Anderson Properties, Inc.

Case Study
Over the past few years a lot has changed in the consumer energy sector, and distributors of home heating oil are struggling with a dynamic environment. Like most oil and coal distributors in the Northeast, Anderson Properties (the company) was family owned and managed for generations. The current manager, Jane, was particularly concerned about the future of the company given the dramatic price swings in the energy market. Would the company survive another generation or would it be overtaken by its competitors? Who in the family could take the reins? How could the company adapt and innovate? All these questions would have to be decided at the annual New Year's meeting, and she wasn't expecting quick and simple answers. One thing Jane knew for certain was that the board of directors would be looking to her to present recommendations next month. Along with this responsibility she manages the day-to-day operations of the office and oversees everything from purchasing to taking customer orders for oil deliveries. This leaves little time to consider the larger issues, especially with the usual demands of family during the holiday season. Jane had been gathering information for weeks so that she could make the most informed decision. At the end of a long day, she put her research in her valise and took it home to read. Company History The company was started by J. B. Anderson in 1880 in the small town of Miniville, New York, just on the northern fringe of Appalachia. Over the past 130 years, the headquarters of the company has remained in the same location. From its beginnings, the company served the western portion of the local county as well as the adjacent area of northern Pennsylvania. The company was incorporated on September 1, 1922, after the death of its sole proprietor, and the descendents of J.B. Anderson have owned and operated the business ever since. According to its certificate of incorporation, J. B. Anderson is authorized to issue 1000 shares of common stock. On November 1, 1922, half of the aforementioned shares were issued in five lots of 100 each. One of the stockholders, Barry, borrowed $700 from the company in the 1930s and pledged his 100 shares as collateral. When the loan was not repaid, another shareholder, Helen, repaid the debt, acquired his shares, and transferred them to the books of the corporation as a contribution to capital. These 100 shares have been recorded as treasury stock ever since. The company's primary business has always been delivering energy for home heating within 30 miles of its central office. Until the 1950s, the vast majority of customers ordered blue large chunk coal for their household furnaces. As coal fell out of favor for environmental reasons, the company added heating oil and

furnace repair to its portfolio of products. Recently the company began selling mulch and some new types of heating equipment. The company is located on a prime piece of real estate adjacent to the town square. Of special note was the main office which was built around the turn of the century. This office is filled with antiques, including a late nineteenth-century cash register which is still being used to ring up sales. Until quite recently, the original phones functioned, and computerization of the office is taking place slowly. The historic nature of the business and building are part of the company's marketing scheme. After the death of her father, Helen managed the business from the 1940s until 1995. Her personal style and relationship with the community were large factors in the company's success. After she retired, her nephew, Theo, took over the business for a short time before his sister, Jane, began managing the business. Jane's personal background was impressive. After graduating from the College of Humanities, she held several positions in a wide variety of fields from legal research to lab assistant in a nuclear medicine facility. In each situation, she was quickly able to master new sets of skills and demonstrated competence. In 1997, with most of her children grown, Jane decided to run Anderson full time. The job of managing the company proved more complex than Jane had expected. Her responsibilities fell into three broad areas. The first and most important was customer service because the local community expects friendly and personal interactions. In many ways, they are the quintessential small hometown company providing a sense of familiarity and trust. This aspect of her job is also the most time consuming because customers often want to catch up on local news and gossip when they place their orders. Although she enjoys speaking to them, her conversations could last over thirty minutes. Her second duty is purchasing oil from the wholesaler and maintaining appropriate inventories of coal. The company never kept any inventories of home heating oil on the premises. Finally she manages a small office staff including a part-time bookkeeper, a furnace repairman, and oil truck driver. After Helen's retirement, there was a reorganization of the Company's Board of Directors as well. The shareholders elected Bruce, Janes second cousin, as the new chief executive officer. A retired executive from Boeing, Bruce lives in New Mexico and has not been to upstate New York for several years. In spite of the distance, he was committed to establishing clear lines of communication by implementing a toll-free number for the use of the shareholders. Since his election, he has not traveled back to upstate New York to convene a meeting of shareholders. At the beginning of fiscal year 2008, there were six registered shareholders of the corporation, all owning equal numbers of shares. However, the share structure

