TAX LIABILITIES.............. -- 281 (281)(a) -- -------- ------- -------- -------- Total liabilities............. 513,847 7,757 47,423 569,027 -------- ------- -------- -------- PARTNERS' CAPITAL: Common unitholders.................. 120,282 -- 4,812(f) 125,094 Subordinated unitholders............ 25,464 -- -- 25,464 Class B subordinated unitholders.... 18,207 -- -- 18,207 General partner..................... 1,341 -- 49(f) 1,390 Accumulated other comprehensive income............................ (2,738) -- -- (2,738) Preferred stock..................... -- 627 (627)(a) -- Common stock........................ -- 322 (322)(a) -- Additional paid-in capital.......... -- 531 (531)(a) -- Retained earnings................... -- 8,103 (8,103)(a) -- Treasury stock...................... -- (626) 626(a) -- -------- ------- -------- -------- Total partners' capital....... 162,556 8,957 (4,096) 167,417 -------- ------- -------- -------- Total liabilities and partners' capital........... $676,403 $16,714 $ 43,327 $736,444 ======== ======= ======== ======== 3
4 HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 31, 2001 (IN THOUSANDS, EXCEPT PER UNIT DATA) HERITAGE PROPANE PARTNERS, PROFLAME, L.P. INC. PRO FORMA AS HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED ---------- ---------- ----------- ----------- REVENUES: Retail fuel......................... $386,235 $32,641 $ -- $418,876 Wholesale fuel...................... 52,948 10,254 -- 63,202 Liquids marketing................... 152,155 -- -- 152,155 Other............................... 33,419 3,713 (392)(i) 36,740 -------- ------- ------- -------- Total revenues............... 624,757 46,608 (392) 670,973 -------- ------- ------- -------- COSTS AND EXPENSES: Cost of products sold............... 268,480 28,981 -- 297,461 Trading activities.................. 150,265 -- -- 150,265 Operating expenses.................. 96,008 7,479 -- 103,487 Depreciation and amortization....... 30,322 959 1,437(j) 32,718 Selling, general and administrative.................... 14,003 4,344 -- 18,347 -------- ------- ------- -------- Total costs and expenses..... 559,078 41,763 1,437 602,278 -------- ------- ------- -------- OPERATING INCOME (LOSS)............... 65,679 4,845 (1,829) 68,695 OTHER INCOME (EXPENSE): Interest expense.................... (26,423) (270) 258(k) (28,897) (2,143)(l) (319)(m) Interest income..................... -- 201 (149)(n) 52 Equity in earnings (losses) of affiliates........................ 1,568 -- -- 1,568 Gain on disposal of assets.......... 502 246 -- 748 Other............................... (443) -- -- (443) -------- ------- ------- -------- INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES.................... 40,883 5,022 (4,182) 41,723 Minority interest................... (1,435) -- (17)(o) (1,452) -------- ------- ------- -------- INCOME (LOSS) BEFORE INCOME TAXES..... 39,448 5,022 (4,199) 40,271 Income taxes........................ -- 1,060 (1,060)(p) -- -------- ------- ------- -------- NET INCOME (LOSS)..................... 39,448 3,962 (3,139) 40,271 GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS)....................... 849 -- 8(q) 857 -------- ------- ------- -------- LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS)....................... $ 38,599 $ 3,962 $(3,147) $ 39,414 ======== ======= ======= ======== BASIC NET INCOME PER LIMITED PARTNER UNIT................................ $ 2.97 $ 3.00 ======== ======== BASIC WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING......................... 12,981 13,141 ======== ======== DILUTED NET INCOME PER LIMITED PARTNER UNIT................................ $ 2.97 $ 2.99 ======== ======== DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING................... 13,012 13,172 ======== ======== 4
5 HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2000 (IN THOUSANDS, EXCEPT PER UNIT DATA) HERITAGE PROPANE PEOPLES GAS PROFLAME, PARTNERS, L.P. COMPANY INC. PRO FORMA AS HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED -------------- ----------- ---------- ----------- ---------- REVENUES: Retail fuel............... $43,815 $10,133 $27,550 $ -- $ 81,498 Wholesale fuel............ 3,807 -- 7,323 -- 11,130 Liquids marketing......... 12,262 -- -- -- 12,262 Other..................... 3,188 -- 3,018 (398)(i) 5,808 ------- ------- ------- ------- -------- Total revenues...... 63,072 10,133 37,891 (398) 110,698 ------- ------- ------- ------- -------- COSTS AND EXPENSES: Cost of products sold..... 29,962 5,198 21,629 -- 56,789 Trading activities........ 11,538 -- -- -- 11,538 Operating expenses........ 16,581 3,601 9,590 -- 29,772 Depreciation and amortization............ 4,686 779 1,357 1,838 (j) 8,660 Selling, general and administrative.......... 1,019 -- 3,790 -- 4,809 ------- ------- ------- ------- -------- Total costs and expenses.......... 63,786 9,578 36,366 1,838 111,568 ------- ------- ------- ------- -------- OPERATING INCOME (LOSS)..... (714) 555 1,525 (2,236) (870) OTHER INCOME (EXPENSE): Interest expense.......... (2,409) -- (319) 303 (k) (5,761) (2,858)(l) (478)(m) Interest income........... -- -- 226 (175)(n) 51 Equity in earnings (losses) of affiliates.............. (67) -- -- -- (67) Gain on disposal of assets.................. 