<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1998
REGISTRATION NO. 333-66005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STAR GAS PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
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DELAWARE 5984 06-1437793
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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2187 ATLANTIC STREET
P.O. BOX 120011
STAMFORD, CT 06912-0011
(203) 328-7300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOSEPH P. CAVANAUGH
PRESIDENT
STAR GAS CORPORATION
2187 ATLANTIC STREET
P.O. BOX 120011
STAMFORD, CT 06912-0011
(203) 328-7300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
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PHILLIPS NIZER BENJAMIN
ANDREWS & KURTH L.L.P. KRIM & BALLON LLP BAKER & BOTTS, L.L.P.
805 THIRD AVENUE 666 FIFTH AVENUE, 28TH FLOOR ONE SHELL PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10103-0084 910 LOUISIANA
(212) 850-2800 (212) 977-9700 HOUSTON, TEXAS 77002-4995
ATTN: MICHAEL ROSENWASSER,
ESQ. ATTN: ALAN SHAPIRO, ESQ. (713) 229-1330
ATTN: R. JOEL SWANSON, ESQ.
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----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and upon
holding of the meetings of securityholders of the Registrant and Petroleum Heat
and Power Co., Inc. described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
STAR GAS PARTNERS, L.P.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
ACQUISITION PROPOSED -- YOUR VOTE IS VERY IMPORTANT
, 1999
Dear Unitholder:
You are cordially invited to attend a meeting of common unitholders to be
held at , New York, New York on , 1999. We have called this meeting
so that you may vote upon our acquisition of Petroleum Heat and Power Co., Inc.
and related matters.
We believe the transaction is an attractive opportunity for Star Gas
Partners, L.P. The transaction has been structured with the intent to provide
an increase in our cash flow. Based on this expectation, we will increase the
minimum quarterly distribution to our unitholders from $0.55 to $0.575 per
unit, or from $2.20 to $2.30 on an annualized basis, upon completion of the
transaction.
Approval of the transaction will require the AFFIRMATIVE vote of a majority
of all common units (other than those held by Star Gas Corporation and its
affiliates). If you fail to vote by proxy or in person, it will have the same
effect as a vote against the transaction. IT IS, THEREFORE, VERY IMPORTANT THAT
YOU VOTE. Whether or not you plan to attend the meeting, PLEASE TAKE THE TIME
TO VOTE BY COMPLETING AND MAILING THE ENCLOSED PROXY CARD TO US.
YOU SHOULD CAREFULLY CONSIDER EACH OF THE FACTORS DESCRIBED UNDER "RISK
FACTORS," STARTING ON PAGE OF THE PROXY STATEMENT.
More detailed information about the meeting is included in the proxy
statement. If you have any questions or need help in voting, please call me or
Richard F. Ambury, Vice President-Finance at (203) 328-7300.
Very truly yours,
Joseph P. Cavanaugh
President, Star Gas Corporation
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
ACQUISITION PROPOSED--YOUR VOTE IS VERY IMPORTANT
, 1999
Dear Stockholder:
You are cordially invited to attend a special meeting to be held at ,
New York, New York on , 1999. We have called this special meeting so that
you may vote upon Star Gas Partners, L.P.'s acquisition of the company. This
letter constitutes the notice of the special meeting required under Minnesota
law.
We think the transaction is an attractive opportunity for you because it will
result in your ownership of equity in a financially stronger company with
growth opportunities. When the transaction is completed, you will receive
.13064 of a senior subordinated unit representing limited partner interests in
Star Gas Partners, L.P. for each of your shares of common stock. The senior
subordinated units have been approved for listing on the New York Stock
Exchange under the symbol " ". However, no assurance can be given that an
active trading market for the senior subordinated units will develop or at what
price they will trade.
Approval of this transaction will require the AFFIRMATIVE vote of a majority
of the shares of Class A Common Stock (other than those owned by our directors
and executive officers and their affiliates). If you fail to vote by proxy or
in person, it will have the same effect as a vote against this transaction. IT
IS, THEREFORE, VERY IMPORTANT THAT YOU VOTE. Whether or not you plan to attend
the special meeting, PLEASE TAKE THE TIME TO VOTE BY COMPLETING AND MAILING THE
ENCLOSED PROXY CARD TO US.
If this transaction is completed, common stockholders who do not vote their
shares in favor of the transaction and who strictly comply with the applicable
sections of the Minnesota Business Corporation Act will be entitled to
statutory dissenters' appraisal rights.
YOU SHOULD CAREFULLY CONSIDER EACH OF THE FACTORS DESCRIBED UNDER "RISK
FACTORS," STARTING ON PAGE OF THE PROXY STATEMENT.
More detailed information about the special meeting is included in the proxy
statement. If you have any questions or need help in voting your common stock,
please call Audrey L. Sevin, Secretary of Petro at (203) 325-5400.
Very truly yours,
Irik P. Sevin
Chairman of the Board
and Chief Executive Officer
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND +
+MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION +
+STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. +
+THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE +
+SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY +
+STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1998
STAR GAS PARTNERS, L.P.
AND
PETROLEUM HEAT AND POWER CO., INC.
JOINT PROXY STATEMENT
-----------
STAR GAS PARTNERS, L.P.
PROSPECTUS
-----------
This joint proxy statement and prospectus describes in detail Star Gas
Partners, L.P.'s proposed acquisition of Petroleum Heat and Power Co., Inc.,
and related matters. If the transaction is completed, Petroleum Heat and Power
Co., Inc. will be a subsidiary of Star Gas Partners, L.P., and the common
stockholders will receive subordinated limited partner interests in Star Gas
Partners, L.P.
This proxy statement is furnished to the holders of common units in Star Gas
Partners, L.P., as of , 1999, for the solicitation of proxies by the
board of directors of Star Gas Corporation, its general partner. The proxies
are for use at a meeting to be held at , New York, New
York on , 1999, at 10:00 a.m., New York City time, and at any and all
adjournments or postponements of the meeting.
This proxy statement is also furnished to holders of common stock of
Petroleum Heat & Power Co., Inc., as of , 1999, for the solicitation of
proxies by the board of directors of Petroleum Heat and Power Co., Inc. The
proxies are for use at a special meeting to be held at ,
New York, New York on , 1999, at 10:00 a.m., New York City time, and
at any and all adjournments or postponements of the special meeting.
This proxy statement is also the prospectus of Star Gas Partners, L.P. for
the resale of limited partner interests received in the transaction by persons
who may be deemed affiliates of Petroleum Heat and Power Co., Inc.
YOU SHOULD CAREFULLY CONSIDER EACH OF THE FACTORS DESCRIBED UNDER "RISK
FACTORS," STARTING ON PAGE OF THIS PROXY STATEMENT.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Joint proxy statement/prospectus dated , 1999, and first mailed to
unitholders/stockholders on , 1999.
<PAGE>
CAUTIONARY STATEMENT
Star Gas Corporation provided all information in this proxy statement about
the Partnership, Star Gas Propane, L.P. and its subsidiaries involved in
propane operations, and Petro/Mergeco, Inc. Petro provided all information in
this proxy statement about Petro and its subsidiaries in the home heating oil
business.
. You should rely only on the information contained in this document or to
which we refer you. We have not authorized anyone to provide you with
information that is different.
. We are not offering to sell or seeking your offer to buy these
securities in any state where it is illegal to do so.
. We are not seeking your proxy in any state where it is illegal to do so.
. This information may change after , 1999.
ii
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TABLE OF CONTENTS
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CAUTIONARY STATEMENT....................................................... ii
QUESTIONS AND ANSWERS...................................................... 1
Questions and Answers for the Partnership's Common Unitholders............ 1
Questions and Answers for Petro's
Common Stockholders...................................................... 3
PROXY STATEMENT SUMMARY.................................................... 5
Parties................................................................... 5
Special Factors........................................................... 6
The Transaction........................................................... 10
Description of the Partnership Units...................................... 11
Financial Information..................................................... 13
RISK FACTORS............................................................... 20
Risks to the Partnership's Common Unitholders............................. 20
Tax Risks to Common Unitholders........................................... 24
Risks to Common Stockholders.............................................. 25
Tax Risks to Common Stockholders.......................................... 31
PARTIES AND CONFLICTS...................................................... 35
Parties to the Transaction................................................ 35
Conflicts of Interest..................................................... 37
PROXY SOLICITATIONS........................................................ 44
The Unitholders Meeting................................................... 44
The Special Meeting....................................................... 46
SPECIAL FACTORS............................................................ 50
Background of the Transaction............................................. 50
Reasons for the Transaction that the Special Committee Considered; Recom-
mendation of the Special Committee....................................... 61
Opinion of A.G. Edwards................................................... 63
Reasons for the Transaction that the Petro Board Considered; Recommenda-
tion of the Petro Board..................................................
Opinion of Dain Rauscher Wessels.......................................... 75
Certain Projections of Petro and the Partnership.......................... 84
THE TRANSACTION............................................................ 92
Description of the Transaction............................................ 92
Description of the Merger and the Exchange................................ 92
Related Financing and Refinancing
Transactions............................................................. 94
Description of the Merger Agreement....................................... 96
Restrictions on Resales of Senior
Subordinated Units by Non-Affiliates and Affiliates...................... 104
Selling Unitholders....................................................... 104
Plan of Distribution for the Resale Units................................. 105
Accounting Treatment of the Transaction................................... 105
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Regulatory Matters Associated with the Transaction........................ 106
MANAGEMENT OF THE PARTNERSHIP AFTER THE TRANSACTION........................ 107
General Partner........................................................... 107
Board of Directors of Star Gas LLC........................................ 107
Officers and Employees of the Operating Partnership and Petro............. 108
Reimbursement of Expenses of the
General Partner.......................................................... 108
Partnership Structure..................................................... 109
BENEFICIAL OWNERSHIP OF PRINCIPAL UNITHOLDERS AND MANAGEMENT............... 112
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS................................... 113
Introduction; Vote Required by
Unitholders in order to Amend the
Partnership Agreement.................................................... 113
Summary of Amendments to the
Partnership Agreement.................................................... 113
Summary of Amendments to the Operating Partnership Agreement.............. 118
Conforming Changes........................................................ 118
THE AMENDED AND RESTATED
PARTNERSHIP AGREEMENT..................................................... 119
Organization and Duration................................................. 119
Purpose................................................................... 119
Power of Attorney......................................................... 119
Restrictions on Authority of the General Partner with Respect to Extraor-
dinary Transactions; Lack of Dissenters' Rights.......................... 120
Withdrawal or Removal of the General
Partner; Approval of Successor General Partner........................... 120
Restriction on Transfer of General Partner Interest....................... 122
Reimbursement for Services of the
General Partner.......................................................... 122
Rights and Status as Limited Partner or
Assignee Upon Transfer of Interest....................................... 122
Limitations on the Rights of Non-citizen
Assignees and Redemption Rights of the Partnership....................... 122
Issuance of Additional Securities by the Partnership...................... 123
Limited Call Right on Outstanding Limited Partner Interests............... 124
Amendment of the Amended and Restated Partnership Agreement............... 125
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iii
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Meetings of Limited Partners and Voting Rights............................ 126
Indemnification Obligations of the
Partnership.............................................................. 127
Potential Loss of Limited Liability by Unitholders........................ 128
Obligations of the General Partner to
Provide Books and Reports to Limited Partners............................ 129
Limited Partners' Right to Inspect
Partnership Books and
Records.................................................................. 129
Description of Termination and Dissolution of the Partnership............. 130
Liquidation of the Partnership and
Distribution of Proceeds................................................. 130
Registration Rights of the General Partner or its Affiliates.............. 130
CASH DISTRIBUTION POLICY................................................... 132
General Description of the Partnership's Cash Distribution................ 132
Quarterly Distributions of Available Cash................................. 133
Distributions of Available Cash from
Operating Surplus During the
Subordination Period..................................................... 133
Distributions of Available Cash from
Operating Surplus After the
Subordination Period..................................................... 135
Incentive Distributions During the
Subordination Period..................................................... 135
Incentive Distributions After the
Subordination Period..................................................... 136
Distributions from Capital Surplus........................................ 137
Limitation on Distributions on Subordinated Interests..................... 138
Adjustment of Minimum Quarterly Distribution and Target Distribution Lev-
els...................................................................... 139
Issuance of Additional Senior Subordinated Units.......................... 139
Distributions of Cash upon Liquidation
During the Subordination Period.......................................... 141
Distributions of Cash upon Liquidation
After the Subordination Period........................................... 142
CASH AVAILABLE FOR DISTRIBUTION............................................ 144
DESCRIPTION OF THE UNITS................................................... 145
The Rights of Unitholders................................................. 145
Transfer Agent and Registrar.............................................. 145
Obligations and Procedures for the Transfer of Units...................... 146
COMPARISON OF SECURITIES................................................... 148
Taxation.................................................................. 148
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Distributions and Dividends.............................................. 148
Voting Rights............................................................ 149
Rights to Call Meetings.................................................. 149
Removal of Directors or the
General Partner ........................................................ 149
Liquidation Rights....................................................... 150
Conversion Rights........................................................ 150
Liability of Holders..................................................... 150
Transferability and Listing.............................................. 151
Redemption............................................................... 151
Appraisal Rights......................................................... 151
Preemptive Rights........................................................ 152
Inspection of Books, Records and List of Holders......................... 152
COMPARATIVE SECURITY PRICE AND DISTRIBUTION INFORMATION................... 153
Partnership Securities................................................... 153
Petro Capital Stock...................................................... 154
Comparative Per Share/Per Unit
Information (Unaudited)................................................. 155
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS........................................................... 156
Tax Consequences of the Merger........................................... 156
Tax Consequences of Unit Ownership....................................... 157
Allocation of Our Income, Gain, Loss and Deduction....................... 163
Tax Treatment of Operations.............................................. 164
Disposition of Units..................................................... 166
Uniformity of Units...................................................... 169
Administrative Matters................................................... 171
State, Local and Other Tax
Considerations.......................................................... 174
DISSENTERS' RIGHTS........................................................ 175
LEGAL MATTERS............................................................. 179
EXPERTS................................................................... 179
WHERE YOU CAN FIND MORE
INFORMATION.............................................................. 179
STATEMENT OF FORWARD-LOOKING DISCLOSURE................................... 180
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE................................................... 181
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION.............................................................. 182
Star Gas Partners, L.P. and Subsidiaries--Pro Forma Condensed Consolidated
Balance Sheet (Unaudited)................................................ 183
Star Gas Partners, L.P. and Subsidiaries--Pro Forma Condensed Consolidated
Statement of Operations (Unaudited)...................................... 184
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iv
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Star Gas Partners, L.P. And Subsidiaries--Notes to Pro Forma Condensed
Consolidated Financial Information..................................... 185
GLOSSARY OF TERMS....................................................... 190
Appendix A--Application for Transfer of Units........................... App-1
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Annexes
A Merger Agreement
B Exchange Agreement
C Amended and Restated Partnership Agreement
D Opinion of A.G. Edwards & Sons Inc.
E Opinion of Dain Rauscher Wessels
F Copy of Sections 302A.471 and 302A.473 of Minnesota Business Corporation
Act
G Calculation of Pro Forma Available Cash from Operating Surplus
</TABLE>
v
<PAGE>
QUESTIONS AND ANSWERS
QUESTIONS AND ANSWERS FOR THE
PARTNERSHIP'S COMMON UNITHOLDERS
Q: WHAT IS BEING PROPOSED?