was made more fragmented due to the recent deaths of two shareholders, Helen and Theo. In accordance with her will, Helen's shares are to be divided and split among the current shareholders as well as four other family members. In June 2008, Theos estate offered to sell his shares to current shareholders. Because of the diluted ownership of the company, no one offered to purchase the shares, and selling them to outside investors was virtually impossible. Although there has been some minimal involvement in the business by the current shareholders children, all but three of the next generations live outside the area. Partly due to the issue of fragmented share ownership, there has been no discussion of which, if any, of the children would like to run the business. Of the individuals living locally each have their own career as a nurse, engineer, and an organic farmer. In all likelihood, any descendent would have to purchase the remaining shares outright, but until recently no one has been willing to sell them. One of Helens great grand nieces had expressed interest in running the company in 1995, but no mention of it has been made sense. Also, another relative by marriage had run his own local home heating and air conditioning company in the 1990s. Anderson Land Enterprises In addition to home heating oil and coal, the company owned and operated a gas station property during the 1940s and 1950s. In the 1960s the gas station was then replaced by restaurant when the road was widened insufficiently and remains the pumps. In 1998, the restaurant and land surrounding it was split off from Anderson Properties office building and organized into its own land holding company. In a spinoff, 72 shares of Anderson Land Enterprises were issued to family members, although not all of the recipients were stockholders in the original company. This was done to compensate for perceived past inequalities based on family happenstance. After the recent deaths in the family, 36 of these shares were transferred to an impartial bank officer to be managed as part of a trust. The restaurant has always been leased to non-family members. At the time of this share spinoff, the building was occupied by a tavern with an outdoor grill. One of the primary reasons for the spinoff was the limitation of potential liability due to the nature of the restaurants business. Following a brief vacancy in the early 1990s, the location was rented to the present occupants, a Chinese restaurant based out of New York City. The current renters have an excellent payment history. In the past, the restaurant owners have expressed an interest in purchasing the land and buildings. The land itself is irregularly shaped and is bordered by a bank, a shopping plaza, the fuel oil office, and Main Street. Frontage along Main Street is a prime commercial location for outdoor advertising. The building is of fairly recent construction and has sufficient facilities for both dining-in and take-out

customers. Parking is ample. The entire surface is paved by blacktop, and access to the shopping plaza, the bank, and Main Street is convenient. Many other businesses operate in the area, and the restaurant draws most of its lunch patrons from surrounding companies. Based on recent tax assessments, the value of the land was approximately $100,000. Commercial real estate has been losing approximately 3% of its value annually over the last three years; so, this estimate may be generous. The remaining assets are approximately $50,000 in cash. The book value of the company has consistently remained at $50,000 for the past several years since net income for rent is passed along to shareholders and not retained. The land company has paid dividends similar to bank certificates of deposit rates every year. Because the land Company is situated next to the fuel office, property management has been fairly simple and straightforward. The usual issues of snow removal, maintenance, and upkeep are taken care of when the main office is serviced. The continuity and reliability of the tenants has also made rent collection a routine and easy process. No significant board level decisions have been made on the property for over seven years. Janes Research Another full day at work ended, and the ride home was snowy and took an unusually long time. After cooking dinner and taking care of the pets, Jane finally found a few quiet moments to review the research she conducted on the Internet at the public library. She was surprised to discover the wealth of information on the Internet and wish she had looked there sooner. The largest home heating oil distributor in the area was Miller Fuel. That company had similar beginnings to Anderson Properties. Started as a family operation selling coal in 1907, Miller Fuel has been offering home heating services to the same general geographic location. In recent years it expanded both its range of products and coverage area. According to the company website, at the end of last year the company offered a variety of home heating products such as oil, propane, natural gas, gasoline, diesel, kerosene and four different sizes of coal: chestnut, stove, rice and pebble. Like Anderson Properties, it offered twenty-four hour maintenance service as well as equipment. Miller fuel had taken advantage of energy deregulation in 1999 by expanding into natural gas electricity sales. When New York State Electric and Gas and Niagara Mohawk Power Co. deregulated natural gas distribution, Miller fuel bulk purchased gas for resale to residential and business customers. Currently, Miller fuel is the second largest independent marketer of utilities in New York State. They have added service to New Jersey, Pennsylvania, Ohio, Massachusetts, Rhode Island, Connecticut and New Hampshire. With the