121 -- 266 -- 387 Other..................... (478) 18 -- -- (460) ------- ------- ------- ------- -------- INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES.............. (3,547) 573 1,698 (5,444) (6,720) Minority interest......... 80 -- -- 76 (o) 156 ------- ------- ------- ------- -------- INCOME (LOSS) BEFORE INCOME TAXES..................... (3,467) 573 1,698 (5,368) (6,564) Income taxes.............. 379 289 32 (32)(p) 668 ------- ------- ------- ------- -------- NET INCOME (LOSS)........... (3,846) 284 1,666 (5,336) (7,232) GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS)...... (46) 1 -- (37)(q) (82) ------- ------- ------- ------- -------- LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS)...... $(3,800) $ 283 $ 1,666 $(5,299) $ (7,150) ======= ======= ======= ======= ======== BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT...... $ (0.37) $ 0.16 $ (0.66) ======= ======= ======== BASIC WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING............... 10,225 1,732 10,857 ======= ======= ======== DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT...................... $ (0.37) $ 0.16 $ (0.66) ======= ======= ======== DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING............... 10,225 1,732 10,857 ======= ======= ======== 5
6 HERITAGE PROPANE PARTNERS, L.P. NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS NINE MONTHS ENDED MAY 31, 2001 AND YEAR ENDED AUGUST 31, 2000 (IN THOUSANDS, EXCEPT UNIT DATA) 1. Presentation: The unaudited pro forma combined financial statements do not give any effect to any restructuring cost, potential cost savings, or other operating efficiencies that are expected to result from the acquisition. The unaudited pro forma combined financial statements are based on certain assumptions and do not purport to be indicative of the results which actually would have been achieved if the acquisition had been consummated on the dates indicated or which may be achieved in the future. The purchase accounting adjustments made in connection with the development of the unaudited pro forma combined financial statements are preliminary and have been made solely for purposes of presenting such pro forma financial information. 2. It has been assumed that for purposes of the unaudited pro forma combined balance sheet, the acquisition of ProFlame occurred on May 31, 2001 and for purposes of the unaudited pro forma combined statements of operations, the acquisition of ProFlame occurred on September 1, 1999. The unaudited pro forma combined balance sheet at May 31, 2001 combines balance sheets of Heritage Propane Partners, L.P. and subsidiaries (Heritage) as of May 31, 2001 and ProFlame, Inc. and subsidiaries and affiliates as of May 31, 2001, after giving effect to pro forma adjustments. The unaudited pro forma combined statement of operations for the nine months ended May 31, 2001 combines the results of operations of Heritage for the nine months ended May 31, 2001 with the results of operations for ProFlame for the nine months ended May 31, 2001. The unaudited pro forma combined statement of operations for the year ended August 31, 2000 combines the results of operations of Heritage (formerly Peoples Gas Company) for the eight months ended August 31, 2000 and the results of operations of Peoples Gas Company for the three months ended December 31, 1999 with the results of operations for ProFlame for the year ended August 31, 2000, after giving effect to pro forma adjustments. On July 5, 2001, Heritage signed definitive agreements to acquire directly and indirectly through Heritage Holdings, Inc. (Heritage's general partner), the propane operations of ProFlame, Inc. and subsidiaries and affiliates in a series of mergers and stock and asset purchases. Upon closing, the asset purchases will be completed by Heritage and Heritage Holdings, Inc. (HHI) will complete the mergers and the stock purchases. HHI will then transfer the assets acquired and liabilities assumed to Heritage. HHI will retain any income tax liability associated with the assets transferred and will be reimbursed by Heritage through the payment of cash and/or the issuance of common units by Heritage to HHI. For purposes of the preparation of the unaudited pro forma combined financial statements, the reimbursement to HHI has been assumed to be in common units only. The purchases of stock and assets will be accounted for as an acquisition using the purchase method of accounting. On July 5, 2001, the Financial Accounting Standards Board approved the issuance of Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Please read "Recently Issued Accounting Standards" above. Statements No. 141 and 142 will impact the purchase allocations for the acquisition of ProFlame and the amortization of certain intangibles, including goodwill. Management has not completed an analysis or appraisal of the additional intangible assets that must be identified and valued. Accordingly, for purposes of the unaudited pro forma financial statements, management has recognized intangible assets for customer lists and covenants not-to-compete, consistent with Heritage's past application of Accounting Principles Board Opinion No. 16, Business Combinations. Accordingly, the following pro forma combined financial statements do not reflect any impact of Statements No. 141 or 142. Heritage has agreed to pay the sellers of ProFlame cash consideration of $39,800 at the closing of the acquisition. Heritage will also reimburse the sellers of ProFlame for working capital in an amount estimated to be $4,138. To the extent working capital is more or less than $4,138, the reimbursement will change. Heritage will also reimburse HHI $4,812 through the payment of cash and/or the issuance of Common Units in Heritage for the income tax liability retained by HHI. Heritage will enter into covenants not to compete with certain key members of management of the seller, subject to certain conditions. The discounted value of the 6