A: You are considering the Partnership's acquisition of Petro. Petro's public
stockholders will receive senior subordinated units in exchange for their
shares of common stock.
Q: WHAT ARE THE REASONS FOR IT?
A: Petro is the largest home heating oil distributor in the country and has
been a principal consolidator of that highly fragmented industry. We believe
Petro's strong position in the home heating oil industry will provide the
Partnership with attractive acquisition and expansion opportunities. In
addition, the acquisition of Petro has been structured with the intent of
providing an increase in the Partnership's cash flow. Based on this
expectation, we will increase the minimum quarterly distribution from $0.55
to $0.575 per unit, or from $2.20 to $2.30 on an annualized basis, upon
completion of the transaction.
Q: WHAT IS THE PURPOSE OF THE MEETING OF COMMON UNITHOLDERS?
A: The meeting is for you to vote upon matters that must be approved in order
to complete the acquisition of Petro.
Q: WHAT ARE THE PROPOSALS THE COMMON UNITHOLDERS WILL VOTE ON?
A: We are asking the common unitholders to approve three proposals:
. The proposal to acquire Petro through a merger and an exchange.
. The proposal to amend the partnership agreement to facilitate the
transaction.
. The proposal to elect a new general partner.
Q: WHAT ARE THE CONDITIONS TO CLOSING THE TRANSACTION?
A: In order for the transaction to occur, several conditions must be met. The
following are three key conditions:
. A majority of the common stockholders and common unitholders must approve
each of the proposals submitted for vote.
. An equity offering by the Partnership and a debt offering by Petro must be
completed.
. Petro must meet the financial tests in the merger agreement.
Q: WHEN IS THE TRANSACTION EXPECTED TO OCCUR?
A: The Partnership and Petro anticipate completing the transaction in early
1999.
Q: WHAT IF THE TRANSACTION DOES NOT HAPPEN?
A: The ownership structures of the Partnership and Petro will continue as they
are on the date of this proxy statement.
Q: WHAT DO I NEED TO DO RIGHT NOW?
A: Just return your signed proxy card in the enclosed return envelope as soon
as possible in order for your units to be represented at the meeting. Based
on the
<PAGE>
recommendation of a special committee of the Star Gas Corporation board of
directors, the Star Gas Corporation board of directors unanimously
recommends that you vote FOR each of the proposals.
Q: WHO IS ENTITLED TO VOTE?
A: Common unitholders of record at the close of business on , 1999.
Q: DO I SEND IN MY UNIT CERTIFICATES?
A: No. Your common units will continue to be listed and traded on the New York
Stock Exchange.
Q:ARE THERE DISSENTERS' RIGHTS?
A: No. Common unitholders do not have dissenters' rights.
2
<PAGE>
QUESTIONS AND ANSWERS
FOR PETRO'S COMMON STOCKHOLDERS
Q: WHAT IS BEING PROPOSED?
A: You are considering the acquisition of Petro by the Partnership. The
Partnership is the eighth largest propane distributor in the United States.
You will receive senior subordinated units of the Partnership in exchange
for your shares of common stock. The senior subordinated units you will
receive will be listed on the New York Stock Exchange.
Q: WHAT ARE THE REASONS FOR IT?
A: Petro is the largest home heating oil distributor in the U.S. and
a principal consolidator of that highly fragmented industry. However, Petro
does not have the financial flexibility to fully capitalize upon the
acquisition, operating and corporate branding opportunities resulting from
this position. This transaction will recapitalize Petro, providing it with
access to lower cost capital to better realize these growth opportunities.
Q: WHAT IS THE PURPOSE OF THE SPECIAL MEETING OF COMMON STOCKHOLDERS?
A: Petro has called a special meeting for you to consider and vote upon the
proposal for the Partnership to acquire Petro.
Q: WHICH PARTS OF THE TRANSACTION AM I CONSIDERING?
A: You are only voting on the Partnership's acquisition of Petro.
Q: WHAT WILL I RECEIVE FOR MY COMMON STOCK IN THE TRANSACTION?
A: For each share of common stock, you will receive:
. .13064 of a senior subordinated unit of limited partner interests in the
Partnership; and
. a check in payment for any fractional units based on the market value of
senior subordinated units.
For example, if you own 100 shares of common stock, you will receive 13
senior subordinated units and a check for your fractional unit.
In the future, senior subordinated unitholders may receive:
. distributions in excess of those made on the common units if the
Partnership generates cash above certain target levels; and
. a proportionate share of up to an additional 909,000 senior subordinated
units, but only if Petro achieves certain financial goals after the
acquisition is completed.
Q: ARE THERE DISSENTERS' RIGHTS?
A: Common stockholders have the right to dissent and obtain payment for the
"fair value" of their shares if certain corporate actions such as the merger
should occur.
3
<PAGE>
Common stockholders who wish to exercise dissenters' rights must comply
fully with the requirements of the Minnesota Business Corporation Act.
Accordingly Petro urges common stockholders wishing to dissent to read
carefully "Proxy Solicitation--The Special Meeting--Dissenters' Rights," in
this proxy statement and its attached Annex F, and to consult their own
legal advisors.
FAILURE TO FOLLOW THE PROCEDURES IN ANNEX F MAY RESULT IN A TERMINATION OR
LOSS OF DISSENTERS' RIGHTS UNDER THE MINNESOTA BUSINESS CORPORATION ACT.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The merger will be a taxable transaction to the extent of the difference
between the value of the senior subordinated units you receive and the
federal income tax basis that you have in your shares of common stock.
Q: WHAT ARE THE CONDITIONS TO CLOSING THE TRANSACTION?
A: In order for the transaction to occur, several conditions must be met. The
following are three key conditions:
. A majority of the common stockholders and common unitholders must approve
each of the proposals submitted for vote.
. An equity offering by the Partnership and a debt offering by Petro must be
completed.
. Petro must meet the financial tests in the merger agreement.
Q: WHEN IS THE TRANSACTION EXPECTED TO OCCUR?
A: The Partnership and Petro anticipate completing the transaction in early
1999.
Q: WHAT IF THE TRANSACTION DOES NOT HAPPEN?
A: The ownership structures of the Partnership and Petro will continue as they
are on the date of this proxy statement. Petro's Class A common stock will
continue to be traded under the symbol "HEAT."
Q: WHAT DO I NEED TO DO RIGHT NOW?
A: Just return your signed proxy card in the enclosed return envelope as soon
as possible in order for your shares of common stock to be represented at
the meeting. The Petro board of directors has approved the transaction and
unanimously recommends that common stockholders vote FOR the proposal to be
acquired by the Partnership.
Q:WHO IS ENTITLED TO VOTE?
A: Common stockholders of record at the close of business on , 1999.
Q: DO I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the transaction is approved, common stockholders of record will
receive written instructions on how to deliver their Petro stock
certificates in exchange for senior subordinated units.
4
<PAGE>
PROXY STATEMENT SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important to you. To fully understand
the transaction, and for a more complete description of legal terms, you should
read carefully this entire document and the documents to which we have referred
you. See "Where You Can Find More Information" (page 179). A glossary of
certain terms used in this proxy statement begins on p. 190.
PARTIES
The Partnership. The Partnership is primarily a retail distributor of propane
and related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers. Propane is used primarily as fuel for
space and water heating and cooking by the Partnership's residential and
commercial customers, which customers constitute the largest portion of its
customer base. The Partnership is the eighth largest retail propane distributor
in the United States, serving approximately 166,000 customers from 74 branch
locations in 13 states in the Midwest and Northeast. For the fiscal year ended
September 30, 1998, on a pro forma basis giving effect to the acquisition in
fiscal 1998, the Partnership's operations had EBITDA (operating income plus
depreciation, amortization and other non-cash charges, less net gain (loss) on
sale of business and equipment) of $20.2 million on total sales of
approximately $116.1 million. In addition to its retail business, the
Partnership serves approximately 30 wholesale customers from its wholesale
operation in southern Indiana.
The executive offices of the Partnership are located at 2187 Atlantic Street,
Stamford, Connecticut 06902. The Partnership's telephone number is (203) 328-
7300.
Petro. Petro is primarily a retail distributor of home heating oil in the
Northeast and Mid-Atlantic states. Petro is the largest distributor of home
heating oil in the United States and serves approximately 340,000 customers
from 24 branch locations. For the twelve months ended September 30, 1998, on a
pro forma basis Petro had EBITDA of $30.7 million and total sales of $450.1
million. If certain non-recurring restructuring, corporate identity and
transaction expenses were not subtracted from EBITDA, pro forma EBITDA would
have been $34.9 million. To a limited extent, Petro also markets other
petroleum products, including diesel fuel and gasoline, to commercial
customers. In addition to its heating oil business, Petro currently owns a
40.5% equity interest in the Partnership. Star Gas Corporation, a wholly-owned
subsidiary of Petro, is the current general partner of the Partnership.
Petro's executive offices are located at 2187 Atlantic Street, Stamford,
Connecticut 06902. Petro's telephone number is (203) 325-5400.
5
<PAGE>
SPECIAL FACTORS
POTENTIAL ADVANTAGES TO THE PARTNERSHIP'S COMMON UNITHOLDERS (SEE PAGE 61)
The following are the potential advantages of the transaction to the common
unitholders:
. The minimum quarterly distribution will increase from $0.55 to $0.575, or
$2.20 to $2.30 on an annualized basis, per unit.
. The transaction has been structured with the intent to increase the amount
of cash available for distribution to unitholders. If this expectation
is realized, it will provide unitholders with greater assurance of
receiving the minimum quarterly distribution and an improved possibility
of future distribution increases.
. The acquisition of Petro should improve the Partnership's growth prospects
by providing attractive acquisition and expansion opportunities.
. Petro common stockholders will receive subordinated limited partner
interests which entitle them to receive distributions only after the
common unitholders receive their full minimum quarterly distribution.
. The period during which the common unit distribution is senior to the
subordinated limited partner interests will be extended 21 months to
October 1, 2002.
. The transaction will increase the Partnership's market capitalization and
should provide greater (1) common unit market liquidity, (2) investment
community awareness and (3) ability to attract securities analyst research
coverage.
POTENTIAL DISADVANTAGES AND RISKS TO THE PARTNERSHIP'S COMMON UNITHOLDERS (SEE
PAGES 20 AND 62)
The following are the potential disadvantages and risks of the transaction
to the common unitholders:
. The Partnership is acquiring an entity that is several times its size
based on 1997 revenues. Therefore, the nature of the Partnership's
business will significantly change.
. Petro has a history of operational and financial difficulties (including
high leverage and recent substantial net losses).
. The success of the transaction depends upon the Partnership's ability to
continue to:
- -- make acquisitions of home heating oil businesses at attractive prices;
- -- reduce Petro's customer attrition rate; and
- -- increase Petro's profit margins on a per gallon basis.
. The Partnership is making a large investment in a business that is more
sensitive to temperature levels than its propane operations. This is due
to Petro's home heating oil sales being used for heating purposes, while
the Partnership's propane sales are often used for uses other than
heating.
. The home heating oil industry is not a growth industry as a result of
increased competition from alternative energy sources.
. The proportion of subordinated limited partner interests to total limited
partner interests will decline from 37.5% to
6
<PAGE>
25.2%, and therefore the support to common units will be reduced.
. The number of common units will increase from approximately 3.9 million to
10.8 million, representing potential significant dilution.
. Petro's income, unlike the income from the Partnership's propane
operations, will be subject to corporate tax prior to any distributions.
. The ratio of taxable income to cash distributions to be made to the
existing common unitholders will increase over time at a greater rate than
if the transaction does not occur, and dividend and interest income from
Petro cannot be offset with past or future losses generated by the
Partnership's propane operations.
POTENTIAL ADVANTAGES TO PETRO'S COMMON STOCKHOLDERS (SEE PAGE 72)
The following are the potential advantages of the transaction to the common
stockholders:
. This transaction will provide Petro with the financial structure to
implement its growth-through-acquisition strategy and invest in its
operating and corporate branding opportunities.
. We believe that Petro should receive an improved market valuation as part
of a publicly-traded limited partnership. Publicly-traded limited
partnerships are cash flow oriented and are valued primarily on a cash
distribution basis. We believe Petro's focus on cash flow is well suited
for that structure.We also believe the Partnership will have greater
investment community awareness than Petro. As the only public home
heating oil company, Petro has had limited securities analyst research
coverage.
. You are more likely to receive cash distributions as a holder of a senior
subordinated unit in the Partnership than you are to receive dividends as
a holder of Petro common stock.
. You will receive senior subordinated units that must receive the minimum
quarterly distribution prior to any payments being made on the junior
subordinated units and the general partner units.
. The senior subordinated units will have the right to receive incentive
distributions. If the Partnership generates cash above target levels, the
holders of senior subordinated units may receive greater cash
distributions than the common unitholders.
. If Petro achieves certain financial goals within the five-year period
after closing, the holders of senior subordinated units, junior
subordinated units and general partner units will receive up to an
additional 909,000 senior subordinated units. This enables common
stockholders to continue to participate in Petro's future performance.
POTENTIAL DISADVANTAGES AND RISKS TO PETRO'S COMMON STOCKHOLDERS (SEE PAGES 25
AND 73)
The following are the potential disadvantages and risks of the transaction to
the common stockholders:
. Unitholders in the Partnership have substantially different, and probably
fewer, legal rights than common stockholders.
. There is no current trading market for the senior subordinated units.
Although the senior subordinated units have been approved for listing on
the New York
7
<PAGE>
Stock Exchange, there is no assurance that any active trading market will
develop. It is expected that the senior subordinated units will trade at
a lower price than the common units.
. Distributions on the senior subordinated units, junior subordinated units
and general partner units are not guaranteed. The Partnership will make
these distributions only after it has made the full minimum quarterly
distribution on the common units. Further, distributions on the senior
subordinated units, junior subordinated units and general partner units
are generally limited to available cash generated after the closing of
the transaction. Therefore, there is significant uncertainty as to the
amount and timing of these distributions.
. Star Gas LLC, the new general partner of the Partnership, will have
conflicts of interest typical of a general partner in a publicly-traded
limited partnership. These conflicts are different than any conflicts of
interest that may exist for the Petro board of directors.
. Like Petro's home heating oil operations, the Partnership's propane
operations are also negatively affected by warm weather during the winter
months.
. The Partnership may face difficulties in the future in making attractive
acquisitions in the propane industry because of the highly competitive
nature of the industry.
. Tax-exempt entities, regulated investment companies or foreign taxpayers
may determine that holding an interest in the Partnership may be
unattractive from a tax perspective. If some of these investors sell
their senior subordinated units following the transaction, the market
price of the senior subordinated units could fall substantially.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND STAR GAS CORPORATION BOARD OF
DIRECTORS AND OPINION OF A.G. EDWARDS & SONS, INC. (SEE PAGES 37, 61 AND 63)
All of the directors of Star Gas Corporation are also directors or officers
of Petro, except for two directors who have no affiliation with Petro but who
were originally elected to the Star Gas Corporation board of directors by
Petro. Because the directors of Petro who are also directors of Star Gas
Corporation may be considered to have a conflict of interest when considering
this transaction and because Petro owns all outstanding subordinated units of
the Partnership, the two non-affiliated directors of Star Gas Corporation were
appointed as a special committee to negotiate the transaction on behalf of the
public common unitholders. Independent legal counsel represented the special
committee in the negotiations. These two directors will each receive
additional compensation of $40,000.