acquisition of these products, Miller fuel has expanded into all nonrenewable home heating products except large chunk charcoal. Additionally the company was a supplier of gasoline to retail gas stations and of lubricants to industrial companies. Aside from its website, Miller fuel has an aggressive television, radio and print campaign that covers Andersons entire service area. The other major heating oil company in the area it is A&F Group. It has over half a million customers in New York, Vermont, Pennsylvania, and New Jersey. Like Miller fuel, A&F offers heating oil, propane, natural gas, gasoline, diesel, and electricity as well as24 hour customer service. Even though A&F has not advertised as much as Miller Fuel, its name is still associated with its past successful media efforts. Three other small family run oil distribution companies operate in the area. They also offer around-the-clock maintenance of equipment but do not offer coal. Every other competitor offers customers the opportunity to purchase guaranteed price contracts and offers formal credit arrangements. The contracts give customers the option to lock in a single price for heating oil throughout the winter season. Additionally, commercial customers can bulk purchase oil at a discount in the fall and take delivery as needed until April the following year. For those not selecting a contract plan, credit arrangements can be made in advance of any possible price fluctuations. Anderson had attempted to offer these types of services to its customers in the early 1990s but had met with little success. Andersons service area has seen dramatic changes over the past decade. The New York area has about a quarter of a million residents, but the population has been declining since 1990 because of the poor local economy. Average income for the area has remained stagnant in the low to mid-$30,000 range. Across the state line in Pennsylvania is where the majority of the company's coal deliveries are. The population there is significantly less at about 40,000, and the average household income is only in the mid-$20,000 range. The demand for coal is greatest here because it is generally less expensive than heating oil and because few natural gas lines have been laid in such a rural county. The typical coal customer has a coal chute into his basement where he must then manually fuel the furnace with a coal shovel. This area's prospects for economic development remain hampered by its low level of education and lack of modernization. Also, new environmental regulations have been proposed in Pennsylvania to limit the use of coal for home heating. The Present Situation The company's financial situation has remained stable over the past several years. The actual number of gallons of fuel oil sold in 2007 and 2008 was projected to match the expected amount in 2009. However, due to the spike in heating oil prices and the rapidly changing economic environment, there was

concern that customers might switch to a large competitor with a price contract program. This could significantly impact projections for beyond 2010. Advertising expenses have been kept to a minimum by targeting present customers only. Paper pamphlets are distributed at the time of oil deliveries and also are inserted into bills. In addition, a small advertisement was taken out the local Yellow Pages listing the various products and services offered by the company. Two phone lines were installed with different exchanges to offer a wider free local calling area for customers. The only other advertising expense is for radio commercials on an oldies music station. The company is fortunate that its employees have remained on the job for many years. Janes part-time office assistant and bookkeeper is very reliable and conscientious; the delivery truck driver is courteous and a familiar face to the customers. The heating repair technician is honest and manages to respond to emergencies on a 24 hour basis. Although sales of heating equipment have never been a large part of the business, it is a necessary component of the entire service package. Overall the staff seems content with the state of affairs. Still, Jane was frustrated that the company had not been growing over the past few years. The customer base was aging and not being replaced by younger consumers. The company has seen its competitors swell in size and scope. The only unique service the company offers is large chunk coal. Small advertising blitzes have been attempted in the past but were not successful. She wondered what might come for the next year. Financial returns to the shareholders were in line with what one could expect from owning a stagnant business; however, there is no growth in the bottom line. With the board meeting looming and with the hustle-bustle of Christmas approaching, Jane knew that she needed to make some difficult decisions. Emotional ties to the family business were strong and no one wanted to see 130-year-old company close its doors. This was the first board meeting in five years where the shareholders would meet face-to-face to make decisions. Her thoughts wandered to passing along the business to the next generation, just as it was passed along to her. Jane put her work away for the night and promised herself that she would write out her recommendations tomorrow.