ITEM 2. PROPERTIES. The Company's headquarters is located in a building owned by the Company at One Rollins Plaza, Wilmington, DE 19803.
The Company's principal operating properties consist of land and buildings used in its truck leasing and rental business. Rollins owns or leases 202 facilities in 42 states.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor any of its subsidiaries is a party to any material legal proceedings. The Company and its subsidiaries are engaged in ordinary routine litigation incidental to the business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
STOCK PRICES AND DIVIDENDS
The range of share prices for the Common Stock on the New York and Pacific Stock Exchanges and per share dividends paid on Common Stock for the fiscal years ended September 30, 1996 and 1995 are as follows:
Prices Dividends 1996 1995 1996 1995 High Low High Low Fiscal Quarter First .......... $11 1/4 $ 9 1/4 $12 1/2 $11 $.045 $.04 Second ......... 11 1/8 10 14 1/2 11 3/8 .045 .04 Third .......... 11 5/8 9 5/8 12 5/8 10 3/8 .045 .04 Fourth ......... 12 1/2 10 1/8 11 3/4 10 1/4 .045 .04
At September 30, 1996, there were 2,379 holders of record of the Common Stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEAR SELECTED FINANCIAL DATA (Dollars in Millions, Except Per Share Amounts)
Year Ended September 30, 1996 1995 1994 1993 1992 Revenues 513.8 482.6 450.9 408.8 380.4 Earnings before income taxes 55.9 67.1 66.4 54.7 40.7 Net earnings 34.1 41.3 39.8 30.4 24.6 Earnings per share .78 .91 .86 .66 .53 Dividends per common share .18 .16 .13 .12 .11 At September 30, Total assets 1,125.2 1,027.0 909.7 781.2 708.5 Equipment on operating leases, net 784.3 727.9 637.8 543.4 468.3 Equipment financing obligations 640.9 573.6 498.4 427.3 390.3 Long-term debt .5 .6 .8 .9 6.8 Shareholders' equity 284.0 275.6 251.2 216.8 191.0
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Fiscal Year 1996 vs. 1995
Revenues increased by $31.2 million (6.5%) to $513.8 million from $482.6 million as full-service lease, guaranteed maintenance and dedicated logistics revenues all improved over the prior year. Revenues from the more economically sensitive short-term commercial rental business declined due in large part to overcapacity in the trucking industry.
Operating expenses increased by $17.8 million (9.2%) reflecting the increase in revenues. Higher vehicle expenses and wages associated with the growing dedicated logistics services business accounted in large part for the operating expense increases. Operating expenses as a percentage of revenues increased to 41.3% in 1996 from 40.2% in 1995. The increased operating cost ratio results from both higher operating costs and industry-wide competitive pricing.
Depreciation expense increased by $11.6 million (7.9%) due to the increased investment in equipment on operating leases and related transportation service facilities. The higher levels of investment in property and equipment reflect, in addition to the higher level of business, increased prices paid for recently acquired capital assets. Depreciation as a percentage of revenues was 30.8% in 1996 compared with 30.4% in 1995. The higher percentage in 1996 reflected both higher equipment costs and the effects of competitive conditions which limited price increases.
Gain on the sale of property and equipment was $7.9 million, a decrease of $4.8 million (37.8%) when compared with the 1995 gain of $12.7 million. The decrease in 1996 resulted from the sale of fewer units of transportation equipment and lower prices realized from such sales.
Selling and administrative expenses increased by $4.9 million (11.4%) to $48.0 million from $43.1 million in 1995. The increase reflects expanded revenues along with higher compensation and related costs of an expanded sales force. In addition, office, bad debt and data processing expenses were higher during 1996. As a percentage of revenues, selling and administrative expenses increased to 9.3% in 1996 from 8.9% in 1995.
Interest expense increased by $3.3 million (7.5%) principally due to the increase in average borrowings related to the purchase of additional equipment offset in part by a lower average interest rate on the Company's Collateral Trust Debentures.
The effective income tax rates for 1996 and 1995 were 39.0% and 38.4%, respectively.
Net earnings decreased by $7.2 million (17.4%) to $34.1 million or $.78 per share from $41.3 million or $.91 per share in 1995. Net earnings as a percentage of revenues was 6.6% in 1996 compared with 8.6% in 1995. The decrease in net earnings was due mainly to the higher operating cost ratio, lower gains on the sale of equipment, higher depreciation, selling and administrative and interest expense.
Fiscal Year 1995 vs. 1994
Revenues increased by $31.7 million (7.0%) to $482.6 million from $450.9 million as full-service leasing, commercial rental and dedicated carriage service revenues all improved over the prior year. This revenue improvement was realized despite a continuing sluggish economic climate. Business conditions were excellent during the first fiscal quarter ended December 31, 1994, but the economy weakened beginning in January, 1995 which affected the Company's short-term commercial rental business for the remainder of the year.
Operating expenses increased by $10.9 million (5.9%) reflecting the increase in revenues and the costs associated with opening new facilities and making improvements to existing facilities. Operating expenses as a percentage of revenues decreased to 40.2% in 1995 from 40.6% in 1994. The increased revenues combined with lower maintenance costs on new equipment and continued expense control efforts accounted for the lower operating cost ratio.
Depreciation expense increased by $16.3 million (12.5%) due to the increased investment in equipment on operating leases and related transportation service facilities. The higher levels of investment in property and equipment reflected, in addition to the higher level of business, increased prices paid for recently acquired equipment. Depreciation as a percentage of revenues was 30.4% in 1995 compared with 28.9% in 1994. The higher percentage in 1995 reflected both higher equipment costs and the effects of competitive conditions which limited price increases.
Gain on the sale of property and equipment was $12.7 million, an increase of $4.2 million (49.4%) over the 1994 gain of $8.5 million. During 1995, the Company sold more vehicles at higher prices resulting in the increased gain.
Selling and administrative expenses increased by $.7 million and were 8.9% of revenues in 1995 compared with 9.4% of revenues in 1994.
Interest expense increased by $7.3 million (19.8%) principally due to the increase in average borrowings related to the purchase of additional equipment and higher short-term interest rates.
The effective income tax rates for 1995 and 1994 were 38.4% and 40.0%, respectively. The 1995 effective tax rate was favorably impacted by the resolution of certain state income tax matters.
Net earnings increased by $1.5 million (3.8%) to $41.3 million or $.91 per share from $39.8 million or $.86 per share in 1994. Net earnings as a percentage of revenues was 8.6% in 1995 compared with 8.8% in 1994. Higher depreciation and interest expenses combined with a lower level of profitability from the commercial rental fleet, offset in part by a higher gain on the sale of equipment, contributed to 1995's lower net profit margin.
Liquidity and Capital Resources The Company's primary operation is the full-service leasing and rental of tractors, trucks and trailers which requires substantial amounts of capital and constant access to financing sources. At September 30, 1996, equipment on operating leases of $784.3 million represented 69.7% of the Company's assets. Funds for the acquisition of this equipment are provided principally by the cash flows from operations, the proceeds from the sale of used equipment and borrowings under the Company's revolving credit facility. Cash flows from operations were $202.4 million in 1996, a 2.0% increase from $198.5 million in 1995. Because existing leases provide the primary source of funds from operations, the Company expects a similar amount of funds to be generated in 1997.
Equipment financing obligations increased to $640.9 million at September 30, 1996 from $573.6 million a year earlier. Borrowings from external sources included equipment term loans furnished by commercial banks and the sale of Collateral Trust Debentures.
The Company's principal subsidiary, Rollins Leasing Corp., has a $100.0 million revolving credit facility of which $90.0 million was available at September 30, 1996. This facility is used primarily to finance vehicle purchases on an interim basis pending placement of long-term financing. On March 15, 1996, the Company closed on a private placement of $75.0 million of 6.89% Series P Collateral Trust Debentures due March 15, 2004 and on August 7, 1996, the Company sold $60.0 million of 6.875% Series Q Collateral Trust Debentures due August 1, 2001.
At September 30, 1996, the Company could sell an additional $30.0 million of Collateral Trust Debentures under its current shelf registration statement. Based on its access to the debt markets and relationships with current lending institutions and others who have expressed an interest in providing financing, the Company expects to continue to be able to obtain financing for its equipment and facility purchases at market rates and under satisfactory terms and conditions.
At September 30, 1996, the debt to equity ratio of the Company was 2.3 to 1.0 compared with 2.1 to 1.0 in 1995.
Capital expenditures were $297.3 million in 1996 compared with $319.0 million in 1995. At September 30, 1996, the Company's commitment for the purchase of revenue equipment was $104.6 million. Based on the current level of business and including commitments already made at September 30, 1996, the Company anticipates spending approximately $275.0 million for equipment and facilities in 1997.
During 1996, the Company purchased for cash and retired 1,746,000 shares of its $1 par value common stock for $18.2 million. At September 30, 1996, the Company was authorized to purchase 344,000 additional shares of its stock. One October 7, 1996, the Board of Directors authorized the purchase of up to an additional 2,000,000 shares of the Company's common stock.