A.G. Edwards & Sons, Inc. has served as independent financial advisor to the
special committee in the transaction. They have rendered an opinion to the
special committee that the transaction is fair, from a financial point of
view, to the public common unitholders. The A.G. Edwards opinion is attached
as Annex D to this proxy statement. Common unitholders and common stockholders
are urged to read the opinion in its entirety for descriptions of the
procedures followed, matters considered and limitations on the analysis
undertaken.
8
<PAGE>
After considering the advice of its independent legal counsel and financial
advisor, and based upon the A.G. Edwards opinion, the special committee
believes that the transaction is fair to, and in the best interests of the
common unitholders who are not affiliated with Star Gas Corporation. The
special committee, therefore, has recommended the transaction to the Star Gas
Corporation board of directors. Based on such recommendation, the Star Gas
Corporation board of directors unanimously recommends that common unitholders
vote FOR each of the proposals.
RECOMMENDATIONS OF PETRO BOARD OF DIRECTORS AND OPINION OF DAIN RAUSCHER
WESSELS (SEE PAGES 37, 72 AND 75)
Each of the members of the Petro board of directors has interests that
conflict, or may be perceived to conflict, with the interests of the public
common stockholders. As a result, the Petro board of directors could not
establish an independent committee. The Petro board of directors has determined
that the transaction is fair and in the best interests of the common
stockholders and has approved the merger agreement and the exchange agreement.
The Petro board of directors, therefore, unanimously recommends that common
stockholders vote FOR the proposal to be acquired by the Partnership.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, has rendered
an opinion to the Petro board of directors that the consideration to be
received in the merger by the common stockholders not affiliated with Star Gas
Corporation is fair, from a financial point of view, to unaffiliated common
stockholders. The Dain Rauscher Wessels opinion is attached as Annex E to this
proxy statement. Common unitholders and common stockholders are urged to read
the opinion in its entirety for descriptions of the procedures followed,
matters considered and limitations on the analysis undertaken.
PaineWebber Incorporated has also acted as a financial advisor to Petro.
9
<PAGE>
THE TRANSACTION
The transaction has four principal parts.
THE MERGER AND THE EXCHANGE (SEE PAGE 92)
As a result of the merger, in general,
. Each outstanding share of Petro public common stock will be converted into
.13064 of a senior subordinated unit.
. Each outstanding share of junior preferred convertible stock of Petro will
be converted into .13064 of a common unit.
. Each outstanding share of Series C exchangeable preferred stock due 2009
of Petro will be converted into the right to receive $23 in cash plus
accrued and unpaid dividends.
As a result of the exchange, in general,
. Irik P. Sevin, Audrey L. Sevin, Hanseatic Corp. and Hanseatic Americas LDC
will contribute some of their common stock to Star Gas LLC in exchange for
the ownership of Star Gas LLC.
. Star Gas LLC will contribute these shares to the Partnership in exchange
for general partner units.
. The owners of Star Gas LLC will contribute their remaining shares of
common stock to the Partnership in exchange for junior subordinated units.
. Other common stockholders who are considered to be affiliates of Petro
will contribute shares of common stock to the Partnership in exchange for
senior subordinated units.
FINANCINGS AND REFINANCINGS (SEE PAGE 94)
An integral element of the transaction is the refinancing of Petro's
outstanding debt and preferred stock that will substantially reduce Petro's
ongoing borrowing costs.
. The Partnership will offer for sale to the public approximately 6.8
million common units, the net proceeds of which are estimated to be $128.3
million.
. Petro will sell approximately $120.0 million of notes, the net proceeds of
which are estimated to be $115.4 million. It is expected that the
Partnership and a subsidiary of Petro will guarantee the notes.
NEW GENERAL PARTNER (SEE PAGE 107)
The new general partner of the Partnership will be Star Gas LLC. The
directors of Star Gas LLC will be identical to the existing Star Gas
Corporation directors as of the date of this proxy statement, except that, at
her request, one of the current directors will withdraw as a director after the
transaction as a result of additional duties associated with a new job. That
director will be replaced by a director selected by the Star Gas LLC board of
directors. The new director will not be an officer or employee of Star Gas LLC
or any of its affiliates.
AMENDMENT OF THE PARTNERSHIP AGREEMENT (SEE PAGE 113)
In order to complete the transaction, the partnership agreement must be
amended. These amendments will substantially change the terms of the
partnership agreement.
10
<PAGE>
DESCRIPTION OF THE PARTNERSHIP UNITS
This summary assumes that the partnership agreement will be amended.
Distributions of available
cash........................ . The Partnership intends to distribute,
(See page 132) to the extent there is sufficient
available cash, at least a minimum
quarterly distribution of $0.575 per
unit ($2.30 per unit on a yearly basis).
. "Available cash" for any quarter
consists generally of all cash on hand
at the end of that quarter, as adjusted
for reserves. The general partner has
broad discretion in establishing
reserves.
. In general, available cash will be
distributed per quarter based on the
following priorities:
First, to the common units until each
has received $0.575 plus any arrearages
from prior quarters.
Second, to the senior subordinated units
until each has received $0.575.
Third, to the junior subordinated units
and general partner units until each has
received $0.575.
Finally, after each unit has received
$0.575, available cash will be
distributed proportionately to all units
until target levels are met.
. If distributions of available cash
exceed target levels greater than
$0.604, the senior subordinated units,
junior subordinated units and general
partner units will receive incentive
distributions as described below.
Limitations on certain
distributions............... . The aggregate amount of distributions
(See page 138) that may be paid on the senior
subordinated units, junior subordinated
units and general partner units for the
quarters ending June 30, 1999 and
September 30, 1999 depends on whether
the combined results of the Partnership
and Petro exceed certain financial
benchmarks.
. Beginning with the quarter ending on
December 31, 1999, the aggregate
distributions paid on the senior
subordinated units, junior subordinated
units and general partner units depend
upon the amount of available cash
generated by the Partnership after
October 1, 1999.
Timing of distributions...... . The Partnership makes distributions
(See page 133) approximately 45 days after each March
31, June 30, September 30 and December
31, to unitholders on the applicable
record date.
11
<PAGE>
. Common units issued in the equity
offering are entitled to receive the
full distribution with respect to the
quarter ending March 31, 1999.
. The first possible distribution on the
senior subordinated units may be paid
for the quarter ending June 30, 1999 on
approximately August 14, 1999 to holders
of record on approximately August 3,
1999. If paid, this will include a
proportionate distribution for the
period between the completion of the
transaction and March 31, 1999.
Subordination period.......... . The subordination period will generally
(See page 133) end once the Partnership meets certain
financial tests, but it cannot end prior
to October 1, 2002. However in certain
instances, if the general partner is
removed, the subordination period will
end.
. When the subordination period ends, all
senior subordinated units and junior
subordinated units will convert into
Class B common units on a one-for-one
basis, and each common unit will be
redesignated as a Class A common unit.
. The main differences between the Class A
common units and Class B common units
are that the Class B common units will
have the right to receive incentive
distributions as described below and the
right to receive additional units.
Incentive distributions....... If quarterly distributions of available
(See page 135) cash exceed target levels, the senior
subordinated units, junior subordinated
units and general partner units will
receive an increased percentage of
distributions, resulting in their
receiving a greater amount on a per unit
basis than the common units.
Additional senior Up to an additional 909,000 senior
subordinated units........... subordinated units will be issued
(See page 139) proportionately to holders of senior
subordinated units, junior subordinated
units and general partner units, but
only if Petro achieves certain financial
goals during the five-year period
following completion of the transaction.
NYSE Trading Symbols:
Common Units.................. "SGU"
Senior Subordinated Units.....
12
<PAGE>
FINANCIAL INFORMATION
ESTIMATED SOURCES AND USES OF FUNDS OF THE EQUITY OFFERING AND DEBT OFFERING
As a result of the transaction, the sources and uses of funds are currently
anticipated to be as follows:
(In thousands)
<TABLE>
<S> <C>
SOURCES
Equity offering, net(a).......................................... $128,300
Debt offering, net(b)............................................ 115,400
--------
243,700
========
USES
Redeem Petro 12 1/4% Senior Subordinated Debentures due
2005(c)(d)...................................................... $ 84,094
Redeem Petro 10 1/8% Senior Subordinated Notes due 2003(d)....... 50,000
Redeem Petro 9 3/8% Senior Subordinated Debentures due 2006(d)... 75,000
Redeem Petro Public Preferred Stock.............................. 27,600
Repurchase Petro 1989 Preferred Stock............................ 4,167
Transaction fees and expenses(e)(f).............................. 2,839
--------
$243,700
========
</TABLE>
--------
(a) Assumes the sale of 6.8 million common units at $20.00 per common unit,
net of underwriting discounts and commissions and expenses. The exact
number of common units will increase or decrease inversely in relation to
the public offering price of the common units.
(b) Net of underwriting discounts and commissions and expenses.
(c) Includes prepayment premium of $2.8 million.
(d) The amounts across from the Petro 12 1/4% Senior Subordinated Debentures,
the Petro 10 1/8% Senior Subordinated Notes, and the Petro 9 3/8% Senior
Subordinated Debentures (1) include certain subordinated debt that was in
Petro's October 1998 exchange offer under which this senior subordinated
debt was issued and (2) assume that Petro will redeem or otherwise
repurchase 100% of these securities. Upon completion of the transaction,
Petro has the right to redeem up to an aggregate 98.5% of the principal
amount of these securities. The Partnership intends to seek to purchase
the remaining securities on comparable terms.
(e) Does not include reserves for dissenters' rights which may be exercised
by former Petro stockholders.
(f) Petro will pay an additional $3.2 million of expenses from its existing
cash balances.
The estimated sources and uses may change, depending on market conditions,
the Partnership's and Petro's operations and other factors.
OUTSTANDING PARTNERSHIP UNITS
The following table sets forth the approximate number of units outstanding
before and after completion of the transaction:
<TABLE>
<CAPTION>
BEFORE TRANSACTION AFTER TRANSACTION
-------------------- ---------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
COMMON UNITS
Existing common units............ 3,858,999 60.5% 3,858,999 26.8%
Issued to Petro Junior Preferred
Stockholders.................... -- -- 102,773 0.7
Issued in equity offering(a)..... -- -- 6,800,000 47.3
--------- ---- ---------- -----
Subtotal....................... 3,858,999 60.5 10,761,772 74.8
SUBORDINATED UNITS
Existing Subordinated Units...... 2,396,078 37.5 -- --
Senior Subordinated Units........ -- -- 2,767,058 19.2
Junior Subordinated Units........ -- -- 568,478 4.0
--------- ---- ---------- -----
Subtotal....................... 2,396,078 37.5 3,335,536 23.2
GENERAL PARTNER
INTERESTS/UNITS(B)............... 127,655 2.0 287,700 2.0
--------- ---- ---------- -----
Total.......................... 6,382,732 100% 14,385,008 100.0%
========= ==== ========== =====
</TABLE>
--------
(a) Estimated based on an assumed offering price of $20.00 per common unit.
The exact number of common units to be issued in the equity offering will
be based on the public offering price of common units at the time of
sale. The exact number of common units will increase or decrease
inversely in relation to the public offering price of the common units.
(b) Stated in equivalent units before the transaction and includes the
general partner's interest in Star Gas Propane, L.P.
13
<PAGE>
CAPITALIZATION
The following table shows the Partnership's historical capitalization as of
September 30, 1998, (1) actual, (2) as adjusted to give pro forma effect to the
acquisition of Petro and (3) as further adjusted to give pro forma effect to
the closing of the equity offering and the debt offering and our application of
the net proceeds of these offerings as described in "Proxy Statement Summary--
Financial Information." You should read this table together with the historical
and pro forma financial statements and notes included and incorporated by
reference in this proxy statement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------
PRO FORMA ADJUSTED
ACTUAL COMBINED(A) PRO FORMA(A)
-------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash..................................... $ 1,115 $ 19,782 $ 16,550
======== ======== ========
Debt:
Star Gas Propane L.P. First Mortgage
Notes.................................. $ 96,000 $ 96,000 $ 96,000
Star Gas Propane L.P. Acquisition Facil-
ity.................................... 8,308 8,308 8,308
The notes issued in the debt offering... -- -- 120,000
Petro Public Debt(b).................... -- 209,094 --
Petro Private Debt(c)................... -- 76,056 81,686
-------- -------- --------
Total Long-Term debt................. 104,308 389,458 305,994
-------- -------- --------
Redeemable Preferred Stock:
Petro Public Preferred Stock............ -- 27,600 --
Partners' capital:
Common unitholders...................... 58,686 60,741 189,041
Existing subordinated unitholders....... (1,446) -- --
Senior and Junior subordinated
unitholders............................ -- 22,544 22,544
General partner......................... 107 1,666 1,666
-------- -------- --------
Total partners' capital.............. 57,347 84,951 213,251
-------- -------- --------
Total capitalization................. $161,655 $502,009 $519,245
======== ======== ========
</TABLE>
- --------
(a) See "Unaudited Pro Forma Condensed Consolidated Financial Information of
Star Gas Partners, L.P.," for a discussion of the pro forma adjustments.
This table does not include $4.2 million of the current portion of Petro's
1989 Preferred Stock, which will be paid with the proceeds of this
offering.
(b) The Petro Public Debt consists of $84.1 million of 12 1/4% Senior
Subordinated Debentures due 2005, $50.0 million of 10 1/8% Senior
Subordinated Notes due 2003 and $75.0 million of 9 3/8% Senior Subordinated
Debentures due 2006. The amounts described (1) include the principal amount
of subordinated debt that was not exchanged in Petro's October 1998
exchange offer in which this senior subordinated debt was issued and (2)
assume that Petro will redeem or otherwise repurchase 100% of these
securities. Upon completion of the transaction, Petro has the right to
redeem up to an aggregate of 98.5% of the principal amount of these
securities. We intend to purchase the remaining securities on comparable
terms.
(c) The Petro Private Debt consists of approximately $63.1 million of 9% Senior
Notes due 2002, $4.3 million of 10 1/4% Subordinated and Senior Notes due
2001 and $14.3 million of notes payable for the purchase of fuel oil
dealers maturing at various dates through 2004.