7 HERITAGE PROPANE PARTNERS, L.P. NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) covenants not to compete is $7,020. The cash consideration of $39,800 and the working capital reimbursement of $4,138 will be financed through borrowings under Heritage's Senior Revolving Acquisition Facility. 3. The pro forma adjustments are as follows: (a) Reflects the elimination of assets not acquired and liabilities not assumed by Heritage and the elimination of ProFlame's equity accounts, including preferred stock. (b) Reflects the pro forma allocation of the step-up to property, plant and equipment to fair value. (c) Reflects the pro forma allocation of the purchase price to customer lists. (d) Reflects the discounted value of the non-compete agreements entered into with the former management of ProFlame. (e) Reflects the pro forma allocation of the residual value of the purchase price to goodwill. (f) Reflects the issuance of 160,400 common units of Heritage, valued at $30 per unit, to HHI, and the cash contribution of $99 by HHI to maintain its general partner interest. (g) Reflects the proceeds from borrowings under Heritage's Senior Revolving Acquisition Facility at a rate of 6.504 percent. (h) Reflects payment of the combined purchase price of ProFlame, Inc. and subsidiaries and affiliates. (i) Reflects the elimination of profits from employee leasing program to ProFlame related entities that discontinues after the acquisition of ProFlame. (j) Reflects increased depreciation and amortization related to the excess purchase price over ProFlame's cost allocated to property, plant and equipment (3-30 years), customer lists (15 years) and goodwill (30 years). Also, reflects amortization of the non-compete agreements (10 years). (k) Reflects elimination of interest expense related to debt not assumed by Heritage. (l) Reflects interest expense related to borrowings under the Senior Revolving Acquisition Facility at a rate of 6.504 percent. (m) Reflects imputed interest on the discounted value of the non-compete agreements. (n) Reflects elimination of interest income related to notes receivable from related parties not acquired by Heritage. (o) Reflects the adjustment to minority interest expense for Heritage Operating, L.P. (p) Reflects the elimination of income tax expense, as income taxes are borne by the partners. (q) Reflects the adjustment to the general partner's interest in the net income of Heritage. 7
8 HERITAGE PROPANE PARTNERS, L.P. NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. The ProFlame historical financial statements include the following nonrecurring charges which are expected to be eliminated through implementation of the Heritage business and operating strategy. NINE MONTHS ENDED YEAR ENDED MAY 31, AUGUST 31, 2001 2000 ----------------- ---------- Personnel costs(a)..................................... 2,950 3,250 Transaction expenses(b)................................ 1,000 -- ------- ------- $ 3,950 $ 3,250 ======= ======= - --------------- (a) Reflects the personnel costs for directors, officers and management of ProFlame who will resign at closing. (b) Reflects expenses recorded by ProFlame related to the acquisition by Heritage. 8
1 EXHIBIT 99.2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of ProFlame, Inc.: We have audited the accompanying consolidated and combined balance sheets of ProFlame, Inc. (a Nevada corporation) and subsidiaries and affiliates identified in Note 1, as of August 31, 2000 and 1999, and the related consolidated and combined statements of operations, stockholders' 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 auditing standards generally accepted in the United States. 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 ProFlame, Inc. and subsidiaries and affiliates, as of August 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Tulsa, Oklahoma June 29, 2001 1