Impact of Recent Accounting Pronouncements During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS 121) and SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which are both effective in fiscal 1997. The Company has determined that SFAS 121 will not have a material effect on its financial statements. The Company has also decided to adopt only the disclosure provisions of SFAS 123 when required in fiscal 1997.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of the Company, the Independent Auditors' Report and the financial statement schedules included in this report are shown on the Index to the Consolidated Financial Statements and Schedules on page 11.
ITEM 9.

ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except as presented below, the information called for by this Item 10 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on January 30, 1997.
Executive Officers of the Registrant. As of October 31, 1996, the Executive Officers of the registrant were:
Name Position Age Term of Office
Patrick J. Bagley Vice President-Finance and 49 7/87 to date Treasurer 1/87 to date
David F. Burr Chairman and Chief Executive 61 10/92 to date Officer, Rollins Leasing Corp.
Michael B. Kinnard Vice President-General Counsel 39 10/94 to date and Secretary 10/94 to date
John W. Rollins Chairman of the Board and 80 1954 to date Chief Executive Officer 10/74 to date
John W. Rollins, Jr. President and Chief Operating 54 9/75 to date Officer and Director
Henry B. Tippie Chairman of the Executive 69 3/74 to date Committee and Vice Chairman of the Board
The Company's Executive Officers are elected for the ensuing year and until their successors are elected.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION. The information called for by this Item 11 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on January 30, 1997.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information called for by this Item 12 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on January 30, 1997.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During the year ended September 30, 1996, the following officers and/or directors of the Company were also officers and/or directors of Rollins Environmental Services, Inc.; Patrick J. Bagley, Michael B. Kinnard, William B. Philipbar, Jr., John W. Rollins, John W. Rollins, Jr. and Henry B. Tippie. The following officers and/or directors of the Company were also officers and/or directors of Matlack Systems, Inc.; Patrick J. Bagley, Michael B. Kinnard, William B. Philipbar, Jr., John W. Rollins, John W. Rollins, Jr. and Henry B. Tippie. John W. Rollins owns directly and of record 6.1% and 11.5% of the outstanding shares of Common Stock of Rollins Environmental Services, Inc. and Matlack Systems, Inc., respectively at October 31, 1996. The description of transactions between the Company and Rollins Environmental Services, Inc. and between the Company and Matlack Systems, Inc. appears under the caption "Transactions with Related Parties" on page 23 of this 1996 Annual Report on Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements - See accompanying Index to Consolidated Financial Statements and Schedules on page 11.
(2) Financial Statements Schedules - See accompanying Index to Consolidated Financial Statements and Schedules on page 11.
(3) Exhibits: (3) (a) Restated Certificate of Incorporation of Rollins Truck Leasing Corp. as last amended on January 25, 1990 as filed with the Company's annual report on Form 10-K for the fiscal year ended September 30, 1992 is incorporated herein by reference.
(3) (b) By-Laws of Rollins Truck Leasing Corp. as last amended on November 25, 1987 as filed with the Company's annual report on Form 10-K for the fiscal year ended September 30, 1992 is incorporated herein by reference.
(4) (a) Collateral Trust Indenture dated as of March 21, 1983, between RLC CORP. (now known as Rollins Truck Leasing Corp.) and Bank of America Illinois (formerly Continental Illinois National Bank and Trust Company of Chicago), as Trustee, as filed with the Company's Registration Statement No. 33-40476 on Form S-3 dated May 10, 1991, is incorporated herein by reference.
(4) (b) Third Supplemental Collateral Trust Indenture dated February 20, 1986 to the Collateral Trust Indenture dated March 21, 1983 between RLC CORP. (now known as Rollins Truck Leasing Corp.) and Bank of America Illinois (formerly Continental Illinois National Bank and Trust Company of Chicago), as Trustee, as filed with the Company's Registration Statement No. 33-40476 on Form S-3 dated May 10, 1991, is incorporated herein by reference.
(4) (c) Eighth Supplemental Collateral Trust Indenture dated May 15, 1990 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's Registration Statement No. 33-67682 on Form S-3 dated August 20, 1993 is incorporated herein by reference.
(4) (d) Ninth Supplemental Collateral Trust Indenture dated December 1, 1991 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's report on Form 8-K dated December 12, 1991, is incorporated herein by reference.
(4) (e) Tenth Supplemental Collateral Trust Indenture dated April 28, 1992 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's report on Form 8-K dated April 28, 1992, is incorporated herein by reference.
(4) (f) Eleventh Supplemental Collateral Trust Indenture dated March 15, 1993 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's report on Form 8-K dated March 30, 1993, is incorporated herein by reference.
(4) (g) Twelfth Supplemental Collateral Trust Indenture dated March 15, 1994 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's report on Form 8-K dated March 21, 1994, is incorporated herein by reference.
(4) (h) Thirteenth Supplemental Collateral Trust Indenture dated March 15, 1995 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's report on Form 10-Q dated April 26, 1995, is incorporated herein by reference.
(4) (i) Fourteenth Supplemental Collateral Trust Indenture dated May 15, 1995 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and Bank of America Illinois (formerly Continental Bank, N.A.), as Trustee, as filed with the Company's report on Form 8-K dated May 16, 1995 is incorporated herein by reference.
(4) (j) Fifteenth Supplemental Collateral Trust Indenture dated March 15, 1996 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and First Trust of Illinois, National Association, as Trustee, as filed with the Company's report on Form 10-Q dated April 24, 1996, is incorporated herein by reference.
(4) (k) Sixteenth Supplemental Collateral Trust Indenture dated August 7, 1996 to the Collateral Trust Indenture dated March 21, 1983 as supplemented and amended by a Third Supplemental Indenture thereto dated as of February 20, 1986 and by an Eighth Supplemental Indenture dated May 15, 1990, between Rollins Truck Leasing Corp. and First Trust of Illinois, National Assocation, as Trustee, as filed with the Company's report on Form 8-K dated August 7, 1996 is incorporated herein by reference.
(4) (l) RLC CORP. (now known as Rollins Truck Leasing Corp.) Rights Agreement dated as of June 14, 1989 as filed as an Exhibit to Registration Statement on Form 8-A filed by Registrant on June 15, 1989 is incorporated herein by reference.
(10) (a) RLC CORP. (now known as Rollins Truck Leasing Corp.) 1982 Incentive Stock Option Plan, as filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held on January 27, 1983, is incorporated herein by reference.
(10) (b) RLC CORP. (now known as Rollins Truck Leasing Corp.) 1986 Stock Option Plan, as filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held on January 29, 1987, is incorporated herein by reference.
(10) (c) Rollins Truck Leasing Corp. 1993 Stock Option Plan, as filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held on January 27, 1994, is incorporated herein by reference.
(21) Rollins Truck Leasing Corp. Subsidiaries at September 30, 1996.
(23) Consent of KPMG Peat Marwick LLP, Independent Auditors, for incorporation by reference in Registration Statement No. 33- 67682 filed on Form S-3.
(27) Rollins Truck Leasing Corp. Financial Data Schedule at September 30, 1996.
(b) Reports on Form 8-K.
On August 7, 1996, a report on From 8-K was filed in connection with the sale of $60,000,000 of the Company's 6 7/8% Collateral Trust Debentures, Series Q, due August 1, 2001, which were sold through Merrill, Lynch, Pierce, Fenner & Smith Incorporated, sole underwriter under the terms of an Underwriting Agreement which was filed as an Exhibit to the Form 8-K and pursuant to Registration Statement No. 33-67682 filed with the Securities and Exchange Commission on August 20, 1993 and which was declared effective on September 8, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATED: November 26, 1996 ROLLINS TRUCK LEASING CORP. (Registrant)
BY: /s/ John W. Rollins, Jr. John W. Rollins, Jr. President and Chief Operating Officer and Director
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:
/s/ Patrick J. Bagley Vice President-Finance and November , 1996 Patrick J. Bagley Treasurer Chief Financial Officer Chief Accounting Officer
/s/ John W. Rollins Chairman of the Board and November , 1996 John W. Rollins Chief Executive Officer
/s/ Gary W. Rollins Director November , 1996 Gary W. Rollins
/s/ Henry B. Tippie Chairman of the Executive November , 1996 Henry B. Tippie Committee and Vice Chairman of the Board
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(1) Consolidated Page(s) Independent Auditors' Report on Financial Statements and Financial Statement Schedules 12
Consolidated Statement of Earnings for the years ended September 30, 1996, 1995 and 1994 13
Consolidated Balance Sheet at September 30, 1996 and 1995 14
Consolidated Statement of Cash Flows for the years ended September 30, 1996, 1995 and 1994 15
Notes to the Consolidated Financial Statements 16 to 23
(2) Financial Statement Schedules
Rollins Truck Leasing Corp. (Parent) Schedule I - Condensed Financial Information
Balance Sheet at September 30, 1996 and 1995 24
Statement of Earnings for the years ended September 30, 1996, 1995 and 1994 25
Statement of Cash Flows for the years ended September 30, 1996, 1995 and 1994 26
Notes to the Financial Statements 27
Rollins Truck Leasing Corp. and Subsidiaries Consolidated
Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 1996, 1995 and 1994 28
Any financial statement schedules otherwise required have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Independent Auditors' Report
The Shareholders and Board of Directors Rollins Truck Leasing Corp.