14
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF THE PARTNERSHIP
The following table describes for the periods and dates indicated, summary
selected historical financial and operating data of the Partnership, which are
derived from the consolidated financial statements of the Partnership. The
financial data is only a summary and should be read in conjunction with the
Partnership's historical financial statements (and related notes) contained in
the annual reports and other information that the Partnership has filed with
the Commission. See "Incorporation of Certain Documents by Reference." The
historical Other Data are unaudited but have been prepared on the same basis as
that of the audited consolidated financial statements. These historical results
of operations are not necessarily indicative of the results of operations to be
expected in the future.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------
1996(A) 1997 1998
--------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales..................... $ 119,634 $ 135,159 $ 111,685
Gross margin.............. 61,077 62,948 62,187
Depreciation and amortiza-
tion..................... 9,680 10,242 11,462
Operating income.......... 9,930 9,166 7,173
Interest expense, net..... 7,124 6,966 7,927
Net income (loss)......... 2,593 2,012 (955)
Net income (loss) per
unit(b).................. $ 0.11(c) $ 0.37 $ (0.16)
Cash distribution declared
per unit................. $ 1.17(c) $ 2.20 $ 2.20
BALANCE SHEET DATA (END OF
PERIOD)
Current assets............ $ 17,842 $ 14,165 $ 17,947
Total assets.............. 156,913 147,469 179,607
Long-term debt............ 85,000 85,000 104,308
Partners' capital......... 61,398 51,578 57,347
SUMMARY CASH FLOW DATA
Net cash provided by oper-
ating activities......... $ 9,982 $ 18,964 $ 9,264
Net cash provided by (used
in) investing activi-
ties..................... (6,954) (4,905) (13,276)
Net cash provided by (used
in) financing activi-
ties..................... (2,649) (14,276) 4,238
OTHER DATA
Earnings before interest,
taxes, depreciation and
amortization less net
gain (loss) on sales of
equipment ("EBITDA")(d).. $ 19,870 $ 19,703 $ 18,906
Retail propane gallons
sold..................... 96,294 94,893 98,870
Ratio of earnings to fixed
charges(e)............... 1.22x 1.27x --
Total capital
expenditures(f).......... $ 5,332 $ 5,279 $ 5,015
</TABLE>
- -------
(a) Reflects the results of operations of the predecessor of the Partnership
for the period October 1, 1995 through December 20, 1995 and the results of
the Partnership from December 20, 1995 through September 30, 1996.
Operating results for the year ended September 30, 1996 were combined to
facilitate an analysis of the fundamental operating data. For the actual
results of the Partnership from December 20, 1995 through September 30,
1996, see Item 14, page F-4 of the Partnership's 1998 Form 10-K, which is
incorporated by reference herein.
(b) Net income per unit is computed by dividing the limited partners' interest
in net income by the limited partners' weighted average number of units
outstanding.
(c) Represents net income per unit and cash distributions paid per unit for the
period December 20, 1995 through September 30, 1996.
(d) "EBITDA" is defined as operating income plus depreciation, amortization and
other non-cash charges, less net gain (loss) on sale of businesses and
equipment. EBITDA should not be considered an alternative to net income (as
an indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating the Partnership's ability to
make the minimum quarterly distribution. The definition of EBITDA set forth
above is different from the definition of EBITDA used by Petro and may be
different from that used by other corporations or partnerships.
(e) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) from continuing operations before
income taxes, plus fixed charges. Fixed charges consist of interest expense
on all indebtedness, the amortization of deferred debt issuance costs and
the portion of operating rental expense that is representative of the
interest factor. For the year ended September 30, 1998, earnings were
inadequate to cover fixed charges by $1.0 million.
(f) Includes net maintenance capital expenditures for the fiscal years ended
September 30, 1996, 1997 and 1998 of $2.3 million, $3.1 million and $2.6
million.
15
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF PETRO
The following table describes for the periods and dates indicated, summary
selected historical financial and operating data of Petro, which are derived
from the consolidated financial statements of Petro. The financial data is only
summary, and you should read it in conjunction with Petro's historical
financial statements (and related notes) contained in the annual reports and
other information that Petro has filed with the Commission. See "Incorporation
of Certain Documents by Reference." Since the Partnership's initial public
offering in December 1995, the Partnership has been accounted for under the
equity method of accounting in Petro's financial statements. The historical
financial data for the nine months ended September 30, 1997 and 1998 and the
historical other data are unaudited. The results of operations for the nine-
month periods ended September 30, 1997 and 1998 contain all adjustments that
are of a normal and recurring nature necessary to present fairly the financial
condition and results of operations for such periods. These historical results
of operations are not necessarily indicative of the results to be expected in
the future.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ --------------------
1996 1997 1997 1998
----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.................... $ 608,161 $ 548,141 $ 386,855 $ 291,479
Gross margin (exclusive of
depreciation)............... 180,773 168,393 115,586 99,971
Operating expenses .......... 138,703 132,383 96,292 81,758
Restructuring, corporate
identity and pension
curtailment................. 4,366 7,640 5,142 1,716
Depreciation, amortization
and other non-cash
costs(a).................... 28,946 28,847 21,567 20,639
Operating income (loss)...... 8,758 (477) (7,415) (4,142)
Interest expense-net......... 32,412 31,668 23,777 22,912
Amortization of debt issuance
cost........................ (1,872) (1,464) (1,097) (1,069)
Other income (expense)-net... 1,842 11,445 65 127
Share of income (loss) of
Star Gas.................... 2,283 (235) (1,808) (1,890)
Income (loss) before extraor-
dinary item................. (21,901) (22,899) (34,382) (30,211)
Net income (loss)............ $ (28,315) $ (22,899) $ (34,382) $ (30,211)
BASIC AND DILUTED EARNINGS
(LOSSES) PER COMMON SHARE(B)
Class A and Class C Common
Stock....................... $ (1.20) $ (1.06) $ (1.47) $ (1.29)
CASH DIVIDENDS DECLARED PER
COMMON SHARE(B)
Class A and Class C Common
Stock....................... $ 0.60 $ 0.30 $ 0.23 --
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic(b)
Class A Common Stock......... 22,983 23,441 23,339 23,960
Class C Common Stock......... 2,598 2,598 2,598 2,598
Diluted(b)
Class A Common Stock......... 23,339 23,960
Class C Common Stock......... 2,598 2,598
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS
31, ENDED SEPTEMBER 30,
----------------------- ----------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD)
Cash.................. $ 3,257 $ 2,390 $ 13,806 $ 13,767
Working capital....... 18,093 12,436 5,414 (7,479)
Total assets.......... 275,025 247,846 223,918 198,678
Long-term debt........ 291,337 288,957 288,774 278,864
Redeemable preferred
stock (long-term
portion)............. 8,333 32,489 34,167 28,555
Stockholders'
deficiency........... (145,733) (177,033) (189,361) (209,618)
SUMMARY CASH FLOW DATA:
Net Cash provided by
(used in) operating
activities........... $ (3,852) $ 18,644 $ 34,342 $ 28,803
Net Cash provided by
(used in) investing
activities........... (26,193) (980) (14,059) 1,011
Net Cash provided by
(used in) financing
activities........... (44,983) (18,531) (9,734) (18,437)
OTHER DATA
Operating income
before depreciation,
amortization and
provision for
supplemental benefits
(EBITDA)(c).......... $ 37,704 (d) $ 28,370(d)(e) $ 14,152(d) $ 16,497(d)(f)
Heating oil gallons... 456,141 410,291 282,806 226,579(f)
Ratio of earnings to
fixed charges(g)..... -- -- -- --
</TABLE>
- --------
(a) Other non-cash costs include provision for supplemental benefits.
(b) For the years ended December 31, 1996 and 1997 there were 12,000 and 11,000
shares of Class B Common Stock outstanding, respectively. For the nine
months ended June 30, 1997 and 1998 there were 11,000 shares of Class B
Common Stock outstanding for both periods. For all periods presented,
shares of Class B Common Stock did not receive an allocation of earnings or
dividends.
(c) EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as
a measure of liquidity or availability to service debt obligations), but
provides additional information for evaluating Petro's financial
performance. The definition of EBITDA set forth above is different from the
definition of EBITDA used by the Partnership and may be different from that
used by other companies.
(d) In 1996, Petro undertook a significant operating restructuring and
corporate identity program to improve its efficiency and ultimately reduce
operating costs. For the years ended December 31, 1996 and 1997 and for the
nine months ended September 30, 1997 and 1998, Petro recorded expenditures
for these programs of $4.4 million, $7.6 million, $5.1 million and $0.7
million, respectively.
(e) The decline in this measurement for the year ended December 31, 1997, as
compared to the year ended December 31, 1996 was primarily due to warm
weather experienced in 1997.
(f) For the nine months ended September 30, 1998, home heating oil volume
declined by 19.9% as compared to the nine months ended June 30, 1997
primarily due to the abnormally warm temperatures associated with the
weather phenomenon generally referred to as "El Nino." While volume
declined 19.9%, operating income before depreciation, amortization and
provision for supplemental benefits (EBITDA) declined only 16.6% due to a
reduction in operating costs largely attributable to the effects of the
restructuring and cost reduction programs.
(g) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) from continuing operations before
income taxes, plus fixed charges. Fixed charges consist of interest expense
on all indebtedness and the amortization of deferred debt issuance costs
and the portion of operating rental expense that is representative of the
interest factor. For the years ended December 31, 1996 and 1997 and for the
nine months ended September 30, 1997 and 1998, earnings were inadequate to
cover fixed charges by $28.3 million, $22.9 million, $34.3 million and
$30.2 million.
17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
The following summary selected unaudited pro forma condensed consolidated
statement of operations data, other data and balance sheet data as of and for
the twelve month period ended September 30, 1998 assume the transaction
occurred on October 1, 1997. The pro forma financial information below reflects
the purchase method of accounting and is intended to give you a better picture
of what our businesses might have looked like had they been combined since
October 1, 1997. The companies may have performed differently if they were
combined. You should not rely on the pro forma financial information as being
indicative of the historical results that we would have had or the future
results that we will experience after the transaction. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements."
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1998
----------------------------------
(dollars in thousands,
except per unit amounts)
Pro
Forma As adjusted
Combined Pro Forma
-------- ------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales..................................... $566,155 $566,155
Gross margin.............................. 216,683 216,683
Depreciation, amortization and other non-
cash costs(a)............................ 37,843 37,843
Operating income.......................... 13,027 13,027
Interest expense, net..................... 39,157 26,859
Net income (loss)......................... (28,238) (14,968)
Net income (loss) per unit(b)............. N.A. $ (1.04)
OTHER DATA
Earnings before interest, taxes,
depreciation, amortization less net gain
(loss) on sales of equipment
("EBITDA")(c)(d)......................... $ 50,918 $ 50,918
Ratio of earnings to fixed charges(e)..... -- --
Heating oil and propane gallons........... 455,360 455,360
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets............................ $100,659 $ 97,427
Total assets.............................. 678,592 679,960
Long-term debt............................ 389,458 305,994
Total partners' capital................... 84,951 213,251
</TABLE>
- --------
(a) Other non-cash costs include provision for supplemental benefits.
(b) Net income per unit is computed by dividing the limited partners' interest
in net income by the limited partners' weighted average number of units
outstanding.
(c) "EBITDA" is defined as operating income plus depreciation and amortization
less net gain (loss) on sale of equipment. EBITDA should not be considered
an alternative to net income (as an indicator of operating performance) or
as an alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information for
evaluating the Partnership's ability to make the minimum quarterly
distribution. The definition of EBITDA set forth above is different from
the definition of EBITDA used by Petro and may be different from that used
by other corporations or partnerships.
(d) EBITDA has been reduced by approximately $4.2 million in expenses
associated with Petro's corporate identity, restructuring and Transaction
expenses.
(e) For the pro forma combined and as adjusted pro forma, the earnings were
inadequate to cover fixed charges by $28.2 million and $15.0 million,
respectively.
18
<PAGE>
In analyzing the historical results of the Partnership and the pro forma
information as provided in the table above, the following three important
factors should be considered.
First, the results for the fiscal 1997 pro forma exclude cost savings
associated with Petro's restructuring program implemented during 1998. This
restructuring program includes reductions in both corporate and field
personnel, the consolidation of employee benefit plans and the rationalization
of branch facilities.
Second, while depreciation and amortization expenses reduce net income, as a
non-cash expense, these expenses do not impact distributable cash flow.
Third, in fiscal 1998, temperatures were significantly warmer than normal for
the areas in which we conduct our propane operations and our home heating oil
operations. We believe that overall levels of pro forma available cash from
operating surplus were adversely affected during fiscal 1998 due to this
abnormally warm weather.
19
<PAGE>
RISK FACTORS
Limited partner interests are inherently different from the capital stock of
a corporation, although the business risks faced by the Partnership are similar
to those of a corporation engaged in a similar business. Common unitholders and
common stockholders should consider the following factors in evaluating the
transaction.
RISKS TO THE PARTNERSHIP'S COMMON UNITHOLDERS
The Star Gas Corporation board of directors urges common unitholders to
carefully consider each of the factors set forth below.
Conflicts of Interest Were Present in Structuring the Transaction
All of the directors of Star Gas Corporation, other than the members of the
special committee, are also directors or officers of Petro. Thus, except for
the special committee, members of the Petro board of directors and the Star Gas
Corporation board of directors have interests that are different from, and in
conflict with, the interests of the common unitholders. The Star Gas
Corporation board of directors appointed the two members of the special
committee to negotiate the acquisition of Petro on behalf of the common
unitholders. Each member of the special committee has received additional
compensation of $40,000 for serving on the special committee.
The Transaction Substantially Changes the Size and Nature of the Partnership's
Business
Petro is substantially larger than the Partnership in terms of assets,
liabilities and revenues. The Partnership's primary business will therefore
shift from the retail distribution of propane to the distribution of home
heating oil.
Petro Has Significant Recent Net Losses
Petro incurred net losses of approximately $23.5 million, $28.3 million and
$22.9 million for the years ended December 31, 1995, 1996 and 1997. These net
losses were primarily a result of the amortization expense associated with
Petro's many acquisitions since 1980 and interest expense. Higher than expected
customer attrition, relatively mild recent winters and other operational
factors also affected operating results. Petro's strategy is to maximize EBITDA
and thus, net losses are likely to continue in the near term.
Increased Distributions per Common Unit Are Not Assured
The Star Gas Corporation board of directors structured the transaction based
on its belief that it would increase the cash available to be distributed per
common unit. The board of directors based this belief on the expectation that
the Partnership will be able to (1) successfully acquire home heating oil
distributors at attractive prices, (2) complete Petro's restructuring program
to reduce customer losses and (3) increase operating margins. There can be no
assurance that these expectations will be realized.
20
<PAGE>
Common Unitholders Are Subject to Dilution in the Percentage of Their
Ownership Interest
After the transaction, it is expected that the number of outstanding units
will increase by approximately 125%. The issuance of these additional units may
dilute the interests of the existing common unitholders since they will own a
smaller percentage of the Partnership. Furthermore, up to an additional 909,000
senior subordinated units will be issued to the holders of senior subordinated,
junior subordinated and general partner units if Petro achieves certain
financial goals during the five-year period following the closing. During the
subordination period, the Partnership can issue 2,500,000 additional common
units without obtaining any unitholder approval. These additional common units
could dilute the interest of then-existing unitholders in the net assets of,
and distributions to be made by, the Partnership. In addition, holders of
common units will not have preemptive rights to acquire additional common units
or other partnership interests that may be issued by the Partnership.
There Will Be Less Support for the Common Units After the Transaction
The existing subordinated units now represent a 37.5% limited partner
interest in the Partnership. After the transaction, the senior subordinated,
junior subordinated and general partner units will represent only a 25.2%
partner interest. Therefore, the amount of support provided by these units for
the payment of the minimum quarterly distribution on the common units will
decline.