2 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED AND COMBINED BALANCE SHEETS (IN THOUSANDS) MAY 31, AUGUST 31, AUGUST 31, 2001 2000 1999 ----------- ---------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................... $ 914 $ 3,032 $ 1,334 Accounts receivable, net.................................. 3,501 2,694 1,764 Inventories, net.......................................... 1,411 988 804 Current portion of notes receivable from related parties and other.............................................. 2,883 1,062 1,694 Other current assets...................................... 687 863 1,113 ------- ------- ------- Total current assets.............................. 9,396 8,639 6,709 PROPERTY, PLANT AND EQUIPMENT, net.......................... 7,174 7,473 8,064 NOTES RECEIVABLE FROM RELATED PARTIES AND OTHER, less current portion............................... -- -- 1,037 INTANGIBLES AND OTHER ASSETS, net........................... 144 194 199 ------- ------- ------- Total assets...................................... $16,714 $16,306 $16,009 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 1,601 $ 1,238 $ 824 Accounts payable to related parties....................... 1,487 2,614 1,414 Accrued and other current liabilities..................... 3,574 3,082 3,140 Current maturities of long-term debt...................... 461 524 518 ------- ------- ------- Total current liabilities......................... 7,123 7,458 5,896 LONG-TERM DEBT, less current maturities..................... 143 460 638 NOTES PAYABLE TO RELATED PARTIES............................ 210 210 210 DEFERRED INCOME TAXES....................................... 281 334 448 COMMITMENTS AND CONTINGENCIES............................... ------- ------- ------- Total liabilities................................. 7,757 8,462 7,192 ------- ------- ------- STOCKHOLDERS' EQUITY: Preferred stock........................................... 627 627 627 Common stock.............................................. 322 337 492 Additional paid-in capital................................ 531 531 835 Retained earnings......................................... 8,103 6,349 6,863 Treasury stock (at cost).................................. (626) -- -- ------- ------- ------- Total stockholders' equity........................ 8,957 7,844 8,817 ------- ------- ------- Total liabilities and stockholders' equity........ $16,714 $16,306 $16,009 ======= ======= ======= The accompanying notes are an integral part of these consolidated and combined financial statements. 2
3 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS) FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED MAY 31, AUGUST 31, ------------------------- ------------------- 2001 2000 2000 1999 ----------- ----------- -------- -------- (UNAUDITED) (UNAUDITED) REVENUES: Retail fuel..................................... $32,641 $23,035 $27,550 $26,814 Wholesale fuel.................................. 10,254 5,712 7,323 5,420 Other........................................... 3,713 2,011 3,018 3,074 ------- ------- ------- ------- Total revenues.......................... 46,608 30,758 37,891 35,308 ------- ------- ------- ------- COSTS AND EXPENSES: Cost of products sold........................... 28,981 17,656 21,629 16,036 Operating expenses.............................. 7,479 7,046 9,590 10,222 Depreciation and amortization................... 959 1,035 1,357 1,217 Selling, general and administrative............. 4,344 2,839 3,790 3,182 ------- ------- ------- ------- Total costs and expenses................ 41,763 28,576 36,366 30,657 ------- ------- ------- ------- OPERATING INCOME.................................. 4,845 2,182 1,525 4,651 OTHER INCOME (EXPENSE): Interest expense................................ (270) (219) (319) (327) Interest income................................. 201 170 226 236 Gain on disposal of assets...................... 246 356 266 200 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES........................ 5,022 2,489 1,698 4,760 Income taxes.................................... 1,060 274 32 1,068 ------- ------- ------- ------- NET INCOME........................................ $ 3,962 $ 2,215 $ 1,666 $ 3,692 ======= ======= ======= ======= The accompanying notes are an integral part of these consolidated and combined financial statements. 3
4 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) ADDITIONAL PREFERRED COMMON PAID-IN RETAINED TREASURY STOCK STOCK CAPITAL EARNINGS STOCK TOTAL --------- ------ ---------- -------- -------- ------- Balance, September 1, 1998.......... $627 $ 492 $ 835 $ 4,721 $ -- $ 6,675 Net income.......................... -- -- -- 3,692 -- 3,692 Distributions....................... -- -- -- (1,550) -- (1,550) ---- ----- ----- ------- ----- ------- Balance, August 31, 1999............ 627 492 835 6,863 -- 8,817 Repurchase and cancellation of common stock...................... -- (155) (304) -- -- (459) Net income.......................... -- -- -- 1,666 -- 1,666 Distributions....................... -- -- -- (2,180) -- (2,180) ---- ----- ----- ------- ----- ------- Balance, August 31, 2000............ 627 337 531 6,349 -- 7,844 Purchase of treasury stock -- cost method (unaudited)................ -- -- -- -- (626) (626) Repurchase and cancellation of common stock (unaudited).......... -- (15) -- (720) -- (735) Net income (unaudited).............. -- -- -- 3,962 -- 3,962 Distributions (unaudited)........... -- -- -- (1,488) -- (1,488) ---- ----- ----- ------- ----- ------- Balance, May 31, 2001 (unaudited)... $627 $ 322 $ 531 $ 8,103 $(626) $ 8,957 ==== ===== ===== ======= ===== ======= The accompanying notes are an integral part of these consolidated and combined financial statements. 4