We have audited the consolidated financial statements of Rollins Truck Leasing Corp. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules 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 Rollins Truck Leasing Corp. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania October 22, 1996
CONSOLIDATED STATEMENT OF EARNINGS
Year Ended September 30, 1996 1995 1994 Revenues $513,779,000 $482,612,000 $450,903,000 Expenses: Operating 211,919,000 194,073,000 183,222,000 Depreciation 158,407,000 146,777,000 130,512,000 Gain on sale of property and equipment (7,950,000) (12,657,000) (8,530,000) Selling and administrative 47,995,000 43,146,000 42,473,000 410,371,000 371,339,000 347,677,000
Operating earnings 103,408,000 111,273,000 103,226,000 Interest income - 272,000 593,000 Interest expense (47,481,000) (44,453,000) (37,429,000) Earnings before income taxes 55,927,000 67,092,000 66,390,000 Income taxes 21,811,000 25,756,000 26,562,000
Net earnings $ 34,116,000 $ 41,336,000 $ 39,828,000
Earnings per share $ .78 $ .91 $ .86
Average common shares and equivalents outstanding 43,730,000 45,365,000 46,310,000
The Notes to the Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEET
September 30, 1996 1995 ASSETS Current assets Cash $ 31,207,000 $ 22,708,000 Accounts receivable, net of allowance for doubtful accounts: 1996-$1,928,000; 1995-$1,635,000 62,389,000 56,946,000 Inventories 9,124,000 8,612,000 Prepaid expenses 14,195,000 14,366,000 Refundable income taxes 897,000 1,667,000 Deferred income taxes 5,960,000 6,241,000 Total current assets 123,772,000 110,540,000 Equipment on operating leases, net 784,346,000 727,893,000 Other property and equipment, net 198,681,000 171,343,000 Excess of cost over net assets of businesses acquired 12,497,000 11,677,000 Other assets 5,916,000 5,576,000 Total assets $1,125,212,000 $1,027,029,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities (excluding equipment financing obligations) Accounts payable $ 8,759,000 $ 8,115,000 Accrued liabilities 44,733,000 43,167,000 Current maturities of long-term debt 124,000 150,000 Total current liabilities 53,616,000 51,432,000 Equipment financing obligations including maturities due within one year: 1996-$75,047,000; 1995-$21,469,000 640,854,000 573,554,000 Long-term debt 508,000 632,000 Other liabilities 11,375,000 10,028,000 Deferred income taxes 134,811,000 115,830,000
Commitments and contingent liabilities (see Notes to the Consolidated Financial Statements)
Shareholders' equity: Common stock, $1 par value, outstanding: 1996-43,383,935 shares; 1995-44,954,679 shares 43,384,000 44,955,000 Additional paid-in capital - 11,453,000 Retained earnings 240,664,000 219,145,000 Total shareholders' equity 284,048,000 275,553,000 Total liabilities and shareholders' equity $1,125,212,000 $1,027,029,000
The Notes to the Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended September 30, 1996 1995 1994 Cash flows from operating activities: Net earnings $ 34,116,000 $ 41,336,000 $ 39,828,000 Adjustments to reconcile earnings to net cash provided by operating activities: Depreciation and amortization 158,738,000 147,003,000 130,741,000 Net gain on sale of property and equipment (7,950,000) (12,657,000) (8,530,000) Changes in assets and liabilities: Notes and accounts receivable (5,443,000) 1,085,000 (3,114,000) Accounts payable and accrued liabilities 2,210,000 3,963,000 3,856,000 Current and deferred income taxes 20,032,000 18,956,000 12,946,000 Other, net 666,000 (1,165,000) (2,072,000) Net cash provided by operating activities 202,369,000 198,521,000 173,655,000
Cash flows from investing activities: Purchase of property and equipment (297,339,000)(318,983,000)(297,492,000) Proceeds from sales of equipment 63,090,000 70,013,000 58,376,000 Excess of cost over net assets of business acquired (1,150,000) - - Net cash used in investing activities (235,399,000)(248,970,000)(239,116,000)
Cash flows from financing activities: Proceeds of equipment financing obligations 171,406,000 239,128,000 177,126,000 Repayment of equipment financing obligations (104,106,000)(163,939,000)(106,068,000) Repayment of long-term debt (150,000) (146,000) (203,000) Payment of dividends (7,974,000) (7,298,000) (6,092,000) Proceeds of stock options exercised 540,000 446,000 780,000 Common stock acquired and retired (18,187,000) (10,128,000) - Other - - (69,000) Net cash provided by financing activities 41,529,000 58,063,000 65,474,000
Net increase in cash 8,499,000 7,614,000 13,000 Cash beginning of period 22,708,000 15,094,000 15,081,000 Cash end of period $ 31,207,000 $ 22,708,000 $ 15,094,000
Supplemental information: Interest paid $ 47,008,000 $ 42,692,000 $ 36,425,000 Income taxes paid $ 1,779,000 $ 6,800,000 $ 13,616,000
The Notes to the Consolidated Financial Statements are an integral part of these statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Organization and Accounting Policies Organization - Rollins Truck Leasing Corp. is engaged primarily in full- service truck leasing and rentals and the provision and management of complete truck transportation and distribution systems. All of the Company's operations currently are conducted within the United States.
Consolidation - The consolidated financial statements include the accounts of all subsidiaries. Intercompany transactions and balances among these subsidiaries have been eliminated.
Revenue recognition - Lease, rental and other transportation service revenues are recognized over the terms of the respective contracts.
Earnings per share - Earnings per share are computed assuming the conversion of all potentially dilutive outstanding stock options.
Inventories - Inventories of transportation equipment parts and supplies are valued at the lower of first-in, first-out cost or market.
Property and equipment - Property and equipment is carried at cost, net of applicable allowances. Tires placed in service on new equipment are capitalized as part of the original equipment cost. Depreciation is provided on a straight-line basis. Depreciable lives for equipment on operating leases and other property and equipment range from 3 to 12 years and 3 to 45 years, respectively. The cost and related accumulated depreciation of property and equipment sold or retired are eliminated from the property accounts and the resulting gain or loss is reflected in the Consolidated Statement of Earnings. Repairs and maintenance are expensed as incurred. Replacement tires are expensed when placed in service. Major additions and improvements are capitalized and written off over the remaining depreciable lives of the assets.
Goodwill - The excess of cost over net assets of businesses acquired prior to October 30, 1970 amounting to $4,588,000 is not being amortized since its value, in management's opinion, has not diminished. The excess of cost over net assets of businesses acquired subsequently is being amortized on a straight-line basis over 40 years.
Leasing operations - Leasing operations consist of the long-term leasing and short-term rental of transportation equipment. All leases are classified as operating leases and expire on various dates during the next 13 years.
Claims and insurance reserves - The Company retains a specific portion of insurable risks with regard to public liability and workers' compensation claims. Retention levels are currently $500,000. Reserves are established for claims incurred plus an estimate for claims incurred but not reported. Reserve requirements are evaluated and established utilizing historical trends, the Company's experience, claim severity and other factors. Claims estimated to be paid within one year have been classified in accrued liabilities with the remainder included with other liabilities.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair values of financial instruments - The carrying amounts reported in the balance sheet for current assets and current liabilities approximate their fair value at September 30, 1996.
Equipment on Operating Leases The Company's investment in equipment on operating leases is as follows:
September 30, 1996 1995 Transportation equipment $1,160,364,000 $1,058,643,000 Less accumulated depreciation (376,018,000) (330,750,000) $ 784,346,000 $ 727,893,000
The net gain on disposition of property and equipment, was $7,950,000 in 1996, $12,657,000 in 1995 and $8,530,000 in 1994.
Commitments for the purchase of transportation equipment amounted to $104,623,000 at September 30, 1996.
At September 30, 1996, minimum future revenues from non-cancelable leases are as follows:
Year Ending September 30, 1997 $219,476,000 1998 189,116,000 1999 149,436,000 2000 106,931,000 2001 68,432,000 Later years 59,054,000 Total future minimum lease revenues $792,445,000
Revenues include contingent rentals, which represent all commercial rental revenues and the mileage charges on full-service leases, of $184,799,000 in 1996, $183,399,000 in 1995 and $169,755,000 in 1994.