Common Unitholders Will Experience a Reduction in Voting Power
After the transaction, matters that previously required only the consent of a
majority of the outstanding common units will also require the consent of a
majority of the senior subordinated and junior subordinated units, voting
together as a single class. Thus, there may be matters in the future that the
common units approve but are not adopted because a majority of the senior
subordinated and junior subordinated units did not approve.
The Partnership's Indebtedness May Limit Its Ability to Make Distributions and
Affect Its Operations
As a result of the transaction, the Partnership will have debt that is
substantial compared to its partners' capital. Principal and interest payable
on this debt will reduce cash available to make distributions on the common
units. Under certain circumstances, the terms of the Partnership's debt
instruments, including the senior subordinated notes issued in the debt
offering, will limit its ability to distribute cash to common unitholders and
to borrow additional funds. The limitations and restrictions in new debt we
issue may be more restrictive than those in our current indebtedness. In
addition, some of the Partnership's debt is secured by its assets. If the
Partnership defaulted on this secured debt, the lenders could institute
foreclosure proceedings to seize its assets. Any attempt to stay these
foreclosure actions by seeking to reorganize under the federal Bankruptcy Code
would have a material adverse effect on the Partnership and the common
unitholders.
The Partnership Has Debt With Change of Control Provisions
After the completion of the transaction, it is expected that the debt
instruments of the Partnership and Petro will contain provisions relating to a
"change of control." There is no restriction on either Neither party is
restricted from entering a transaction that would trigger the change of control
provisions.
21
<PAGE>
If these change of control provisions are triggered, some of the outstanding
debt may become due. It is possible that the Partnership or Petro will not
have sufficient funds at the time of any change of control to make the
required payments on its debt or that restrictions in its other debt
instruments will not permit those payments. In some instances, lenders would
have the right to foreclose on the Partnership's or Petro's assets if debt
payments were not made upon a change of control.
Weather Conditions Affect the Demand for Heating Oil More than the Demand for
Propane
Petro's operations are more sensitive to temperature levels than are the
Partnership's since Petro's home heating oil sales are for heating purposes,
while the Partnership's propane sales are often for uses other than heating.
Since sales of home heating oil during the peak heating season from October
through March represent 75% to 80% of Petro's annual home heating oil volume,
weather conditions during this period can have a material effect on Petro's
financial results. It is possible that average temperatures in future years
will be above the historical average.
Petro Has Experienced Significant Customer Losses
Petro's net attrition of home heating oil customers has been between
approximately 5% to 6% per year over the past five years. This rate represents
an annual gross customer loss rate of about 15% to 16%, offset by customer
gains of approximately 10% yearly. Customer losses are the result of various
factors, including customer relocations, supplier changes, natural gas
conversions and credit problems. There can be no assurance that Petro will be
able to maintain or reduce its customer net attrition rate in the future.
Petro Cannot Grow Unless It Makes Acquisitions on Economically Acceptable
Terms
The home heating oil industry is not a growth industry because of increased
competition from alternative energy sources. Petro's growth in the past decade
has been directly tied to the success of its acquisition program. Its future
financial performance will depend on its ability to continue to make
acquisitions at attractive prices. There is no assurance that Petro will be
able to continue to make acquisitions or to do so on economically acceptable
terms. If Petro is able to make acquisitions, there is no assurance that they
will be profitable, or that any additional debt will not offset the cash
generated. Petro must comply with certain covenants in certain agreements that
restrict its ability to incur debt to finance acquisitions. Factors that may
adversely affect Petro's operating and financial results may also limit
Petro's access to capital and its acquisition activities.
Petro Could Experience Oil Price Increases That May Affect Its Operations
During periods of sudden and sharp increases in the supply cost of home
heating oil, such as those experienced during 1996, Petro may be unwilling or
unable to pass the entire increase in costs on to its customers. This may
reduce gross profit margins. Price increases that continue over a long period
of time may be passed on to customers, which could reduce demand by
encouraging conservation or conversion to alternative energy sources. If
demand were reduced and Petro was unable to increase its gross profit margin
or reduce its operating expenses, the decrease in volume would adversely
affect Petro's operating results.
22
<PAGE>
The Home Heating Oil Business Is Highly Competitive
Petro competes with heating oil distributors offering a broad range of
services and prices, from full service distributors, like Petro, to those
offering delivery only. Competition with other companies in the home heating
oil industry is based primarily on customer service and price. Long-standing
customer relationships are typical in the industry. It is customary in this
business for companies to deliver home heating oil to their customers based
upon weather conditions and historical consumption patterns, without the
customer making an affirmative purchase decision. Most companies provide home
heating equipment repair service on a 24-hour per day basis. In some cases,
homeowners have formed buying cooperatives that seek to purchase fuel oil from
distributors at a price lower than individual customers are otherwise able to
obtain. As a result of these factors, it may be difficult for Petro to acquire
new retail customers.
Petro also competes for customers with suppliers of alternative energy
products, principally natural gas. Petro could face additional price
competition from alternative heating sources such as electricity and natural
gas as a result of deregulation in those industries. Over the past five years,
conversions by Petro's customers from heating oil to other sources have
averaged approximately 1% per year of the homes it serves. This conversion
trend is not entirely within Petro's control, and it may worsen.
Petro Is Subject to Operating and Litigation Risks That May Not Be Insured
Petro's operations, like those of the Partnership, are subject to all
operating hazards and risks incidental to providing customers with combustible
liquids such as home heating oil. As a result, in the ordinary course of
business, Petro may be a defendant in litigation. Petro maintains insurance
policies in the amounts and with coverages and deductibles as it believes are
reasonable. However, there can be no assurance that this insurance will be
adequate to protect Petro from all expenses related to potential future claims.
Petro Is Subject to Governmental Regulation and Could Have Significant Costs
With Respect to Environmental and Other Regulatory Matters
Petro's business is subject to federal and state laws and regulations related
to a wide range of environmental and other regulatory matters. Petro has
implemented environmental programs and policies designed to avoid potential
liability and cost under applicable environmental laws. It is possible,
however, that Petro will have increased costs due to stricter pollution control
requirements or liabilities resulting from non-compliance with operating or
other regulatory permits. New environmental regulations might adversely impact
Petro's operations, including underground storage and transportation of home
heating oil. In addition, the environmental risks inherently associated with
Petro's home heating oil operations, such as the risks of accidental release or
spill, are greater than those associated with the Partnership's propane
operations. It is possible that material costs and liabilities will be
incurred, including those relating to claims for damages to property and
persons.
No Dissenters', Appraisal or Similar Rights for Non-consenting Common
Unitholders
Under applicable Delaware law and the terms of the partnership agreement,
common unitholders will have no dissenters', appraisal or similar rights in the
transaction, nor will the Partnership
23
<PAGE>
voluntarily accord those rights to them. If a majority of common unitholders
approve each of the proposals, then all common unitholders will be bound, even
if they may have voted against them. Therefore, common unitholders who dissent
from the proposals submitted to the common unitholders for approval will not be
entitled to receive cash payment from the Partnership for the fair value of
their common units. See "Dissenters' Rights".
Petro Could Experience Oil Supply Interruptions
While substantially all of Petro's home heating oil supply in recent years
has been from North American sources, it is possible that disruptions in the
supply of crude oil from foreign sources will adversely affect Petro's home
heating oil business.
TAX RISKS TO COMMON UNITHOLDERS
Taxes Payable By Petro Will Reduce Distributions
The transaction will result in income to Petro equal to the difference in the
value of the units distributed in the merger (including the amount of any debt
Petro is relieved of) and the federal income tax basis Petro has in those
units. Petro expects that its net operating losses ("NOLs") will generally
offset this income and Petro will incur only nominal tax. The IRS could
challenge the amount of Petro's net operating losses and the use of the net
operating losses to offset income realized in the transaction. A successful
challenge could reduce the cash available for distribution by the Partnership.
Although Petro and its corporate affiliates do not expect to pay significant
federal income tax for several years following the transaction, over time the
amount of federal income taxes paid by Petro and its corporate affiliates will
increase, and this will also reduce the amount of cash that the Partnership can
distribute to unitholders. A successful IRS challenge to the deduction of
depreciation or interest on certain debt will increase the Partnership/Petro
corporate group's tax liability and this will reduce the Partnership's ability
to distribute cash to unitholders.
Although Petro believes that the Partnership/Petro corporate group will not
pay significant federal income tax for several years, Petro expects the related
entities to generate earnings and profits during that time making that a
portion of the distributions from the entities to the Partnership taxable
dividend income to the unitholders. This dividend income cannot be offset by
past or future losses generated by the Partnership's propane activities.
Ratio of Taxable Income to Distributions Will Increase
The portion of the cash distributions that constitute taxable income to
unitholders will increase at a greater rate if the transaction occurs. For
example, the general partner estimates that a holder of a common unit issued in
the initial public offering would be allocated, in the aggregate, no net
passive income and less than $0.05 per unit per year of portfolio income
through December 31, 2004 if the transaction is not completed. In contrast, if
the transaction is completed the general partner estimates that the same holder
would instead be allocated, in the aggregate, no net passive income and
approximately $.20 per unit per year of portfolio income through December 31,
2002. In either case, the taxable income allocated to a common unitholder after
either date will constitute an increasingly higher percentage of cash
distributed to him. Furthermore, distributions that are in excess of the
minimum quarterly distribution will increase the portion of each cash
distribution that
24
<PAGE>
constitutes taxable income to an existing common unitholder. However, the
transaction will have different tax effects on different common unitholders,
depending on when they purchased their units.
RISKS TO COMMON STOCKHOLDERS
The Petro board of directors urges common stockholders to carefully consider
each of the factors set forth below.
Conflicts Were Present in Structuring the Transaction
Certain directors of Petro have interests that are different from, and in
conflict with, the interests of the Petro public common stockholders.
Senior Subordinated Unitholders Are Not Assured of Receiving Cash
Distributions
Petro public common stockholders will receive senior subordinated units in
exchange for their shares of common stock. During the subordination period,
which generally cannot end before October 1, 2002, no distributions of cash for
any quarter may be made on the senior subordinated units until the common units
have received the minimum quarterly distribution, plus any arrearages on those
common units. In addition to receiving distributions after the common units,
the senior subordinated units will not receive distributions unless the
Partnership generates sufficient amounts of cash. The amount that may be paid
for the quarters ending June 30, 1999 and September 30, 1999 depends on whether
the combined results of the Partnership and Petro exceed certain financial
benchmarks. Beginning with the quarter ending on December 31, 1999, the amount
of distributions depends upon the amount of available cash generated by the
Partnership after October 1, 1999. At no time do senior subordinated units
accrue distribution arrearages. There can be no assurance that the Partnership
will generate sufficient cash to make distributions on the senior subordinated
units. In addition, there can be no assurance that the Partnership will ever
meet the tests that must be satisfied to end the subordination period.
Accordingly, there can be no assurance that the senior subordinated units will
ever convert to Class B common units. Furthermore, there can be no assurance
that Petro will meet the financial tests necessary for additional senior
subordinated units to be issued to the holders of senior subordinated units.
Cash Distributions Are Not Guaranteed and May Fluctuate with Partnership
Performance
Although generally the Partnership distributes all its available cash to
unitholders, there is no assurance regarding the amounts of cash it will
generate. Cash distributions on the senior subordinated units will not be
guaranteed and may fluctuate based on the performance of the Partnership. The
actual amount of cash that is available will depend upon numerous factors,
including profitability of operations, required principal and interest payments
on debt, the cost of acquisitions, issuance of debt and equity securities,
fluctuations in working capital, capital expenditures, adjustments in reserves,
prevailing economic conditions and financial, business and other factors. Some
of these factors are beyond the control of the general partner.
The partnership agreement gives the general partner discretion in
establishing reserves for the proper conduct of the Partnership's business.
These reserves will also affect the amount of cash available for distribution.
The general partner may establish reserves for distributions on the senior
25
<PAGE>
subordinated units only if those reserves will not prevent the Partnership
from distributing the full minimum quarterly distribution, plus any
arrearages, on the common units for the following four quarters. Cash
distributions are dependent primarily on cash flow and reserves, and not on
profitability, which is affected by non-cash items. Thus, at certain times,
cash distributions may be made during periods when the Partnership records
losses, and may not be made when the Partnership records profits. In addition,
the Partnership is required to establish reserves for the future payment of
principal and interest on certain debt instruments. The notes issued in the
debt offering by Petro and the guarantee of those notes by the Partnership may
have certain restrictions that will require cash reserves. As a result of
these and other factors, the Partnership can give no assurance regarding the
actual levels of cash distributions.
The amount of cash needed to pay the minimum quarterly distribution for four
quarters on units outstanding immediately after the transaction is
approximately $33.1 million ($24.7 million for the common units, $6.4 million
for the senior subordinated units, $1.3 million for the junior subordinated
units and $0.7 million for the general partner units). After giving pro forma
effect to the transaction, the amount of available cash generated in the
twelve months ended September 30, 1998 would have been about $18.7 million. If
certain infrequent restructuring, corporate identity and transaction expenses
were not taken into effect, pro forma cash available for distribution would
have been $22.9 million.
There Is No Active Trading Market in, and Uncertainty Regarding Market Prices
of, Senior Subordinated Units
At present there is no trading market for the senior subordinated units.
Although an application has been approved to list the senior subordinated
units on the NYSE there can be no assurance that an active trading market will
develop after the transaction. The Petro board of directors believes
that senior subordinated units will likely trade at a discount to the price
per common unit. The actual trading price of the senior subordinated units
will depend on a variety of factors, including market conditions for
securities of publicly-traded limited partnerships, the trading price of the
common units, weather conditions and the cash generated by the Partnership.
There can be no assurance that holders of senior subordinated units will be
able to sell their units at favorable prices. After the transaction, if a
number of former common stockholders sell their senior subordinated units, the
trading price of the senior subordinated units could decline significantly.
The Partnership Has Substantial Indebtedness That May Affect its Ability to
Make Distributions and Operations
Although it has less debt than Petro, after the transaction, the Partnership
will have debt that is substantial compared to its partners' capital.
Principal and interest payable on this debt will reduce cash available to make
distributions on the common units. Under certain circumstances, the terms of
the Partnership's debt instruments, including the senior subordinated notes
issued in the debt offering, will limit its ability to distribute cash to
common unitholders and to borrow additional funds. The limitations and
restrictions in new debt we issue may be more restrictive than those in our
current indebtedness. In addition, some of the Partnership's debt is secured
by its assets. If the Partnership defaulted on this secured debt, the lenders
could institute foreclosure proceedings to seize its assets.
26
<PAGE>
Any attempt to stay these foreclosure actions by seeking to reorganize under
the federal Bankruptcy Code would have a material adverse effect on the
Partnership and the common unitholders.
The Partnership Has Debt With Change of Control Provisions
After the completion of the transaction, it is expected that the debt
instruments of the Partnership and Petro will contain provisions relating to a
"change of control." Neither party is restricted from entering a transaction
that would trigger the change of control provisions. If these change of
control provisions are triggered, some of the outstanding debt may become due.
It is possible that the Partnership or Petro will not have sufficient funds at
the time of any change of control to make the required payments on its debt or
that restrictions in its other debt instruments will not permit those
payments. In some instances, lenders would have the right to foreclose on the
Partnership's or Petro's assets if debt payments were not made upon a change
of control.