5 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED MAY 31, AUGUST 31, ------------------------- ------------------- 2001 2000 2000 1999 ----------- ----------- -------- -------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................... $ 3,962 $ 2,215 $ 1,666 $ 3,692 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 959 1,035 1,357 1,217 Gain on sale of capital assets............... (246) (356) (266) (200) Deferred income taxes........................ (51) (153) (156) (71) Change in assets and liabilities: Accounts receivable........................ (807) (899) (930) 751 Inventories................................ (423) (200) (184) (90) Other current assets....................... 174 (541) 292 (766) Intangibles and other assets............... 26 (27) (27) 13 Accounts payable........................... 363 738 414 191 Accrued and other current liabilities...... 492 (825) (58) 649 ------- ------- ------- ------- Net cash provided by operating activities............................ 4,449 987 2,108 5,386 ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................ (691) (583) (906) (825) Proceeds from sale of property, plant and equipment.................................... 301 412 438 383 ------- ------- ------- ------- Net cash used in investing activities... (390) (171) (468) (442) ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to shareholders................... (1,488) (2,510) (2,180) (1,550) Change in notes receivable from related parties...................................... (1,821) (501) 1,669 (1,393) Change in accounts payable to related parties... (1,127) 964 1,200 (1,122) Payments of long-term debt...................... (380) (34) (172) (266) Purchase of treasury stock...................... (626) -- -- -- Repurchase and cancellation of common stock..... (735) -- (459) -- ------- ------- ------- ------- Net cash provided by (used in) financing activities............................ (6,177) (2,081) 58 (4,331) ------- ------- ------- ------- NET INCREASE (DECREASE) IN CASH................... (2,118) (1,265) 1,698 613 CASH AT BEGINNING OF PERIOD....................... 3,032 1,334 1,334 721 ------- ------- ------- ------- CASH AT END OF PERIOD............................. $ 914 $ 69 $ 3,032 $ 1,334 ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURE: Interest paid................................... $ 242 $ 191 $ 280 $ 327 Income taxes paid............................... $ 248 $ 350 $ 350 $ 1,616 The accompanying notes are an integral part of these consolidated and combined financial statements. 5
6 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED AS TO MAY 31, 2001 AND 2000 DATA) 1. OPERATIONS AND FINANCIAL STATEMENT PRESENTATION The consolidated and combined financial statements include the accounts of ProFlame, Inc. (a Nevada corporation, "ProFlame Nevada") and its majority-owned subsidiaries which have been consolidated -- ProFlame, Inc. (an Oklahoma corporation, "ProFlame Oklahoma"), Hesperia Liquid Gas Co. (a Nevada corporation), Coastside Gas Service (a California corporation), ProFlame Gas Company (a California corporation) and San Diego ProFlame (a California corporation). These companies are collectively referred to herein as consolidated ProFlame Nevada. Additionally, certain affiliated companies under common control and involved in propane-related operations have been combined with consolidated ProFlame Nevada, including California Western Gas Company (a Delaware corporation), Coast Liquid Gas, Inc. (a California corporation), Growth Properties (a California corporation), L.P.G. Associates (a California subchapter S corporation) and WMJB, Inc. (a California subchapter S corporation). These companies are collectively referred to herein as the combined companies. All of the companies referred to above are under common management and are parties to a definitive agreement whereby the businesses of each would be acquired by Heritage Holdings, Inc., the general partner of Heritage Propane Partners, L.P., or its affiliates (collectively referred to herein as Heritage). The terms of the definitive agreement are disclosed in Note 9. Other affiliated companies under common management, which are unrelated to the propane operations and are not parties to the definitive agreement, are not included in the consolidated and combined financial statements. Additionally, certain balances and transactions of the companies included in the consolidated and combined financial statements have been eliminated from the presentation herein as they are not to be acquired by Heritage. The companies included in the consolidated and combined financial statements are collectively referred to as the Company. All significant intercompany accounts and transactions have been eliminated, except for the equity accounts of the companies being combined as no parent-subsidiary relationship exists. The Company sells propane and propane-related products from retail outlets located principally in California and Nevada. The Company is also a wholesale propane supplier in those regions. The accompanying unaudited consolidated and combined financial statements as of May 31, 2001, and for the nine months ended May 31, 2001 and 2000, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, including all adjustments of a normal and recurring nature which are, in the opinion of the Company's management, necessary for the fair presentation of interim results. Not all information and notes required for complete financial statements are included. The results of operations presented are not necessarily indicative of the results for the full year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL Revenue Recognition Sales of propane, propane appliances, parts and fittings are recognized at the later of the time of delivery of the product to the customer or the time of sale or installation. Revenue from service labor is recognized upon completion of the service, and tank rent is recognized ratably over the period it is earned. 6