Other Property and Equipment The Company's other property and equipment accounts are as follows:
September 30, 1996 1995 Land $ 48,749,000 $ 40,117,000 Transportation service facilities 181,362,000 154,943,000 Other operating assets 36,500,000 34,580,000 Less accumulated depreciation (67,930,000) (58,297,000) $198,681,000 $171,343,000
Accrued Liabilities Accrued liabilities are as follows: September 30, 1996 1995 Employee compensation $ 9,534,000 $ 7,491,000 Interest 8,050,000 7,541,000 Taxes other than income 11,057,000 10,195,000 Insurance reserves 6,063,000 6,113,000 Environmental 1,868,000 2,817,000 Unbilled services and supplies 5,647,000 7,802,000 Other 2,514,000 1,208,000 $44,733,000 $43,167,000
Indebtedness Equipment financing obligations are as follows: September 30, 1996 1995 Revolving Credit Agreement $ 10,000,000 $ 14,000,000 Collateral Trust Debentures: Series H, 10.60%, due 1999 - 75,000,000 Series I, 10.35%, due 2000 50,000,000 50,000,000 Series J, 8 5/8 %, due 1998 30,000,000 30,000,000 Series K, 7 3/4 %, due 1997 50,000,000 50,000,000 Series L, 7 %, due 2003 70,000,000 70,000,000 Series M, 7 %, due 2001 60,000,000 60,000,000 Series N, 8.27%, due 2002 100,000,000 100,000,000 Series O, 7.25%, due 2005 50,000,000 50,000,000 Series P, 6.89%, due 2004 75,000,000 - Series Q, 6.87%, due 2001 60,000,000 - Other equipment financing obligations 85,854,000 74,554,000 $640,854,000 $573,554,000
Two banks provide an unsecured $100,000,000 line under a Revolving Credit Agreement ("the Revolver"). At the option of the banks, the Revolver and the Collateral Trust Debentures may be secured by certain leasing equipment. Termination of the Revolver would result in repayment of the outstanding balance over 60 months in equal installments; otherwise, no repayments are required unless the financing value of the eligible equipment available as security falls below the outstanding loan balance. At September 30, 1996, interest rates on borrowings under the Revolver averaged 6.0%. The Revolver provides for the maintenance of specified financial ratios and restricts payments to the Company by a consolidated subsidiary. Net assets of all subsidiaries not restricted under the Revolver totaled $189,865,000 at September 30, 1996. Other equipment financing obligations due within one year totaled $25,047,000 at September 30, 1996 with the balance payable through 2005. Interest rates on these obligations averaged 6.3% at September 30, 1996. The other equipment financing obligations are collateralized by certain leasing equipment. The Collateral Trust Debentures are secured by notes from a subsidiary.
Equipment financing obligations due within one year are not classified as current liabilities as the Company intends and has the ability to refinance them on a long-term basis through available credit facilities.
Based on published bid prices, at September 30, 1996, the estimated fair value of the Company's Collateral Trust Debentures was $550,088,000 compared to the recorded book amount of $545,000,000. The fair value of the remaining $95,854,000 of equipment indebtedness approximates its recorded amount.
Long-term debt consists of real estate and other obligations payable in installments over various periods to 2001, at interest rates ranging from 8.8% to 9.0%. Land and buildings with a carrying value of $1,535,000 are pledged as collateral.
The aggregate amounts of maturities for all indebtedness over the next five years are as follows: 1997-$75,171,000; 1998-$21,488,000; 1999- $45,043,000; 2000-$58,301,000 and 2001-$124,168,000.
Pension Plans The Company maintains a noncontributory pension plan for eligible employees not covered by pension plans under collective bargaining agreements. Pension costs are funded in accordance with the provisions of the Internal Revenue Code. The Company also maintains a nonqualified, noncontributory defined benefit pension plan for certain employees to restore pension benefits reduced by federal income tax regulations. The cost associated with the plan is determined using the same actuarial methods and assumptions as those used for the Company's qualified pension plan.
The following table sets forth the funded status and the amount recognized in the Company's balance sheet for the plans:
September 30, 1996 1995 Actuarial present value of accumulated benefit obligation: Vested $31,114,000 $27,081,000 Non-vested 1,279,000 1,267,000 $32,393,000 $28,348,000 Projected benefit obligation $38,227,000 $33,734,000 Plan assets at market value 39,167,000 35,230,000 Plan assets in excess of projected benefit obligation (940,000) (1,496,000) Unrecognized gain 6,352,000 6,929,000 Unrecognized prior service costs (717,000) (775,000) Unrecognized overfunding at adoption 281,000 351,000 Accrued pension liability $ 4,976,000 $ 5,029,000
At September 30, 1996, the assets of the pension plans were invested 76% in equity securities, 22% in fixed income securities and the balance in other short-term interest bearing accounts.
The discount rate and the rate of assumed compensation increase for all three years were 8.0% and 5.0%, respectively. The expected long-term rate of return on assets was 9.0% for 1996 and 1995 and 9.5% for 1994.
The components of net periodic pension cost are as follows:
Year Ended September 30, 1996 1995 1994 Service cost $2,555,000 $2,175,000 $2,283,000 Interest cost 2,727,000 2,371,000 2,152,000 Return on plan assets (3,659,000) (7,420,000) (947,000) Net amortization and deferral 244,000 4,907,000 (1,580,000) Net periodic pension cost $1,867,000 $2,033,000 $1,908,000
Effective October 1, 1994, the Company established a defined contribution 401(k) plan which permits participation by substantially all employees not represented under a collective bargaining agreement.
The Company expensed payments to multi-employer pension plans required by collective bargaining agreements of $85,000 in 1996, $131,000 in 1995 and $172,000 in 1994. The actuarial present value of accumulated plan benefits and net assets available for benefits to employees under these plans are not available.
Shareholders' Equity Changes in the components of shareholders' equity are as follows:
$1 Par Value Additional Common Paid-in Retained Stock Capital Earnings Balance at September 30, 1993 $30,363,000 $35,016,000 $151,371,000 Net earnings 39,828,000 Dividends on common stock, $.13 per share (6,092,000) Three-for-two common stock split 15,252,000 (15,321,000) Exercise of stock options 156,000 624,000 Balance at September 30, 1994 45,771,000 20,319,000 185,107,000 Net earnings 41,336,000 Dividends on common stock, $.16 per share (7,298,000) Common stock acquired and retired (963,000) (9,165,000) Exercise of stock options 147,000 299,000 Balance at September 30, 1995 44,955,000 11,453,000 219,145,000 Net earnings 34,116,000 Dividends on common stock, $.18 per share (7,974,000) Common stock acquired and retired (1,746,000)(11,818,000) (4,623,000) Exercise of stock options 175,000 365,000 Balance at September 30, 1996 $43,384,000 $ - $240,664,000
The Company is authorized to issue 100,000,000 shares of its $1 Par Value Common Stock and 1,000,000 shares of Preferred Stock. The preferred shares are without par value, with terms and conditions of each issue as determined by the Board of Directors.
Each share of common stock includes one common stock purchase right ("Right") which is non-exercisable until certain defined events occur, including tender offers or the acquisition by a person or group of affiliated or associated persons of 20% of the Company's common stock. Upon the occurrence of certain defined events, the Right entitles the holder to purchase additional stock of the Company or stock of an acquiring company at a 50% discount. The Right expires on June 30, 1999 unless earlier redeemed by the Company at a price of $.0045 per Right.
The terms of a credit agreement restrict the Company's dividend payments to consolidated net earnings subsequent to September 30, 1984 subject to certain adjustments. At September 30, 1996, $187,050,000 of retained earnings was available for the payment of cash dividends.
Stock Option Plans Under the Company's stock option plans, options to purchase common stock of the Company may be granted to officers and key employees at not less than 100% of the fair market value at the date of grant. Option activity is as follows:
Year Ended September 30, 1996 1995 1994 Number of options: Outstanding at beginning of year 1,326,773 1,121,499 1,368,005 Granted 481,800 359,500 7,515 Exercised (175,256) (146,501) (226,321) Expired or canceled (50,571) (7,725) (27,700) Outstanding at September 30 1,582,746 1,326,773 1,121,499 At September 30: Options available for grant 518,385 954,014 1,305,789 Options exercisable 623,521 539,662 470,500
Per share prices: Options granted $9.50 to $10.50 $11.00 to $11.50 $12.08 Options exercised $2.39 to $ 7.56 $ 2.39 to $ 7.56 $ 2.39 to $7.56 Options outstanding $2.83 to $12.08 $ 2.39 to $12.08 $ 2.39 to $12.08
Lease Commitments The Company leases some of the premises and equipment used in its operations. Leases classified as operating leases expire on various dates during the next 18 years. Some of the leases are renewable at the Company's option. Minimum future rental payments required under operating leases having non-cancelable terms in excess of one year as of September 30, 1996 are as follows:
Year Ending September 30, 1997 $ 3,394,000 1998 2,899,000 1999 2,351,000 2000 1,899,000 2001 1,523,000 Later years 4,596,000 Total minimum payments required $16,662,000
Total rental expense for all operating leases except those with terms of a month or less was $7,604,000 in 1996, $7,560,000 in 1995 and $7,695,000 in 1994.