The General Partner Manages and Operates the Partnership; Holders of Units
Have Limited Voting Rights
The general partner manages and operates the Partnership and Star Gas
Propane, L.P. Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting the Partnership's
business. Unitholders have no right to elect the general partner on an annual
or other continuing basis. The general partner generally may not be removed
unless approved by the holders of 66 2/3% of the outstanding units voting
together as a single class (except those of the general partner and its
affiliates). As a result, unitholders have only limited influence on matters
affecting the operation of the Partnership, and it would be difficult for
third parties to control or influence the Partnership. Although the
partnership agreement provides that the general partner may not (with certain
exceptions) transfer its general partner units to another person prior to
December 31, 2005 unless approved by a unit majority, the members of Star Gas
LLC may transfer their limited liability company interests in Star Gas LLC to
a third party at any time without the approval of the unitholders.
Unlike the holders of common units, the holders of senior subordinated units
do not have the right to approve the issuance of additional partnership
interests under any circumstances. Furthermore, the matters on which the
senior subordinated units may vote require the approval of a unit majority.
During the subordination period, a unit majority means at least a majority of
the common units (except those of the general partner and its affiliates) and
at least a majority of the senior subordinated units and junior subordinated
units voting as a single class. Thus, there may be matters that are approved
by a majority of the senior subordinated units but that are nevertheless not
adopted because either too few junior subordinated units approved or a
majority of the common units did not approve.
The Partnership May Issue Additional Units Diluting the Percentage of
Ownership Interest of Existing Unitholders
After the transaction, the Partnership will have the authority to issue up
to 2,500,000 common units. In certain circumstances, it may also issue an
unlimited number of additional common, senior subordinated, and junior
subordinated units or other equity securities for the consideration and on the
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terms and conditions as are established by the general partner, in its sole
discretion without obtaining the approval of the unitholders. The issuance of
these additional units may dilute the interests of the existing unitholders
since they will own a smaller percentage of the Partnership.
The Partnership Agreement Contains Provisions That May Discourage a Change of
Management
The partnership agreement contains certain provisions that may discourage
attempts to remove an incumbent general partner or otherwise change the
management of the Partnership. These provisions may diminish the price at which
the senior subordinated units will trade under certain circumstances.
Reimbursement of General Partner Has Priority over Distributions
Before any distributions on the units, the Partnership will reimburse the
general partner for all expenses it has incurred on behalf of the Partnership.
Reimbursable expenses are determined by the general partner in its sole
discretion. In addition, the general partner may charge the Partnership
reasonable fees for services. The reimbursement of those expenses and the
payment of those fees could adversely affect the ability of the Partnership to
make distributions.
The General Partner and the Partnership Will Have a Limited Call Right with
Respect to the Units
If at any time less than 20% of the outstanding units of any class are held
by persons other than the general partner and its affiliates, the general
partner has the right to acquire all, but not less than all, of those units
held by the unaffiliated persons. The price for these units will generally
equal the then-current market price of the units. The general partner may
assign this acquisition right to any of its affiliates or the Partnership. As a
consequence, a holder of units may be required to sell these units at an
undesirable time or price. Also, after the subordination period ends, if the
Partnership acquires more than 66 2/3% of the Class B common units in a
twelve-month period, then the Partnership will have a call right that is
similar to that of the general partner described above.
Unitholders May Not Have Limited Liability in Certain Circumstances
A number of states have not clearly established limitations on the liability
of limited partners for the obligations of a limited partnership. If it were
determined that the Partnership had been conducting business in any state and
had failed to comply with the applicable limited partnership statute, or that
the rights or exercise of the rights by the limited partners as a group
pursuant to the partnership agreement constituted participation in the
"control" of the Partnership, then a unitholder might be held liable to the
same extent as the general partner for the Partnership's obligations.
Petro Common Stockholders Will Have Fewer Rights as Unitholders
After the transaction, the common stockholders will lose their rights as
stockholders in a Minnesota corporation, but will gain the rights of limited
partners in a Delaware limited partnership. Overall, the transaction probably
will result in a reduction in common stockholder's legal rights. For example,
while common stockholders currently have the right to elect directors,
unitholders do not have the right to elect the directors of the general
partner. A comparison of these changes in rights is described in "Comparison of
Securities."
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Weather Conditions Affect the Demand for Propane
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, retail propane sales are
directly affected by the severity of the winter weather. The highest sales
occur during the six-month peak heating season from October through March,
which period accounts for about 70% to 75% of total retail propane volume.
Weather conditions can vary substantially from year to year, significantly
affecting the Partnership's results of operations. For the fiscal year ended
September 30, 1998, temperatures were significantly warmer than normal for the
areas in which the Partnership sells propane. Weather variations also affect
demand for propane from agricultural customers, because dry weather during the
harvest season reduces demand for propane in crop drying. It is possible that
average temperatures in future years will be above historical averages.
The Partnership Could Experience Propane Price Increases It Cannot Pass on to
Its Customers
The retail propane business is a margin-based business in which gross profits
depend on sales prices over propane supply costs. Consequently, the
Partnership's profitability is sensitive to changes in wholesale and market
prices of propane. The Partnership has no control over these market conditions.
Thus when there are large or sudden increases in the supply costs of propane,
the Partnership may not be able to pass on these increases to its customers
through higher sales prices.
The Partnership Could Be Unable to Sell Inventory Profitably Due to Market
Volatility and/or Inflation
Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Partnership purchases propane from a variety of suppliers under supply
contracts and on the spot market. The major portion of propane purchased by the
Partnership (approximately 95% in fiscal 1998) is produced domestically. To the
extent that the Partnership purchases propane from Canadian sources
(approximately 5% in fiscal 1998), its propane business will be subject to
risks of disruption in foreign supply. The Partnership attempts to minimize
inventory risks by purchasing propane on a short-term basis. During periods of
low demand for propane, which generally occur during the summer months, the
Partnership has on occasion purchased large volumes of propane at lower-than-
market costs for storage in the Partnership's 21 million gallon Indiana
underground storage facility for future resale. Because of the potential
volatility of propane prices, the market price for propane could fall below the
price at which the Partnership purchased it, thereby adversely affecting gross
margin or rendering sales from inventory unprofitable. The Partnership may from
time to time engage in transactions such as options or fixed price contracts to
purchase propane to hedge product costs in an attempt to reduce cost
volatility. To date, the level of these activities has not been significant,
and the Partnership is not currently engaged in any of these transactions.
Inflation increases the Partnership's operating and administrative costs. The
Partnership attempts to limit the effects of inflation on its operations
through cost control efforts, productivity improvement and increases in gross
profit margins.
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The Partnership Is Dependent on Principal Suppliers
Historically, a substantial portion of the propane purchased by the
Partnership has originated in Mont Belvieu, Texas and has been shipped to the
Partnership through a major common carrier pipeline. Any significant
interruption in the service at Mont Belvieu or on the common carrier pipeline
could have a material adverse effect on the business of the Partnership.
Although the Partnership believes that alternative sources of propane are
readily available, if the Partnership were unable to purchase propane from its
usual sources, the failure to obtain alternate sources at competitive prices
and on a timely basis could have a material adverse effect on the Partnership.
The Retail Propane Business Is Highly Competitive
Many of the Partnership's competitors and potential competitors are larger or
have substantially greater financial resources than the Partnership, which may
provide them with certain advantages. Competition within the propane
distribution industry stems primarily from three types of participants: larger,
multistate marketers; smaller, local independent marketers; and farm
cooperatives. Generally, competition in the past few years has intensified,
partly as a result of warmer-than-normal weather and general economic
conditions. Most of the Partnership's propane retail branch locations compete
with five or more marketers or distributors. Each branch location operates in
its own competitive environment, as retail marketers are typically located in
close proximity to their customers to lower the cost of providing service. The
principal factors influencing competition with other retail marketers are
price, reliability and quality of service, responsiveness to customer needs and
safety concerns. The Partnership can make no assurances that it will be able to
compete successfully on the basis of these factors. If a competitor attempts to
increase market share by reducing prices, the Partnership's operating results
and financial condition could be materially and adversely affected. Competition
from alternative energy sources has been increasing as a result of reduced
regulation of many utilities, including natural gas and electricity.
As a result of long-standing customer relationships that are typical in the
retail home propane industry, the inconvenience of switching tanks and
suppliers and the lack of growth in the industry, the Partnership's propane
business experiences difficulty in acquiring new retail customers (other than
through acquisitions).
The Partnership Cannot Grow Unless It Makes Acquisitions on Economically
Acceptable Terms
The propane business is mature and total demand is expected to remain
relatively flat or to decline slightly. The Partnership's future financial
performance will depend on its ability to make acquisitions at attractive
prices. Growth strategy continues to be focused on the acquisition of
complementary businesses. The Partnership cannot assure that it will be able to
identify attractive acquisition candidates in the future or to acquire them on
economically acceptable terms. In particular, competition for acquisitions in
the propane business has intensified and become more costly in recent years.
Factors that may adversely affect operating and financial results, such as warm
weather patterns, may limit the Partnership's access to capital and adversely
affect its ability to make acquisitions. Any acquisition will also involve
potential risks, including an increase in debt; the inability to integrate the
acquired business; excessive expenses of the acquisition; diversion of
management's attention; and potential loss of the acquired business' key
employees. In addition,
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acquisitions may be dilutive to earnings and any additional debt incurred to
finance acquisitions may affect the Partnership's ability to make distributions
to the unitholders.
The Partnership Is Subject to Operating and Litigation Risks That May Not Be
Insured
The Partnership's operations are subject to all operating hazards and risks
incidental to providing consumers with combustible liquids such as propane.
Thus, in the ordinary course of business, the Partnership may be a defendant in
litigation. The Partnership maintains insurance policies in the amounts and
with the coverages and deductibles as the general partner believes are
reasonable. However, there can be no assurance that this insurance will be
adequate to protect the Partnership from all material expenses related to
potential future claims.
The General Partner Has Conflicts of Interest and Limited Fiduciary
Responsibilities
The general partner and its affiliates may have conflicts of interest with
the Partnership and its limited partners. The partnership agreement contains
provisions that limit the general partner's liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of fiduciary
duty. Unitholders are deemed to have consented to certain actions and conflicts
of interest that might otherwise be deemed a breach of fiduciary or other
duties under applicable state law. The availability of cash for distributions
to unitholders is affected by decisions of the general partner with respect to
the amount of and timing of asset purchases and sales, cash expenditures,
borrowings, issuances of additional units and the creation, reduction or
increase in reserves.
Except for Irik P. Sevin, who is subject to a non-compete agreement regarding
the Partnership's propane and heating operations, the general partner's
affiliates are not be prohibited from engaging in other businesses or
activities, including direct competition with the Partnership. There can be no
assurance that there will not be competition between the Partnership and
affiliates of the general partner.
TAX RISKS TO COMMON STOCKHOLDERS
There Are Risks Involving Tax Treatment of the Merger
The transaction will be taxable to a common stockholder, generally resulting
in gain or loss in an amount equal to the difference between the value of the
senior subordinated units he receives and the federal income tax basis he has
in the shares he exchanges. Any gain or loss will be capital gain or loss if
the stock has been held as a capital asset, and will be long-term capital gain
or loss if held for more than one year. Long-term capital gains are generally
taxed at a maximum rate of 20%. Capital losses can be deducted against capital
gains and thereafter against ordinary income to the extent of $3,000 per year
for individuals. Any unused capital loss can be carried forward indefinitely.
The transaction will also result in income to Petro equal to the difference
in the value of the units it distributes (including the amount of any debt
Petro is relieved of) and the federal income tax basis Petro has in the units.
Petro expects that its net operating losses will generally offset this income,
however, the IRS could challenge the amount or use of the net operating losses
and a successful challenge could reduce the cash available for distribution by
the Partnership.
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Tax Treatment Is Dependent on Partnership Status
The federal income tax benefits of an investment in the Partnership depend
largely on the Partnership's classification as a partnership for federal income
tax purposes. Assuming the accuracy of certain factual matters represented as
true by the general partner and the Partnership, counsel is of the opinion that
the Partnership has been and will be classified as a partnership for federal
income tax purposes. No ruling from the IRS as to classification has been or is
expected to be requested. Instead, the Partnership intends to rely on the
opinion of counsel, which is not binding on the IRS. Based on the
representations of the Partnership and the general partner and a review of
applicable legal authorities, counsel is also of the opinion that at least 90%
of the Partnership's gross income is "qualifying income," within the meaning of
Section 7704 of the Internal Revenue Code of 1986, as amended. This means that
the Partnership's income is derived from the exploration, development, mining
or production, processing, refining, transportation or marketing of any mineral
or natural resource or other items. Whether the Partnership will continue to be
classified as a partnership depends, at least partly, on the Partnership's
ability to continue to meet this qualifying income test in the future.
If the Partnership were classified as an association taxable as a corporation
for federal income tax purposes, the Partnership would pay tax on its income at
corporate rates (currently a 35% federal rate), distributions would generally
be taxed again to the unitholders as corporate distributions, and no income,
gains, losses and deductions would flow through to the unitholders. Because a
tax would be imposed upon the Partnership as an entity, the cash available for
distribution to unitholders would be substantially reduced. Treatment of the
Partnership as an association that is taxable as a corporation or otherwise as
a taxable entity would result in a material reduction in the anticipated cash
flow and after-tax return to the unitholders, likely causing a substantial
reduction in the market value of the units.
There can be no assurance that the law will not change so as to cause the
Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The partnership agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity-level taxation for income tax purposes, then certain provisions of
the partnership agreement are subject to change, including a decrease in
distribution to reflect the impact of that law on the Partnership.
No IRS Ruling with Respect to Tax Consequences Leaves Uncertainty
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane activities generate "qualifying income" under Section
7704 of the Internal Revenue Code or any other matter affecting the
Partnership. Accordingly, the IRS may adopt positions different from counsel's
conclusions expressed herein. It may be necessary to resort to administrative
or court proceedings to sustain some or all of counsel's conclusions, and these
conclusions may ultimately not be sustained. Any such contest with the IRS
might materially and adversely impact the market value of the units. In
addition, the costs of any contest with the IRS will be borne directly or
indirectly by some or all of the unitholders and the general partner.
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Risk of Tax Liability Exceeding Cash Distributions
A unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Partnership's
income, whether or not he receives cash distributions from the Partnership. No
assurance can be given that a unitholder will receive cash distributions equal
to his allocable share of taxable income of the Partnership or even equal to
the actual tax liability that results from this allocable share of income.
Further, upon the sale of his units, a unitholder may incur a tax liability in
excess of the amount of cash he receives.
Ownership of Units Raises Issues for Tax-Exempt Organizations and Certain
Other Investors
Investment in units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to these persons. For
example, for any unitholder that is an organization exempt from federal income
tax (including IRAs and other retirement plans), virtually all of the
unitholder's allocable share of taxable income in the first few years will
constitute unrelated business taxable income and thus will be taxable to this
unitholder. A significant portion of the Petro common stockholders may,
therefore, find it necessary or advisable to sell the senior subordinated units
they acquire in the transaction, possibly driving down the market price of
those units.