7 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Inventories Inventories are valued at the lower of cost or market. The cost of fuel inventories is determined using weighted-average cost, while the cost of appliances, parts and fittings is determined by the specific identification method. Inventories consisted of the following: AUGUST 31, MAY 31, ----------- 2001 2000 1999 ------- ---- ---- Fuel........................................................ $1,200 $790 $508 Appliances, parts and fittings.............................. 211 198 296 ------ ---- ---- $1,411 $988 $804 ====== ==== ==== Property, Plant and Equipment Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are expensed as incurred. Components and useful lives of property, plant and equipment were as follows: AUGUST 31, MAY 31, ----------------- 2001 2000 1999 ------- ------- ------- Land.................................................... $ 2,148 $ 2,207 $ 2,207 Buildings and improvements (10 to 30 years)............. 1,171 1,178 1,166 Plant facilities and equipment (5 to 30 years).......... 2,418 2,374 2,309 Tanks and other equipment (5 to 30 years)............... 13,460 12,910 12,606 Transportation equipment (5 to 15 years)................ 3,579 3,633 3,553 Furniture and fixtures (5 to 10 years).................. 647 626 618 ------- ------- ------- 23,423 22,928 22,459 Less -- accumulated depreciation........................ 16,249 15,455 14,395 ------- ------- ------- Property, plant and equipment, net.................... $ 7,174 $ 7,473 $ 8,064 ======= ======= ======= Long-lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of long-lived assets is not recoverable, the Company reduces the carrying amount of such assets to fair value. No impairment of long-lived assets was required during the period ended May 31, 2001, or the years ended August 31, 2000 and 1999. 7
8 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Accrued and Other Current Liabilities Accrued and other current liabilities consisted of the following: AUGUST 31, MAY 31, --------------- 2001 2000 1999 ------- ------ ------ Interest payable........................................... $ 67 $ 39 $ -- Wages and payroll taxes.................................... 462 1,651 1,120 Deferred tank rent......................................... 585 585 575 Customer deposits.......................................... 271 254 246 Taxes other than income.................................... 124 175 142 Income taxes payable....................................... 889 26 188 Professional services...................................... 1,000 -- -- Other...................................................... 176 352 869 ------ ------ ------ Accrued and other current liabilities............ $3,574 $3,082 $3,140 ====== ====== ====== Income Taxes The Company follows the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred income taxes are recorded based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are received and liabilities are settled. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value The carrying amount of accounts receivable and accounts payable approximates their fair value. Based on the estimated borrowing rates currently available to the Company for long-term loans with similar terms and average maturities, the aggregate fair value at August 31, 2000 of the Company's long-term debt approximates the aggregate carrying amount. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" and by Statement No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, and for hedging activities, be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the 8
9 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED) hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS 133 on September 1, 2000. The adoption had no impact on the Company's financial statements, as it is not currently using derivative instruments. Additional volatility in earnings and comprehensive income may occur as a result of the adoption of SFAS 133 should the Company use derivative instruments in the future. 3. INCOME TAXES The provision for income taxes for the period ended May 31, 2001 and 2000, and the years ended August 31, 2000 and 1999, was comprised of the following: FOR THE NINE MONTHS ENDED FOR THE YEARS MAY 31, ENDED AUGUST 31, -------------- ---------------- 2001 2000 2000 1999 ------ ----- ------ ------- Income tax provision (benefit): Current........................................... $1,111 $ 427 $ 188 $1,139 Deferred.......................................... (51) (153) (156) (71) ------ ----- ----- ------ Total..................................... $1,060 $ 274 $ 32 $1,068 ====== ===== ===== ====== The income tax effect of temporary differences comprising the current deferred tax asset and long-term deferred tax liability on the accompanying balance sheets are a result of the following: MAY 31, AUGUST 31, AUGUST 31, 2001 2000 1999 ------- ---------- ---------- Current deferred income taxes: Vacation accrual..................................... $ 55 $ 29 $ 29 Deferred tank revenue................................ 