Income Taxes The tax provisions for the three years ended September 30, 1996 are comprised as follows:
Year Ended September 30, 1996 1995 1994 Current: Federal $ 2,514,000 $ 6,584,000 $ 8,692,000 State 15,000 1,128,000 2,796,000 Deferred: Federal 16,413,000 16,256,000 13,516,000 State 2,869,000 1,788,000 1,558,000 Total income taxes $21,811,000 $25,756,000 $26,562,000
A reconciliation of the tax provisions for the three years ended September 30, 1996 with amounts calculated by applying the statutory federal tax rate to earnings before income taxes for those years is as follows:
Year Ended September 30, 1996 1995 1994 Federal tax $19,574,000 $23,482,000 $23,236,000 State taxes, net of federal benefit 1,875,000 1,896,000 2,830,000 Other 362,000 378,000 496,000 Total income taxes $21,811,000 $25,756,000 $26,562,000
The tax effect of temporary differences and the tax credit carryforwards which comprise the current and non-current deferred tax amounts shown on the balance sheet are as follows: September 30 1996 1995 Depreciation $148,599,000 $124,775,000 Expenses deductible when paid (9,077,000) (9,198,000) Alternative minimum tax credit carryforward (11,335,000) (6,924,000) Other 664,000 936,000 Deferred income taxes, net $128,851,000 $109,589,000
At September 30, 1996, the Company had alternative minimum tax credit carryforwards of $11,335,000 which have no expiration date. The Company has no tax credit carryforwards for financial reporting purposes since all such credits have been considered in the determination of deferred tax amounts.
Environmental Regulation The Company is subject to certain regulations of the Environmental Protection Agency in that it stores and dispenses petroleum products. Most of these regulations address testing and replacement of underground tanks. The Company's adherence to these regulations is part of its normal business operations. These regulations have not had any material adverse effect upon the Company.
Commitments and Contingent Liabilities There are various routine claims and legal actions pending against the Company incidental to the ordinary operation of its business. The Company is of the opinion, based on the advice of counsel, that it is only remotely likely that the ultimate resolution of these claims and actions will be material.
Transactions with Related Parties Certain directors and officers of the Company are also directors and officers of Rollins Environmental Services, Inc. and Matlack Systems, Inc.
The Company sold materials (principally vehicle fuel) and services (including data processing services) and rented transportation equipment and office space to Rollins Environmental Services, Inc. The aggregate charges for these materials and services, which have been included in revenues or offset against operating expense, as appropriate, in the Consolidated Statement of Earnings, were $4,769,000 in 1996, $6,617,000 in 1995 and $6,551,000 in 1994.
The Company provided administrative services and rented office space to Matlack, Inc. for aggregate charges of $3,542,000 in 1996, $3,286,000 in 1995 and $2,949,000 in 1994, which have been included in revenues or offset against operating expense, as appropriate, in the Consolidated Statement of Earnings. Interest charges to Matlack, Inc., which have been offset against interest expense, were $272,000 in 1995 and $593,000 in 1994.
An officer of the Company is the trustee of an employee benefits trust which provides certain insurance and health care benefits to employees of the Company. Contributions to the trust, which were charged to operating or selling and administrative expense, as appropriate, were $10,892,000 in 1996, $9,099,000 in 1995 and $8,166,000 in 1994.
In the opinion of management of the Company, the foregoing transactions were effected at rates which approximate those which the Company would have realized or incurred had such transactions been effected with independent third parties.
Quarterly Results (Unaudited) December March June September 1996 31 31 30 30 Revenues $125,021,000 $122,192,000 $130,723,000 $135,843,000 Gross profit $ 37,293,000 $ 33,232,000 $ 39,347,000 $ 41,531,000 Earnings before income taxes $ 13,586,000 $ 8,833,000 $ 15,903,000 $ 17,605,000 Net earnings $ 8,356,000 $ 5,432,000 $ 9,742,000 $ 10,586,000 Earnings per share $ .19 $ .12 $ .22 $ .25
Revenues $119,079,000 $116,671,000 $122,726,000 $124,136,000 Gross profit $ 39,807,000 $ 36,924,000 $ 40,037,000 $ 37,651,000 Earnings before income taxes $ 19,060,000 $ 15,356,000 $ 17,810,000 $ 14,866,000 Net earnings $ 11,509,000 $ 9,273,000 $ 11,233,000 $ 9,321,000 Earnings per share $ .25 $ .20 $ .25 $ .21
SCHEDULE I - Condensed Financial Information
ROLLINS TRUCK LEASING CORP. BALANCE SHEET ($000 Omitted) Assets September 30, 1996 1995 Current assets (excluding notes receivable from subsidiaries) Cash $ 1,255 $ 860 Accounts receivable 14 59 Accounts receivable from subsidiaries* 4 14 Other current assets 141 146 Total current assets 1,414 1,079 Notes receivable from subsidiary* 545,000 485,000 Investments in subsidiaries, at equity* 282,202 262,291 Advances to subsidiaries* 15,832 16,830 Property and equipment, at cost, net of accumulated depreciation 1,100 908 Other assets 96 195 Total assets $845,644 $766,303
Liabilities and Shareholders' Equity Current liabilities Accounts payable to subsidiaries* $ 5 $ 29 Accounts payable to others 437 163 Accrued liabilities 494 488 Income taxes payable 1,785 1,500 Total current liabilities 2,721 2,180 Bank Master Note Obligation 3,000 - Collateral Trust Debentures 10.60 % Series H, due 1999 - 75,000 10.35 % Series I, due 2000 50,000 50,000 8 5/8% Series J, due 1998 30,000 30,000 7 3/4% Series K, due 1997 50,000 50,000 7 % Series L, due 2003 70,000 70,000 7 % Series M, due 2001 60,000 60,000 8.27 % Series N, due 2002 100,000 100,000 7.25 % Series O, due 2005 50,000 50,000 6.89 % Series P, due 2004 75,000 - 6 7/8% Series Q, due 2001 60,000 - Advances from subsidiaries* 10,320 3,160 Other liabilities 215 - Deferred federal income taxes 340 410 Commitments and contingent liabilities (see Notes to the Financial Statements)
Shareholders' equity Common shares $1 Par Value, 100,000,000 shares authorized; issued and outstanding: 1996: 43,383,935; 1995: 44,954,679 43,384 44,955 Additional paid-in capital - 11,453 Retained earnings 240,664 219,145 Total shareholders' equity 284,048 275,553 Total liabilities and shareholders' equity $845,644 $766,303 * Eliminated in consolidation.
The Notes to the Financial Statements are an integral part of these statements. SCHEDULE I - Condensed Financial Information (continued)
ROLLINS TRUCK LEASING CORP. STATEMENT OF EARNINGS ($000 Omitted)
Year Ended September 30, 1996 1995 1994
Revenues: Dividends from subsidiaries $12,300 $12,501 $ 1,800 Other income 6,322 5,301 4,502 18,622 17,802 6,302
Expenses: Administrative 2,930 3,365 3,418 Depreciation and amortization 254 220 193 Loss on sale of property and equipment - 9 11 3,184 3,594 3,622
Earnings before interest and income taxes 15,438 14,208 2,680
Interest income 40,085 36,995 31,700 Interest expense (40,307) (36,995) (31,700)
Earnings before income taxes 15,216 14,208 2,680
Income taxes 1,089 980 825
Net earnings of Rollins Truck Leasing Corp. 14,127 13,228 1,855
Equity in undistributed net earnings of subsidiaries 19,989 28,108 37,973
Net earnings $34,116 $41,336 $39,828
The Notes to the Financial Statements are an integral part of these statements. SCHEDULE I - Condensed Financial Information (continued)
ROLLINS TRUCK LEASING CORP. STATEMENT OF CASH FLOWS ($000 Omitted) Year Ended September 30, 1996 1995 1994 Cash flows from operating activities: Earnings prior to equity in subsidiaries' undistributed earnings $ 14,127 $ 13,228 $ 1,855
Adjustments to reconcile earnings to net cash provided by operating activities: Depreciation and amortization 254 220 193 Loss on sale of property and equipment - 9 11 Changes in assets and liabilities: Accounts receivable 55 70 28 Accounts payable and accrued liabilities 256 (92) 9 Current and deferred income taxes 215 767 275 Other, net 318 (235) (252) Net cash provided by operating activities 15,225 13,967 2,119
Cash flows from investing activities: Purchase of equipment (367) (148) (152) Proceeds from sale of equipment - 12 - Net cash used in investing activities (367) (136) (152)
Cash flows from financing activities: Proceeds of equipment financing 144,300 150,000 60,000 Notes receivable from subsidiaries (135,000) (150,000)(56,300) Repayment of note by subsidiary 75,000 45,600 - Repayment of note by Matlack, Inc. - 6,000 - Repayment of equipment financing (81,300) (50,000) - Payment of dividends (7,974) (7,298) (6,092) Proceeds of stock options exercised 540 446 780 Common stock acquired and retired (18,187) (10,128) - Subsidiary advances and payments 8,158 1,710 - Other - - (69) Net cash used in financing activities (14,463) (13,670) (1,681)
Net increase in cash 395 161 286
Cash beginning of period 860 699 413 Cash end of period $ 1,255 $ 860 $ 699
Supplemental information: Interest paid $ 39,377 $ 35,291 $31,525 Income taxes paid $ 1,655 $ 6,710 $10,660
The Notes to the Financial Statements are an integral part of these statements. SCHEDULE I - Condensed Financial Information (continued)
ROLLINS TRUCK LEASING CORP. Notes to the Financial Statements
Accounting Policies The accounting policies of the Registrant and its subsidiaries are set forth on page 16 of this 1996 Annual Report on Form 10-K.