There Are Limits on Deductibility of Losses
For any taxpayers who are subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership
will only be available to offset future passive income generated by the
Partnership and cannot be used to offset income from other activities,
including passive activities or investments or interest and dividend income
generated by the Partnership. Passive losses that are not deductible because
they exceed the unitholder's share of income of the Partnership may be deducted
in full when the unitholder disposes of his entire investment in the
Partnership in a fully taxable transaction with an unrelated party. Net passive
income from the Partnership may be offset by unused Partnership losses carried
over from prior years, but not by losses from other passive activities,
including losses from other publicly traded companies.
Tax Shelter Registration Could Increase Risk of Potential IRS Audit
The Partnership is registered with the Secretary of the Treasury as a "tax
shelter." The IRS has issued the following tax shelter registration number to
the Partnership: 96026000016. The Partnership cannot assure unitholders that it
will not be audited by the IRS or that adjustments to its income or losses will
not be made. Any unitholder owning less than a 1% profit interest in the
Partnership has very limited rights to participate in the income tax audit
process. Further, any adjustments in the Partnership's tax returns will lead to
adjustments in the unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to the Partnership.
Each unitholder is responsible for any tax owed as the result of an examination
of his personal tax return.
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There is a Possibility of Loss of Tax Benefits Relating to Non-Uniformity of
Units and Non-Conforming Depreciation Covenants
Because the Partnership cannot match transferors and transferees of units and
because of other reasons, the Partnership has adopted certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful IRS challenge to those
conventions could adversely affect the amount of tax benefits available to a
purchaser of units and could have a negative impact on the value of the units.
Tax Gain or Loss on Disposition of Units Could Be Different Than Expected
A unitholder who sells units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in these units. Thus, prior
Partnership distributions in excess of cumulative net taxable income
attributable to a unit that decreased a unitholder's tax basis in this unit
will, in effect, become taxable income if the unit is sold at a price greater
than the unitholder's tax basis in this unit, even if the price is less than
his original cost. A portion of the amount realized (whether or not
representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions used by the Partnership, a unitholder
could realize more gain on the sale of units than would be the case if the
conventions were used, without the benefit of decreased income in prior years.
Reporting of Partnership Tax Information Is Complicated and Subject to Audits
The Partnership will furnish each unitholder with a Schedule K-1 that sets
forth his allocable share of income, gains, losses and deductions for each
year. In preparing these schedules, the Partnership will use various accounting
and reporting conventions and adopt various depreciation and amortization
methods. There is no assurance that these schedules will yield a result that
conforms to statutory or regulatory requirements or to administrative
pronouncements of the IRS. Further, the Partnership's tax return may be
audited, and any audit of this type could result in an audit of a partner's
individual tax return as well as increased liabilities for taxes because of
adjustments resulting from the audit.
There Are State, Local and Other Tax Considerations
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Partnership does business or owns property. A
unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various
jurisdictions in which the Partnership does business or owns property and may
be subject to penalties for failure to comply with those requirements. The
general partner anticipates that substantially all of the Partnership's income
will be generated in the following states: Connecticut, Indiana, Kentucky,
Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island and West Virginia; however, New Hampshire's tax only
applies to interest and dividend income. Each of these states currently imposes
a personal income tax. It is the responsibility of each unitholder to file all
United States federal, state and local tax returns that may be required of him.
Counsel has not rendered an opinion on the state or local tax consequences of
ownership or sale of units.
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PARTIES AND CONFLICTS
PARTIES TO THE TRANSACTION
The Partnership and the Operating Partnership
The Partnership is a publicly-traded Delaware limited partnership formed in
1995 to acquire and operate the propane business of Star Gas Corporation ("Star
Gas") and Petro. The Partnership's activities are conducted through Star Gas
Propane, L.P., a Delaware Corporation (the "Operating Partnership") and a
corporate subsidiary. Except as the context otherwise requires, references to
or descriptions of operations of the Partnership include the operations of the
Operating Partnership and any other subsidiary operating partnership or
corporation.
The Partnership is primarily engaged in the retail distribution of propane
and related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers. The Partnership believes that it is the
eighth largest retail propane distributor in the United States, serving
approximately 166,000 customers from 74 branch locations in the Midwest and
Northeast, with total sales on a pro forma basis of approximately $116.1
million for the fiscal year ended September 30, 1998. Propane is used primarily
as fuel for space and water heating and cooking by the Partnership's
residential and commercial customers, which customers constitute the largest
portion of the Partnership's customer base. In the Midwest, the Partnership
services customers in Indiana, Kentucky, Michigan, Ohio and West Virginia. In
the Northeast, the Partnership services customers in Connecticut, Maine,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania and Rhode
Island. In addition to its retail business, the Partnership serves
approximately 50 wholesale customers from its wholesale operation in southern
Indiana. For the fiscal year ended September 30, 1998, approximately 80% of the
Partnership's sales (by volume of gallons sold) were to retail customers (of
which approximately 56%, 18%, 19% and 7% were sales to residential customers,
industrial/commercial customers, agricultural customers and motor fuel
customers, respectively) and approximately 20% were to wholesale customers.
Residential sales have a greater profit margin and a more stable customer
base and tend to be less sensitive to price changes than the other markets
served by the Partnership. Sales to residential customers for fiscal 1998
accounted for 66% of the Partnership's gross profit on propane sales,
reflecting the higher-margin nature of this segment of the retail market.
The Partnership's business strategy is to maximize its cash flow and
profitability, primarily through (1) internal growth, (2) controlling operating
costs and (3) acquisitions that have the potential for generating attractive
returns on investment. The retail propane industry is mature, experiences only
limited growth in total demand for the product and is large and highly
fragmented, with approximately 6,000 independently owned and operated
distributors. Given these characteristics, the Partnership's acquisition
strategy is focused on acquiring smaller to medium-sized local and regional
independent propane distributors, particularly those with a relatively large
percentage of residential customers, which generate higher margins than other
types of customers, and those located in the Midwest and Northeast, where the
Partnership believes it can attain higher margins than in other areas of the
United States.
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To facilitate the Partnership's acquisition strategy, the Operating
Partnership has bank credit facilities, which consist of a $25 million
acquisition facility and a $12 million working capital facility (collectively,
the "Bank Credit Facilities"). As of September 30, 1998, $9.0 million was
outstanding under the Acquisition Facility and $14.8 million under the Working
Capital Facility. In addition to borrowings under the Bank Credit Facilities,
the Partnership may fund future acquisitions from internal cash flow or from
the issuance of additional Partnership interests or debt securities.
While the Partnership regularly considers and evaluates acquisitions as part
of its ongoing acquisition program, the Partnership does not have any present
agreements or commitments with respect to any material acquisition other than
the Transactions undertaken to facilitate the acquisition of Petro (the
"Transaction"). Star Gas LLC (the "General Partner") has broad discretion in
making acquisitions and it is expected that the General Partner will not
generally seek approval by the Partnership's limited partners of acquisitions.
See "Risk Factors."
For information concerning weather conditions, and other factors that could
adversely affect the Partnership's operations, see "Risk Factors--Risks to
Common Stockholders--Weather Conditions Affect the Demand for Propane."
Additional information about the Partnership is included in the Partnership's
Annual Report on Form 10-K for its fiscal year ended September 30, 1998 and the
other documents relating to the Partnership that are incorporated herein by
reference. See "Incorporation of Certain Documents By Reference."
Petro
Petro is a Minnesota corporation engaged primarily in the retail distribution
of home heating oil in the Northeast and Mid-Atlantic states. Petro serves
approximately 340,000 customers from 24 branch locations including metropolitan
Boston, New York City, Baltimore, Providence, and Washington, D.C., with total
sales on a pro forma basis of approximately $450.1 million for the twelve
months ended September 30, 1998. Petro believes that it is the largest retail
distributor of home heating oil in the United States. As an adjunct to its
heating oil business, Petro installs and repairs heating equipment. Petro
considers these services, which are typically not designed to generate profits,
to be an integral part of its basic fuel oil business and generally does not
provide service to any person who is not a home heating oil customer. To a
limited extent, Petro also markets other petroleum products, including diesel
fuel and gasoline, to commercial customers. In addition, through Star Gas,
Petro has a 40.5% equity interest in the Partnership.
The home heating oil industry is large, highly fragmented and undergoing
consolidation, with approximately 3,700 independently owned and operated home
heating oil distributors in the Northeast. Petro has been the principal
consolidator in this industry and, since 1979, when Petro's current management
assumed control, has acquired over 180 retail heating oil distributors. Petro
acquires distributors in both new and existing markets and integrates them into
the existing operations. Economies of scale are realized from these purchases
through its centralization of accounting, data processing, fuel oil purchasing,
credit and marketing functions. Petro is well known in the heating oil industry
and is regularly contacted by potential sellers. As a result of its growth
strategy, heating oil sales volume increased from 59.4 million gallons in 1980
to 410.3 million gallons for the year ended December 31, 1997, a compound
annual growth rate of 12%. Despite its size, Petro estimates that its customer
base represents only approximately 5% of the residential home heating oil
customers in the Northeast.
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Petro has been implementing an operational restructuring program, including a
"brand name" identity program to, among other things, reduce customer attrition
and improve operating margins.
Following the completion of the Transaction, Petro will operate as a wholly-
owned indirect subsidiary of the Operating Partnership.
Additional information about Petro is included in Petro's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and other documents
relating to Petro that accompany this proxy statement. See "Incorporation of
Certain Documents By Reference."
CONFLICTS OF INTEREST
Certain Persons Have Interests in the Transaction that Conflict, or May be
Perceived to Conflict, with the Interests of Common Stockholders and Common
Unitholders
Star Gas, the current general partner of the Partnership, is a wholly-owned
subsidiary of Petro. Petro also owns all the currently outstanding subordinated
units representing limited partner interests ("Subordinated Units") of the
Partnership. All of the directors of Star Gas are also directors or officers of
Petro, except the members of a special committee (the "Special Committee"),
consisting of the two members of the Star Gas Corporation board of directors
("Star Gas Board") who are neither officers, directors, nor employees of Petro.
As a result, the members of the Star Gas Board who are also members of the
Petro board of directors (the "Petro Board") have conflicting fiduciary duties
to the holders ("Common Unitholders") of the common units of limited partner
interests (the "Common Units") of the Partnership, Petro and its holders (the
"Common Stockholders") of Class A Common Stock and Class C Common Stock
(collectively, the "Common Stock"). Certain members of the Star Gas Board have
interests that are different from, and in conflict with, the interests of its
Common Unitholders.
Prior to Petro's acquisition of Star Gas, Star Gas engaged Nicoletti &
Company Inc., an investment banking firm owned by William P. Nicoletti, a
member of the Special Committee, to perform certain investment banking services
for Star Gas. Pursuant to this engagement, Star Gas paid Nicoletti & Company
Inc. fees of $40,000, $521,500 and $81,600 for services rendered during 1992,
1993 and 1994, respectively. In 1995, Star Gas paid Nicoletti & Company Inc.
$20,000 in advisory fees for a proposed acquisition. In 1997, Star Gas paid Mr.
Nicoletti $20,000 for serving on the Special Committee which explored the
possible sale or merger of the Partnership. In 1998, Star Gas paid Mr.
Nicoletti $40,000 for serving on the Board of Directors Special Committee which
explored the business combination with Petro.
Elizabeth K. Lanier, a member of the Special Committee, was a partner in the
law firm of Frost & Jacobs, in Cincinnati, Ohio until June 1996. Frost & Jacobs
has acted as counsel to Star Gas in certain litigation matters. In 1997, Star
Gas paid Ms. Lanier $20,000 for serving on the Board of Directors Special
Committee which explored the possible sale or merger of the Partnership. In
1998, Star Gas paid Ms. Lanier $40,000 for serving on the Special Committee
which explored the business combination with Petro.
The officers and directors of Star Gas will be indemnified, to the extent
permitted by law, for any and all actions taken in the Transaction and they are
also covered by customary directors' and officers' liability insurance. Each
member of the Star Gas Board will be a member of the board of directors of Star
Gas LLC (the "Star Gas LLC Board") following the Transaction, except that, at
her request, one of the current Star Gas directors will withdraw after the
Transaction as a result of
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additional duties associated with a new job. That director will be replaced by
a director selected by the Star Gas LLC Board, and the new director will not be
an officer or employee of Star Gas LLC or any of its affiliates. The current
officers of Star Gas will be employed as officers of the Operating Partnership
following the Transaction.
Certain directors of Petro have interests in the Transaction that are
different from, and in conflict with, the interests of the Common Stockholders
who are not directors, officers or affiliates of Petro (the "Public Common
Stockholders"), since certain directors and their affiliates are receiving
consideration that is different from that of the Public Common Stockholders.
All directors and executive officers of Petro have interests in the
Transaction, in addition to their interests as Common Stockholders, and they
are exchanging their Common Stock in a tax-free exchange, whereas the Public
Common Stockholders, must exchange their shares in a taxable transaction. These
directors and their affiliates will be exchanging their Common Stock for Junior
Subordinated Units and General Partner Units, while the Public Common
Stockholders and certain other directors and other affiliates will be receiving
Senior Subordinated Units.
The Junior Subordinated Units and General Partner Units will not be entitled
to distributions until the Senior Subordinated Units receive the Minimum
Quarterly Distribution. The Senior Subordinated Units will be publicly traded
and have been approved for listing on the New York Stock Exchange. The Junior
Subordinated Units and General Partner Units have not been registered and will
not be publicly traded.
The affiliates exchanging their Common Stock for Junior Subordinated Units
and General Partner Units will receive .15909 of a Junior Subordinated Unit
or General Partner Unit for each share of Common Stock, whereas the remaining
Common Stockholders will exchange their shares for Senior Subordinated Units at
a ratio of .13064 of a Senior Subordinated Unit for each share of Common Stock.
The Transaction has been structured so that the Public Common Stockholders
will realize a taxable gain or loss on the Transaction, while substantially all
affiliates of Petro will exchange their Common Stock without realizing a
taxable gain or loss. This structure was designed to minimize the tax effect of
the Transaction on Petro. It was also based on the assumption that certain
Petro affiliates have a low tax basis and would prefer not realizing a taxable
gain on the Transaction, whereas Public Common Stockholders generally have a
higher tax basis and would prefer realizing a tax loss.
Irik P. Sevin is both the Chairman of the Board and Chief Executive Officer
of Petro and the Chairman of the Board of Star Gas; Audrey L. Sevin is the
Secretary and a director of both Petro and Star Gas; and Messrs. Paul
Biddelman, Thomas J. Edelman and Wolfgang Traber are directors of both Petro
and Star Gas. Messrs. Sevin, Biddelman, Edelman and Traber and Mrs. Sevin are
beneficial owners of Class A Common Stock and Class C Common Stock. As a
result, the members of the Petro Board who are also members of the Star Gas
Board have conflicting fiduciary duties to the Public Common Stockholders and
the Common Unitholders who are not directors, officers or affiliates of the
Partnership (the "Public Common Unitholders"). Therefore, certain members of
the Petro Board have interests that conflict with the interests of the Public
Common Stockholders.
The officers and directors of Petro will be indemnified, to the extent
permitted by law, for any and all actions taken in the Transaction. The current
officers of Petro will continue to be employed as officers following the
Transaction.