189 189 189 Other................................................ 44 72 30 ----- ----- ----- Total current deferred tax asset............. $ 288 $ 290 $ 248 ===== ===== ===== Long-term deferred income taxes: Depreciation......................................... $(417) $(457) $(557) Amortization......................................... 28 24 18 Interest on subordinated notes....................... 108 99 91 ----- ----- ----- Total long-term deferred tax liability....... $(281) $(334) $(448) ===== ===== ===== Income taxes differ from amounts computed by applying the federal statutory rates to pre-tax income as follows: FOR THE NINE FOR THE MONTHS ENDED YEARS ENDED MAY 31, AUGUST 31, ------------ ------------ 2001 2000 2000 1999 ---- ---- ---- ---- Federal income taxes at statutory rate................... 35% 35% 35% 35% S corporation income..................................... (11)% (21)% (30)% (10)% State income tax, net.................................... (3)% (3)% (3)% (3)% --- --- --- --- Provision for income taxes..................... 21% 11% 2% 22% === === === === 9
10 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT Long-term debt consisted of the following at May 31, 2001, August 31, 2000 and 1999: MAY 31, AUGUST 31, AUGUST 31, 2001 2000 1999 ------- ---------- ---------- Note payable to a Bank, due May 31, 2006; monthly payments of principal and interest (approximately $5) with the remaining balance due at maturity; interest at Bank's Prime Rate plus 0.5% (9.86% at August 31, 2000). Secured by personal property of the Company... $ -- $331 $ 393 Note payable to a Corporation, due May 16, 2003; monthly payments of principal and interest (approximately $8) with the remaining balance due at maturity; interest at 7.0%. Secured by certain assets of the Company....................................... 198 237 313 6% subordinated notes.................................. 374 353 326 Other.................................................. 32 63 124 ---- ---- ------ 604 984 1,156 Less -- current portion of long-term debt.............. 461 524 518 ---- ---- ------ $143 $460 $ 638 ==== ==== ====== The 6% subordinated notes have an original face value of $94 and are owned by various note holders unrelated to the Company. The notes were due on December 31, 1977. The Company has increased the carrying value of the notes each year to reflect the accrual of interest on the outstanding notes that will be paid when the notes are retired. The Company has recorded accrued interest of $280, $259 and $232 as of May 31, 2001, August 31, 2000 and August 31, 1999, respectively. The notes are classified as current maturities of long-term debt on the balance sheet as the notes have matured. Future maturities of long-term debt at August 31, 2000 were as follows: 2001........................................................ $524 2002........................................................ 173 2003........................................................ 127 2004........................................................ 58 2005........................................................ 58 Thereafter.................................................. 44 ---- $984 ==== 10
11 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. COMMITMENTS AND CONTINGENCIES Certain property and equipment is leased under non-cancelable leases, which require fixed monthly rental payments and expire at various dates through 2026. Rental expense under these leases totaled approximately $1,266 and $1,119 for the years ending August 31, 2000 and 1999 and $806 and $1,042 for the nine months ending May 31, 2001 and 2000, respectively. Future minimum lease commitments as of August 31, 2000, for such leases were as follows: 2001........................................................ $102 2002........................................................ 83 2003........................................................ 69 2004........................................................ 40 2005........................................................ 34 Thereafter.................................................. 341 ---- $669 ==== Subsequent to August 31, 2000, the Company purchased vehicles for approximately $1,612, which were previously being leased under month-to-month leases. The Company has received from the Environmental Protection Agency (EPA) an information request letter with respect to property owned by the Company concerning the Newmark groundwater contamination Superfund site in San Bernadino, California. The Company has responded timely to the EPA's request for information and the inquiry is in preliminary stages. Management cannot estimate the likelihood of an outcome assigning any responsibility to the Company. However, management does not expect the ultimate outcome of this matter to have a material adverse effect on the Company's results of operations or its financial position. The Company is a party to various legal proceedings incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, all such matters are covered by insurance, are without merit or involve amounts, which, if resolved unfavorably, would not have a significant effect on the financial position or results of operations of the Company. The Company has entered into several purchase and supply commitments with varying terms as to quantities and prices, which expire at various dates through March 2002. 