The Company's principal sources of earnings are dividends and management fees paid by its subsidiaries. Certain loan agreements restrict payments to the Company by its subsidiaries. Net assets of subsidiaries not restricted under such loan agreements totaled $189,865,000 at September 30, 1996. The Company also realizes cash receipts by assessing subsidiaries for federal taxes on income and expends cash in payment of such taxes on a consolidated basis. Tax assessments are based on the amount of federal income taxes which would be payable (recoverable) by each subsidiary company based on its current year's earnings (loss) reduced by that subsidiary's applicable portion of any consolidated carryforward or carryback of net operating losses, investment tax credits, alternative minimum tax credits or similar items utilized currently in the consolidated federal income tax return.
Interest income on notes receivable from a subsidiary which are pledged to secure the Collateral Trust Debentures (described on page 18 of this 1996 Annual Report on Form 10-K) was $40,085,000, $36,995,000 and $31,700,000 in 1996, 1995 and 1994, respectively.
Commitments and Contingencies The Company is obligated to an affiliated company for $283,000 annually ($1,468,000 in the aggregate) of future rentals under a lease to 2001. Rent expense was $345,000 in 1996, $398,000 in 1995 and $391,000 in 1994.
Commitments of the Company have been collateralized by bank letters of credit issued on behalf of the Company in the amount of $4,950,000.
The aggregate amounts of maturities for the Collateral Trust Debentures during the next five years are $50,000,000 in 1997, $30,000,000 in 1999, $50,000,000 in 2000 and $120,000,000 in 2001.


ITEM 1. BUSINESS
Sterling Drilling Fund 1983-1, L.P., formerly Sterling-Fuel Resources Drilling Fund 1983-1 (the "Registrant" or the "Partnership") is a limited partnership formed under the laws of the State of New York on March 18, 1983. The sole business of the Partnership was the drilling of formation extension wells principally for natural gas in various locations in the State of West Virginia. No exploratory drilling was undertaken.
The principal place of business of the Partnership is at One Landmark Square, Stamford, Connecticut 06901, telephone (203) 358-5700. The Managing General Partner of the Partnership is PrimeEnergy Management Corporation, a New York corporation which is a wholly-owned subsidiary of PrimeEnergy Corporation, a publicly held Delaware corporation. Messrs. Charles E. Drimal, Jr., Oliver J. Sterling and Samuel R. Campbell also are General Partners. Mr. Drimal is a Director, President and Chief Executive Officer of PrimeEnergy Management Corporation and PrimeEnergy Corporation, and Mr. Campbell is a Director of PrimeEnergy Corporation.
The aggregate contributions to the Partnership were $11,077,000, all of which, net of the organization expenses of the Partnership, was expended in the drilling of such formation extension wells. Such properties are located in Clay, Roane, Calhoun, Gilmer, Wirt, Kanawha, Lincoln and Putnam Counties, West Virginia. The Partnership does not operate any of the properties in which it has an interest, but generally such properties are operated and serviced by Prime Operating Company, a Texas corporation, and Eastern Oil Well Service Company, a West Virginia corporation, both wholly-owned subsidiaries of PrimeEnergy Corporation.
During 1996, the Partnership did not engage in any development drilling activities or the acquisition of any significant additional properties, but engaged in the production of oil and gas from its producing properties in the usual and customary course. Since January 1, 1997, and to the date of this Report, the Partnership has not engaged in any drilling activities nor participated in the acquisition of any material producing oil and gas properties.
COMPETITION AND MARKETS
Competitors of the Partnership in the marketing of its oil and gas production include oil and gas companies, independent concerns, and individual producers and operators, many of which have financial resources, staffs and facilities substantially greater than those available to the Partnership. Furthermore, domestic producers of oil and gas must not only compete with each other in marketing their output, but must also compete with producers of imported oil and gas and alternative energy sources such as coal, nuclear power and hydroelectric power.
The availability of a ready market for any oil and gas produced by the Partnership at acceptable prices per unit of production will depend upon numerous factors beyond the control of the Partnership, including the extent of domestic production and importation of oil and gas, the proximity of the Partnership's producing properties to gas pipelines and the availability and capacity of such pipelines, the marketing of other competitive fuels, fluctuation in demand, governmental regulation of production, refining, transportation and sales, general national and worldwide economic conditions, and pricing, use and allocation of oil and gas and their substitute fuels.
The Partnership does not currently own or lease any bulk storage facilities or pipelines, other than adjacent to and used in connection with producing wells. The Partnership deals with a number of major and independent companies for the purchase of its oil and gas production, in the areas of production. In 1996, approximately $251,000, or 96.66%, of the Partnership's gas production was sold to one unaffiliated purchaser, Phoenix Diversified. This purchaser has no relationship or is otherwise affiliated with the Partnership. Sales are made under short-term contractual arrangements. The Partnership believes that its current purchasers will continue to purchase oil and gas products and, if not, could be replaced by other purchasers.
ENVIRONMENTAL MATTERS
The petroleum industry is subject to numerous federal and state environmental statutes, regulations and other pollution controls. In general, the Partnership is, and will be subject to, present and future environmental statutes and regulations, and in the future the cost of its activities may materially increase as a result thereof. The Partnership's expenses relating to preserving the environment during 1996 as they relate to its oil and gas operations were not significant in relation to operating costs and the Partnership expects no material change in the near future. The Partnership believes that environmental regulations should not, in the future, result in a curtailment of production or otherwise have a materially adverse effect on the Partnership's operations or financial condition.
REGULATION
The Partnership's oil and gas operations are subject to a wide variety of federal, state and local regulations. Administrative agencies in such jurisdictions may promulgate and enforce rules and regulations relating to, among other things, drilling and spacing of oil and gas wells, production rates, prevention of waste, conservation of natural gas and oil, pollution control, and various other matters, all of which may affect the Partnership's future operations and production of oil and gas. The Partnership's natural gas production and prices received for natural gas are regulated by the Federal Energy Regulatory Commission ("FERC") and the Natural Gas Policy Act of 1978 and various state regulations. The Partnership was subject to the Crude Oil Windfall Profit Tax Act of 1980, which imposed an excise tax on producers of crude oil at various rates for prices received in excess of certain historical base prices. That Act was repealed in August, 1988. The Partnership is also subject to state drilling and proration regulations affecting its drilling operations and production rates.
The FERC continues to regulate interstate natural gas pipeline transportation rates and service conditions pursuant to the NGA and NGPA. Federal regulation of interstate
transporters affects the marketing of natural gas produced by the Partnership as well as the revenues received by the Partnership for sales of such natural gas. Since the latter part of 1985, through its Order Nos. 436, 500 and 636 rulemakings, the FERC has endeavored to make natural gas transportation accessible to gas buyers and sellers on an open and non-discriminatory basis. The FERC's efforts have significantly altered the marketing and pricing of natural gas. No prediction can be made as to what additional legislation may be proposed, if any, affecting the competitive status of a gas producer, restricting the prices at which a producer may sell its gas, or the market demand for gas, nor can it be predicted which proposals, including those presently under consideration, if enacted, might be effective.
A number of legislative proposals have been introduced in Congress and the state legislatures of various states, that, if enacted, would significantly affect the petroleum industry. Such proposals involve, among other things, the imposition of land and use controls and certain measures designed to prevent petroleum companies from acquiring assets in other energy areas. In addition, there is always the possibility that if market conditions change dramatically in favor of oil and gas producers that some new form of "windfall profit" or severance tax may be proposed for and imposed upon either oil or gas. At the present time it is impossible to predict which proposals, if any, will actually be enacted by Congress or the various state legislatures. The Partnership believes that it will comply with all orders and regulations applicable to its operations. However, in view of the many uncertainties with respect to the current controls, including their duration and possible modification together with any new proposals that may be enacted, the Partnership cannot predict the overall effect, if any, of such controls on its operations.
TAXATION
The Partnership received an opinion of its counsel that the Partnership would be classified as a partnership and the holders of Partnership Units would be treated as limited partners for federal income tax purposes. The Partnership itself, to the extent that it is treated for federal income tax purposes as a partnership, is not subject to any federal income taxation, but it is required to file annual partnership returns. Each holder of Partnership Units will be allocated his distributive shares of the Partnership's income, gain, profit, loss, deductions, credits, tax preference items and distributions for any taxable year of the Partnership ending within or with his taxable year without regard as to whether such holder has received or will receive any cash distributions from the Partnership.
ITEM 2.

ITEM 2. PROPERTIES
The Partnership has no interest in any properties other than its oil and gas properties. The information set forth below summarizes the Partnership's oil and gas wells, production and reserves, for the periods indicated.
PRODUCING WELLS AND OPERATING INFORMATION
The Partnership, following its formation, and in November, 1983, contracted for the drilling of 38 development wells, which resulted in 37 producing wells and one dry hole.
As of December 31, 1996, the Partnership had ownership interests in the following gross and net producing oil and gas wells and gross and net producing acres(1). The Partnership has no material undeveloped leasehold, mineral or royalty acreage.
Producing wells:
- -------------- (1) A gross well is a well in which an interest is owned; a net well is the sum of the interests owned in gross wells. Wells are classified by their primary product. Some wells produce both oil and gas.
The following table sets forth the Partnership's oil and gas production, average sales prices and average production costs as of and for the periods indicated:
OIL AND GAS RESERVES
The Partnership's interests in proved developed oil and gas properties have been evaluated by Ryder Scott Company for the periods indicated below. All of the Partnership's reserves are located in the continental United States. The following table summarizes the Partnership's oil and gas reserves at the dates shown (figures rounded):
The estimated future net revenue (using current prices and costs as of the dates indicated, exclusive of income taxes (at a 10% discount for estimated timing of cash flow) for the Partnership's proved developed oil and gas reserves for the periods indicated are summarized as follows (figures rounded):
Since January 1, 1996, the Partnership has not filed any estimates of its oil and gas reserves with, nor were any such estimates included in any reports, to any federal authority or agency, other than the Securities and Exchange Commission.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Partnership is not a party to, nor is any of its property the subject of, any legal proceedings actual or threatened, which would have a material adverse effect on the business and affairs of the Partnership.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during 1996 for vote by the holders of Partnership Units.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no market for the Limited Partnership Units (the "Units") of the Partnership. As of March 14, 1997, there were 801 holders of record of the Units.
The Units are not regarded as stock and payments or distributions to holders of Units are not made in the form of dividends. Cash distributions to the holders of Units for 1996 aggregated $41,528. Aggregate cash distributions to the holders of the Units as of December 31, 1996, is $2,256,928.
The Managing General Partner may purchase Units directly from the unit holders if presented to the Managing General Partner, subject to conditions, including limitations on numbers of Units, and at a price to be fixed by the Managing General Partner in accordance with certain procedures, all as provided for in the Limited Partnership Agreement of the Partnership.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data to highlight significant trends in the Registrant's financial condition and results of operations for the periods indicated. The selected financial data should be read in conjunction with the financial statements and related notes included elsewhere in this report.
ITEM 7.

ITEM 7. MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
1. Liquidity: The oil and gas industry is intensely competitive in all its phases. There is also competition between this industry and other industries in supplying energy and fuel requirements of industrial and residential consumers. It is not possible for the Partnership to calculate its position in the industry as the Partnership competes with many other companies having substantially greater financial and other resources. In accordance with the terms of the Agreement of Limited Partnership of the Partnership, the General Partners of the Partnership will make cash distributions of as much of the Partnership cash credited to the capital accounts of the partners as the General Partners have determined is not necessary or desirable for the payment of any contingent debts, liabilities or expenses for the conduct of the Partnership business. As of December 31, 1996, the General Partners have distributed to the Limited Partners $2,256,928 or 20.375% of the total Limited Partner capital contributions to the Limited Partnership.
The net proved oil and gas reserves of the Partnership are considered to be a primary indicator of financial strength and future liquidity. The present value of unescalated future net revenue (S.E.C. case) associated with such reserves, discounted at 10% as of December 31, 1996, was approximately $1,313,750 as compared to the discounted reserves as of December 31, 1995, which were approximately $893,700. The increase in total estimated discounted
future net revenue was due primarily to a higher year end gas price as of December 31, 1996, when compared to the gas price in effect as of December 31, 1995.
Reservoir engineering is a subjective process of estimating underground accumulations of gas and oil that can not be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of the engineering and geological interpretation and judgment. Accordingly, reserve estimates are generally different from the quantities of gas and oil that are ultimately recovered and such differences may have a material impact on the Partnership's financial results and future liquidity.
2. Capital resources: The Partnership was formed for the sole intention of drilling oil and gas wells. The Partnership entered into a drilling contract with an independent drilling contractor in November, 1983, for $9,400,000. Pursuant to the terms of this contract, thirty-eight wells were drilled resulting in thirty-seven producing wells and one dry-hole.
3. Results of Operations:
1996 compared to 1995
Operating revenue increased from $279,580 in 1995 to $290,733 in 1996. The Partnership's oil production remained consistent with the prior years, 1,524 barrels of oil in 1996 compared with 1,508 barrels of oil in 1995 while the gas production declined slightly from 116,201 mcf in 1995 to 113,277 mcf in 1996. Gas revenue increased even with the drop in production due to an increase in the average gas price per mcf from $2.17 in 1995 to $2.31 in 1996. The Partnership generally renews contracts as they come due for an additional twelve month period. The Partnership was able to obtain fixed price contracts on a majority of its gas production for 1996. The Partnership successfully renewed its contracts for 1997.
Production expenses decreased from $147,306 in 1995 to $135,780 in 1996. Most of the production expenses incurred in 1995 and 1996 were to maintain the general upkeep of the wells and well sites. The Partnership did expend funds on additional capitalized well equipment. The operator will determine if additional equipment, for example lift equipment, will have a favorable effect on production. The beneficial effect looked for by the operator is to increase, improve or sustain production on a particular well. General and administrative costs increased from $106,973 in 1995 to $121,632 in 1996. Management continues to monitor any third party costs and use in-house resources if it will provide efficient and timely services to the Partnership. Amounts in both years are substantially less than the $553,850 allocable to the Partnership under the Partnership Agreement.
The Partnership records additional depreciation, depletion and amortization to the extent that the net capitalized costs exceeds the undiscounted future net cash flows attributable to the Partnership. No revisions to the basis of the Partnership properties was needed in 1996 or 1995. The overall depreciation was consistent with the rates used and the remaining property basis.
1995 compared to 1994
Operating revenue declined from $345,484 in 1994 to $279,580 in 1995. The Partnership's oil production remained consistent with prior years, 1,521 barrels of oil in 1994, compared with 1,508 barrels of oil 1995, while the gas production increased slightly from 104,386 mcf in 1994 to 116,201 mcf in 1995. Oil revenue was up due to consistent production and higher average oil price from $12.89 in 1994 to $17.82 in 1995. Gas revenue was lower even with increased production due to the average gas price per mcf of $2.17 in 1995 as compared to the higher average mcf price of $3.12 for 1994.
The Partnership was paid spot prices throughout all of 1995 for its gas produced. Spot prices fluctuate and were low during off peak usage times of the year. The Partnership generally renews contracts as they come due for an additional twelve month period. The Partnership was under a fixed contract price for the first nine months of 1994. The price offered in 1994, at the renewal date for the 1994-1995 contracts, was lower than was deemed favorable. Therefore, the price remained at spot prices during 1994 and 1995. During the fourth quarter of 1995 the Partnership locked into a twelve month fixed price contract.
Columbia Gas Transmission Corp., a gas purchaser of the Partnership's gas, filed a Chapter 11 petition in the U.S. Bankruptcy Court in Wilmington, Delaware, on July 31, 1991. At that time, the Bankruptcy Court released Columbia from any active contracts. The Partnership filed a claim with the Bankruptcy Court to recover revenues suspended at the time the bankruptcy occurred. Such amounts were not recorded during the applicable period since the claim amount was undetermined and open-ended. The Court's settlement of the Columbia bankruptcy proceedings were finalized in November of 1995. The Partnership received $75,375, which was reported as other income for 1995.
Production expenses decreased from $181,570 in 1994 to $147,306 in 1995. The higher production costs experienced in 1994 can be attributed to higher general labor, repairs and location costs associated with the inclement weather conditions throughout 1994. The weather caused line damages, floods and other situations that increased normal maintenance costs. Most of the production expenses incurred in 1995 were to maintain the general upkeep of the wells and well sites. General and administrative costs declined from $181,739 in 1994 to $106,973 in 1995. Amounts in both years are substantially less then the $553,850 allocable to the Partnership under the Partnership Agreement. The lower amounts reflect management's efforts to limit costs, both incurred and allocated to the Partnership.