6. STOCKHOLDERS' EQUITY The following represents the equity summaries of the combined companies as of August 31, 2000: ADDITIONAL PREFERRED COMMON PAID-IN RETAINED TREASURY STOCK STOCK CAPITAL EARNINGS STOCK TOTAL --------- ------ ---------- -------- -------- ------ ProFlame Nevada (consolidated)...... $ -- $ -- $531 $3,435 $-- $3,966 California Western Gas Co........... 627 -- -- 950 -- 1,577 Coast Liquid Gas, Inc. ............. -- 15 -- 823 -- 838 Growth Properties................... -- 322 -- 554 -- 876 L.P.G. Associates................... -- -- -- 880 -- 880 WMJB, Inc. ......................... -- -- -- (293) -- (293) ---- ---- ---- ------ --- ------ Total..................... $627 $337 $531 $6,349 $-- $7,844 ==== ==== ==== ====== === ====== Each share of preferred stock is due dividends payable in arrears at a rate of $1.50 per year. The amount of dividends in arrears at August 31, 2000 related to shareholders outside of the combined group was $371, which is not reflected in the accompanying financial statements. California Western Gas Co. may redeem the outstanding preferred stock, at any time, by paying the preferred shareholder $26 per share, plus dividends in 11
12 PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED) arrears. The preferred stock shall, with respect to dividend rights and rights upon liquidation, rank prior to any common stock. 7. PROFIT SHARING AND 401(k) SAVINGS PLAN The Company sponsors a defined contribution 401(k) savings plan (the "Plan"), which covers all employees subject to service period requirements. Contributions are made to the Plan at the discretion of the Board of Directors. Total expense related to the Plan during the years ended August 31, 2000 and 1999, was approximately $135 and $133, respectively. Total expense related to the Plan during the nine months ended May 31, 2001 and 2000 was $107 and $108, respectively. 8. RELATED PARTY TRANSACTIONS The Company enters into various transactions with related parties. These transactions include the borrowing and lending of cash. The payables and receivables derived from the borrowing and lending of cash to various related parties are classified on the balance sheet as notes receivable from related parties and other and accounts payable to related parties. Interest is charged on the balances between related parties at a rate of 5.25%. The Company recognized interest income from related parties of approximately $149, $138, $175 and $174 for the nine months ended May 31, 2001 and 2000 and the years ending August 31, 2000 and 1999, respectively. The Company recognized interest expense from related parties of approximately $182, $138, $192 and $175 for the nine months ended May 31, 2001 and 2000 and for the years ended August 31, 2000 and 1999, respectively. The Company has notes payable to related parties. These notes are due on April 15, 2004, with interest payments of 18% due annually and principal due at maturity. The Company incurred interest expense of approximately $28, $28, $38 and $38 for the nine months ended May 31, 2001 and 2000 and for the years ended August 31, 2000 and 1999, respectively. In addition, L.P.G. Associates leases certain employees to affiliated companies. L.P.G. Associates charges the affiliated companies an amount equal to the payroll cost of the leased employees plus a mark-up. The margin related to the employee leasing activity is included in other revenue in the consolidated and combined statements of operations. The margin recorded by L.P.G. Associates was approximately $392, $300, $398 and $268 for the nine months ended May 31, 2001 and 2000, and for the years ended August 31, 2000 and 1999, respectively. The majority owners of the Company are also officers of the Company. Salaries and bonuses paid to these officers were approximately $2,950, $2,438, $3,250 and $2,650 for the nine months ended May 31, 2001 and 2000, and for the years ended August 31, 2000 and 1999, respectively. 9. SUBSEQUENT EVENTS In May 2001, the Company entered into an agreement with an officer (and a shareholder) of the Company, whereby the Company would loan the officer a total of $1,454. The Company loaned the officer $442 in May 2001, which has been recorded in notes receivable from related parties and others in the May 31, 2001, consolidated and combined balance sheet. The Company loaned the remaining $1,011 in June 2001. The officer signed a promissory note with the Company at an interest rate of 7.0 percent. The note is payable on demand. In July 2001, the Company signed a definitive agreement whereby the businesses of the Company would be acquired by Heritage. 12