The Partnership records additional depreciation, depletion and amortization to the extent that the net capitalized costs exceeds the undiscounted future net cash flows attributable to the Partnership. Additional depletion was needed of $450,000 in 1994 and no revision was needed in 1995. Depreciation, depletion and amortization rates were significantly higher in 1994 compared to 1995, resulting in a higher depletion expense, $148,120 for 1994, as compared to $86,358 for 1995.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Sterling Drilling Fund 1983-1, L.P.:
We have audited the accompanying balance sheets of Sterling Drilling Fund 1983-1, L.P. (a New York limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, changes in partners' equity, and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Partnership'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 Sterling Drilling Fund 1983-1, L.P. as of December 31, 1996 and 1995, and the results of its operations and cash flows for the years ended December 31, 1996, 1995 and 1994 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statements and schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the examination of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
PUSTORINO, PUGLISI & CO., LLP New York, New York January 31, 1997
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
Assets ------
The Notes to Financial Statements are an integral part of these statements.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Notes to Financial Statements are an integral part of these statements.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Notes to Financial Statements are an integral part of these statements.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Notes to Financial Statements are an integral part of these statements.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) Organization and Capital Contributions:
Sterling Drilling Fund 1983-1, L.P., formerly Sterling-Fuel Resources Drilling Fund 1983-1, a New York limited partnership (the "Partnership"), was formed on March 18, 1983 for the primary purpose of acquiring, developing and producing oil and gas in the state of West Virginia. The general partners are: PrimeEnergy Management Corporation (PEMC), a wholly owned subsidiary of PrimeEnergy Corporation (PEC), Charles E. Drimal, Jr., Oliver J. Sterling and Samuel R. Campbell. Eleven thousand seventy-seven limited partnership units, (11,077), were sold at $1,000 per unit aggregating total limited partner contributions of $11,077,000. The general partners' contributions amounted to $902,847. Partnership operations commenced on November 10, 1983.
(2) Summary of Significant Accounting Policies:
Revenue Recognition:
The Partnership recognizes operating revenues, consisting of sales of oil and gas production, in the month of sale. Uncollected revenue is accrued based on known facts and trends of the relevant oil and gas properties on a monthly basis.
Basis of Accounting:
The accounts of the Partnership are maintained in accordance with accounting practices permitted for federal income tax reporting purposes. Under this method of accounting, (a) substantially all exploration and development costs except leasehold and equipment costs are expensed as paid, (b) costs of abandoned leases and equipment are expensed when abandoned, and (c) depreciation (for equipment placed in service) is provided on an accelerated basis. In order to present the accompanying financial statements in accordance with generally accepted accounting principles, memorandum adjustments have been made to account for oil and gas properties, as discussed below.
Oil and Gas Producing Activities:
The Partnership accounts for its oil and gas operations using the successful efforts method of accounting on a property by property basis. The Partnership only participates in developmental drilling. Accordingly, all costs of drilling and equipping these wells, together with leasehold acquisition costs, are capitalized. These capitalized costs are amortized on a property by property basis by the unit-of-production method based upon the ratio of production to proved oil and gas reserves. Additional depreciation, depletion and amortization is recorded to the extent that net capitalized costs exceed the undiscounted future net cash flows attributable to Partnership properties. (See Note 4)
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(2) Summary of Significant Accounting Policies - (Cont'd)
Federal Income Taxes:
As federal income taxes are the liability of the individual partners, the accompanying financial statements do not include any provision for federal income taxes. (See Note 8)
Limited Partners' Loss Per Equity Unit:
The limited partners' loss per equity unit is computed on the 11,077 limited partner equity units.
Cash and Cash Equivalents:
For purposes of the statements of cash flows the Partnership considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards:
The Partnership has implemented the provisions of FAS Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The implementation of this standard has had no material effect on the financial statements.
(3) Oil and Gas Properties:
The Partnership acquired leases or farmouts from PEMC at its cost. Cost is defined as any amount paid for delay rentals, lease bonuses, if any, surveys and other expenses including such portion of any of the general partners', or their affiliates' reasonable, necessary and actual expenses for geological, geophysical, seismic, land, engineering, drafting, accounting, legal and other services. The Partnership currently pays royalties of approximately 12.5% to 17.9% of the selling price of the oil and gas extracted.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(3) Oil and Gas Properties - (Cont'd)
The following table sets forth certain revenue and expense data concerning the Partnership's oil and gas activities for the years ended December 31, 1996, 1995 and 1994:
(4) Quantities of Oil and Gas Reserves:
The amount of proved developed reserves presented below have been estimated by an independent firm of petroleum engineers as of January 1, 1997. Petroleum engineers on the staff of PEC have reviewed the data presented below, as of December 31, 1996, for consistency with current year production and operating history. All of the Partnership's oil and gas reserves are located within the United States:
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(4) Quantities of Oil and Gas Reserves - (Cont'd)
Should current prices continue into the future, operation of certain wells would become uneconomic, on a pretax basis, as production levels decline with age. In accordance with the rules and regulations of the Securities and Exchange Commission, proved reserves exclude production which would be uneconomic. The partners are entitled to certain tax benefits and credits which, if available in the future, may result in production continuing beyond the level included in the above table.
Revisions arise from changes in current prices, as well as engineering and geological data which would alter the useful life and therefore the overall predicted production of each well. Future changes in these estimates are common and would impact the reserve quantities used to calculate depreciation, depletion and amortization.
As discussed in Note 2, the Partnership records additional depreciation, depletion and amortization to the extent that net capitalized costs exceed the undiscounted future net cash flows attributable to Partnership properties. Price declines affect estimated future net revenues both directly and as a consequence of their impact on estimates of future production. The Partnership has recorded no additional provision for 1996 and 1995, however, an additional provision of $450,000 was recorded in 1994. If the additional provision had been computed based on the limited partners' interest in capitalized costs and estimated future net revenues, rather than on the basis of total Partnership interests, the limited partners' income for 1996 and 1995 would not have been reduced, however, in 1994 it would have been reduced by an additional $225,000.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(5) Allocation of Partnership Revenues, Costs and Expenses:
Under the terms of the Limited Partnership Agreement, all Partnership revenues and expenses, including deductions attributable thereto, are to be allocated as follows:
(6) Transactions With Affiliates:
(a) The due from affiliates at December 1996 and 1995 represents general and administrative and certain other expenses incurred on behalf of the Partnership by PEC and its subsidiaries, and amounts due for production operator's fees (Note 6(b)), net of production revenues collected on behalf of the Partnership.
(b) As operator of the Partnership's properties, Prime Operating Company (POC), a subsidiary of PEC, receives, as compensation from the Partnership, a monthly production operator's fee of $399 for each producing gas well and $546 for each producing oil or combination gas and oil well, based on the Partnership's percentage of working interest in the well. Such fee is subject to annual adjustment by the percentage increase in the Cost of Living Index published by the U.S. Department of Labor over the year in which production began. During 1996, 1995 and 1994, $87,747, $71,148 and $100,509 of production operator's fees were incurred, respectively.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(6) Transactions With Affiliates - (Cont'd):
(c) In accordance with the terms of the Partnership Agreement, the general partners are required to pay 8.5% of drilling and completion costs, lease acquisition costs and certain other costs, of which 1% will be paid for by the general partners out of revenues received by them from the Partnership. At December 31, 1996, $22,703 was due from certain general partners for such costs.
(d) Eastern Oil Well Services Company (EOWSC), a subsidiary of PEC, provided field services to the Partnership during the year ending December 31, 1996 for which it was billed $10,690.
(7) General and Administrative Expenses:
In accordance with the Management Agreement, the general partners are reimbursed for the portion of their in-house overhead, including salaries and related benefits, attributable to the affairs and operations of the Partnership.
This amount, combined with certain direct expenses for geology, engineering, legal, accounting, auditing, insurance and other items shall not exceed an annual amount equal to 5% of limited partner capital contributions. Excess expenses shall be borne by the general partners.
During 1996, 1995 and 1994, the Partnership recognized general and administrative expenses incurred on its behalf by a general partner of $100,000, $85,000 and $160,000, respectively.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(8) Federal Income Taxes:
The following is a reconciliation between the net income (loss) as reported on the Partnership's federal income tax return and the net income (loss) reported in the accompanying financial statements:
The tax returns of the Partnership, the qualifications of the Partnership as such for tax purposes, and the amount of Partnership income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes with respect to Partnership's qualifications or in changes to its income or loss, the tax liability of the partners would be changed accordingly.
The Tax Reform Act of 1976 provides that no part of any depletion deduction with respect to oil and gas wells is to be determined by the Partnership but must be computed separately by the partners. Thus, cost or percentage depletion, as applicable, must be computed by each partner so that a specific depletion computation can be made when each partner files his U.S. income tax return. Information is furnished to the partners to compute the depletion deduction.
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(9) Major Customers:
A schedule of the major purchases of the Partnership's production is as follows:
The Partnership renewed its gas purchase contract in December, 1996 resulting in a fixed price for one year.
(10) Other Revenue:
Other revenue represents settled claims against Columbia Gas Transmission Corp. (Columbia) arising from amounts due from Columbia when they declared bankruptcy. No significant additional claims are expected concerning this matter.
SCHEDULE V
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
PROPERTY AND EQUIPMENT - OIL AND GAS PROPERTIES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SCHEDULE VI
STERLING DRILLING FUND 1983-1, L.P. (a New York limited partnership)
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION - OIL AND GAS PROPERTIES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INDEX TO EXHIBITS