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Conflicts of Interest May Arise as a Result of the Publicly-Traded Limited
Partnership Structure
Certain conflicts of interest have arisen and could arise in the future as a
result of relationships between the General Partner and its affiliates, on the
one hand, and the Partnership or any of the partners, on the other hand. The
directors and officers of the General Partner have fiduciary duties to manage
the General Partner, including its investments in its subsidiaries and
affiliates, in a manner beneficial to its members. In general, the General
Partner has a fiduciary duty to manage the Partnership in a manner beneficial
to the Partnership and the Unitholders. The Amended and Restated Partnership
Agreement contains provisions that allow the General Partner to take into
account the interests of parties in addition to the Partnership in resolving
conflicts of interest, thereby limiting its fiduciary duty to the Unitholders.
It also restricts the remedies available to Unitholders for actions taken that
without those limitations, constitute breaches of fiduciary duty. The duty of
the directors and officers of the General Partner to the security holders of
the General Partner may, therefore, come into conflict with the duties of the
General Partner to the Partnership and the Unitholders. An audit committee of
the Star Gas LLC Board (the "Audit Committee"), consisting of two directors who
are not officers of the General Partner, will, at the request of the General
Partner, review conflicts of interest that may arise between the General
Partner or its affiliates, on the one hand, and the Partnership, on the other.
See "Management of the Partnership After the Transaction" and "--Fiduciary
Duties Owed to Unitholders by the General Partner as Prescribed by Law and the
Partnership."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act") that allow the fiduciary duties of a general partner to be
waived or restricted by a partnership agreement have not been resolved in a
court of law. Further, the General Partner has not obtained an opinion of
counsel covering the provisions in the Amended and Restated Partnership
Agreement that purport to waive or restrict fiduciary duties of the General
Partner. Common Unitholders should consult their own legal counsel concerning
the fiduciary responsibilities of the General Partner and its officers and
directors and the remedies available to the Common Unitholders.
Conflicts of interest could arise in the situations described below, among
others:
Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders or Accelerate the Right to Convert
Senior Subordinated Units and Junior Subordinated Units. The amount of cash
that is available for distribution to Unitholders is affected by decisions of
the General Partner regarding matters such as cash expenditures, participation
in capital expansions and acquisitions, borrowings, issuance of additional
Units and establishment of reserves. In addition, borrowings by the Partnership
do not constitute a breach of any duty owed by the General Partner to the
Unitholders, including borrowings that have the purpose or effect of causing
incentive distributions to be made, hastening the expiration of the
Subordination Period or the conversion of the Senior Subordinated and Junior
Subordinated Units into Class B Common Units. The Partnership Agreement
provides that the Partnership may borrow funds from the General Partner and its
affiliates although the General Partner and its affiliates may not borrow funds
from the Partnership. See "Risk Factors" and "Cash Distribution Policy."
Our Borrowings May Enable the General Partner to Permit Distributions on the
Senior Subordinated Units, Junior Subordinated Units and General Partner
Units. The General Partner generally must act as a fiduciary to us and the
Unitholders, and therefore must generally consider our
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best interests when deciding whether to make capital or operating expenditures
or take other steps with respect to our business. It is not a breach of the
General Partner's fiduciary duty under the Amended and Restated Partnership
Agreement if our borrowings are effected in a manner that, directly or
indirectly, enable the General Partner to permit the payment of distributions
on the Senior Subordinated Units, Junior Subordinated Units and General Partner
Units.
The Partnership Reimburses the General Partner and Its Affiliates for Certain
Expenses. Under the Partnership Agreement, the General Partner and its
affiliates are reimbursed by the Partnership for certain expenses incurred on
behalf of the Partnership, including costs incurred in providing corporate
staff and support services to the Partnership. The General Partner determines
the expenses that are allocable to the Partnership in any reasonable manner and
in its sole discretion. See "Management of the Partnership After the
Transaction--Reimbursement of Expenses of the General Partner."
The General Partner Intends to Limit Its Liability with Respect to the
Partnership's Obligations. The General Partner intends to limit the
Partnership's liability under contractual arrangements so that the other party
has recourse only as to all or particular assets of the Partnership, and not
against the General Partner or its assets. The Partnership Agreement provides
that any action taken by the General Partner to limit its liability or that of
the Partnership is not a breach of the General Partner's fiduciary duties, even
if the Partnership could have obtained more favorable terms without the
limitation on liability.
Unitholders Have No Right to Enforce Obligations of the General Partner and
Its Affiliates Under Agreements with the Partnership. The Partnership will
acquire services from, or provide certain services to, the General Partner and
its affiliates on an ongoing basis. The agreements relating to these
arrangements will not grant to the Unitholders, separate and apart from the
Partnership, the right to enforce the obligations of the General Partner and
its affiliates in favor of the Partnership. Therefore, the General Partner is
primarily responsible for enforcing these obligations.
Contracts Between the Partnership on the One Hand, and the General Partner
and Its Affiliates on the Other Will Not Be the Result of Arm's-Length
Negotiations. Under the terms of the Amended and Restated Partnership
Agreement, the General Partner is not restricted from paying the General
Partner or its affiliates for any services rendered (provided these services
are rendered on terms that are fair and reasonable to the Partnership) or
entering into additional contractual arrangements with any of them on behalf of
the Partnership. Neither the Amended and Restated Partnership Agreement nor any
of the other agreements, contracts and arrangements between the Partnership, on
the one hand, and the General Partner and its affiliates, on the other, are or
will be the result of arm's-length negotiations. All of these transactions
entered into are required to be on terms that are fair and reasonable to the
Partnership provided that any transaction shall be deemed fair and reasonable
if (1) the transaction is approved by the Audit Committee (although no party is
obligated to seek approval), (2) its terms are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (3) taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership), the transaction is
fair to the Partnership. The General Partner and its affiliates have no
obligation to permit the Partnership to use any facilities or assets of
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the General Partner and those affiliates, except as may be provided in
contracts entered into from time to time specifically dealing with that use,
nor is there any obligation of the General Partner and its affiliates to enter
into any of these contracts.
Units Are Subject to the General Partner's Limited Call Right. The General
Partner may exercise its right to call for and purchase Units as provided in
the Partnership Agreement or assign this right to its affiliates or to the
Partnership. The General Partner thus may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise that right. As
a consequence, a Unitholder may have his Units purchased from him even though
he may not desire to sell them, and the price paid may be less than the amount
the holder would desire to receive upon sale of his Units. For a description of
this right, see "The Amended and Restated Partnership Agreement--The General
Partner Limited Call Right on Outstanding Limited Partner Interests."
The General Partner's Affiliates May Compete with the Partnership. The
General Partner may not engage in any business or activity or incur any debts
or liabilities except in its duties associated with or incidental to (1) its
performance as general partner of the Partnership or its affiliates or (2) the
acquiring, owning or disposing of debt or equity securities of these entities.
In addition, Irik P. Sevin has an agreement with the Partnership which provides
that following the completion of the Transaction he will not engage in the
retail propane or retail home heating oil business in the United States so long
as he (a) is a director, officer or employee of the General Partner, the
Partnership or a subsidiary of the Partnership or (b) has access to information
that would put the Partnership at a competitive disadvantage. Further, so long
as Mr. Sevin and his mother, Ms. Audrey Sevin, own in the aggregate more than a
10% voting interest in the General Partner, he will not directly or indirectly
employ in the retail propane business or the retail home heating oil business a
person who was a managerial employee of the General Partner, the Partnership or
a subsidiary of the Partnership during the twelve-month period prior to that
date of employment.
The General Partner Is Not Restricted from Engaging in a Transaction That
Would Trigger Change of Control Provisions. The Partnership's debt instruments
contain provisions relating to change of control. If these change of control
provisions are triggered, the outstanding indebtedness may become due. There is
no restriction on the ability of the General Partner to enter into a
transaction that would trigger such change of control provisions.
Fiduciary Duties Owed to Unitholders by the General Partner as Prescribed by
Law and the Partnership Agreement
The General Partner is accountable to the Partnership and the Unitholders as
a fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Partnership. In contrast to
the relatively well-developed law concerning fiduciary duties owed by officers
and directors to the common stockholders of a corporation, the law concerning
the duties owed by general partners to other partners and to partnerships is
relatively undeveloped. Neither the Delaware Act nor case law defines with
particularity the fiduciary duties owed by general partners to limited partners
or a limited partnership, but the Delaware Act provides that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties that might otherwise be applied by a court in analyzing the
standard of duty owed by general partners to limited partners and the
partnership. Fiduciary duties are generally considered to include an
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obligation to act with the highest good faith, fairness and loyalty. Such duty
of loyalty, in the absence of a provision in a partnership agreement providing
otherwise, would generally prohibit a general partner of a Delaware limited
partnership from taking any action or engaging in any transaction as to which
it has a conflict of interest. In order to induce the General Partner to manage
the business of the Partnership, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect of
restricting the fiduciary duties that might otherwise be owed by the General
Partner to the Partnership and its partners and waiving or consenting to
conduct by the General Partner and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Partnership, a Unitholder is required to agree to be bound by the
provisions thereof, including the provisions discussed above. This is in
accordance with the policy of the Delaware Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
Delaware Act also provides that a partnership agreement is enforceable even if
not signed by a person being admitted as a limited partner or becoming an
assignee in accordance with the terms thereof.
The Amended and Restated Partnership Agreement provides that whenever a
conflict of interest arises between the General Partner or its affiliates, on
the one hand, and the Partnership or any other partner, on the other, the
General Partner shall resolve this conflict. The General Partner shall not be
in breach of its obligations under the Amended and Restated Partnership
Agreement or its duties to the Partnership or the Unitholders if the resolution
of this conflict is fair and reasonable to the Partnership, and any resolution
shall conclusively be deemed to be fair and reasonable to the Partnership if
the resolution is (1) approved by the Audit Committee (although no party is
obligated to seek approval and the General Partner may adopt a resolution or
course of action that has not received approval), (2) on terms no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties or (3) fair to the Partnership, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership). In resolving this conflict, the General
Partner may (unless the resolution is specifically provided for in the Amended
and Restated Partnership Agreement) consider the relative interests of the
parties involved in the conflict or affected by the action, any customary or
accepted industry practices or historical dealings with a particular person or
entity and, if applicable, generally accepted accounting or engineering
practices or principles and other factors as it deems relevant. Thus, unlike
the strict duty of a fiduciary who must act solely in the best interests of his
beneficiary, the Amended and Restated Partnership Agreement permits the General
Partner to consider the interests of all parties to a conflict of interest,
including the interests of the General Partner. In connection with the
resolution of any conflict that arises, unless the General Partner has acted in
bad faith, the action taken by the General Partner shall not constitute a
breach of the Partnership Agreement, any other agreement or any standard of
care or duty imposed by the Delaware Act or other applicable law. The
Partnership Agreement also provides that in certain circumstances the General
Partner may act in its sole discretion, in good faith or pursuant to other
appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is
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not likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties
to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the General Partner and its officers and directors to act
under the Amended and Restated Partnership Agreement or any other agreement
contemplated therein and to make any decision pursuant to the authority
prescribed in the Amended and Restated Partnership Agreement so long as that
action is reasonably believed by the General Partner to be in, or not
inconsistent with, the best interests of the Partnership. Further, the
Partnership Agreement provides that the General Partner and its officers and
directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and the other persons acted in good faith.
In addition, under the terms of the Amended and Restated Partnership
Agreement, the Partnership is required to indemnify the General Partner and its
officers, directors, employees, Affiliates, partners, agents and trustees, to
the fullest extent permitted by law, against liabilities, costs and expenses
incurred by the General Partner or other persons, if the General Partner or
those persons acted in good faith and in a manner they reasonably believed to
be in, or not opposed to, the best interests of the Partnership and, with
respect to any criminal proceedings, had no reasonable cause to believe the
conduct was unlawful. See "The Amended and Restated Partnership Agreement--
Indemnification Obligations of the Partnership." Thus, the General Partner
could be indemnified for its negligent acts if it meets the requirements
concerning good faith and the best interests of the Partnership.
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PROXY SOLICITATIONS
THE UNITHOLDERS MEETING
Date, Time and Place. The meeting of Common Unitholders (the "Unitholders
Meeting") will be held on , 1999, at 10:00 a.m., New York City time,
at New York, New York.
Purpose. The purpose of the Unitholders Meeting is to consider and vote upon
the proposal to acquire Petro (the "Acquisition Proposal"), the proposal to
amend the partnership agreement ("the Amendment Proposal") and the proposal to
change the general partner (the "General Partner Proposal" and, together with
the Acquisition Proposal and the Amendment Proposal, the "Star Proposals").
Star Gas Record Date. The close of business on , 1999 has been
fixed by the Star Gas Board as the record date (the "Star Gas Record Date") for
the determination of Common Unitholders entitled to notice of, and to vote at,
the Unitholders Meeting and any adjournment or postponement thereof. On the
Star Gas Record Date, there were 3,858,999 Common Units issued and outstanding,
held by approximately holders of record.
Recommendations of the Special Committee and the Star Gas Board. The Special
Committee believes that the Transaction is in the best interests of the Public
Common Unitholders and has recommended the Transaction to the Star Gas Board.
Based on this recommendation, the Star Gas Board unanimously recommends that
Common Unitholders vote FOR the Star Proposals. See "Special Factors--Reasons
for the Transaction that the Special Committee Considered; Recommendation of
the Special Committee."
Description of Proxies and Procedures for Voting and Revoking Proxies. A
proxy card for voting at the Unitholders Meeting is enclosed with this proxy
statement, which is being mailed to all holders of Common Units as of the Star
Gas Record Date. When a proxy card is returned, properly completed, signed and
dated, the Common Units it represents will be voted in accordance with the
instructions contained on the proxy card. If a Common Unitholder does not
attend the Unitholders Meeting and does not return the signed proxy card, that
holder's shares will not be voted, and this will have the effect of a vote
"AGAINST" the matters to be voted on at the Unitholders Meeting. Common
Unitholders are urged to mark the box on the proxy card to indicate how Common
Units represented by the proxy card are to be voted. An executed proxy card
that does not indicate how Common Units are to be voted will be voted "FOR" all
Star Proposals. Star Gas does not intend to bring any matters before the
Unitholders Meeting, other than approval of the Star Proposals, and does not
know of any other matters sought to be brought before the Unitholders Meeting
by others. If any business other than the Star Proposals is brought before the
Unitholders Meeting, the Common Units represented by a proxy card will be voted
by those persons appointed by Star Gas to vote the Common Units represented by
the proxy card according to their best judgment. The proxy card also confers
discretionary authority on the persons appointed by Star Gas named on the proxy
card to vote the Common Units represented thereby on any other procedural
matter that is properly presented for action at the Unitholders Meeting.
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The execution of a proxy card will not affect a Unitholder's right to attend
the Unitholders Meeting and vote in person. A Unitholder who has given a proxy
may revoke it at any time before it is exercised at the Unitholders Meeting by
(a) delivering a written notice of revocation to the Vice President--Finance of
Star Gas, (b) executing and submitting a proxy card bearing a later date or (c)
attending the Unitholders Meeting and voting in person. However, the mere
presence at the Unitholders Meeting by a person who has given a proxy will not
revoke that proxy.
Unless the arrangement between the beneficial owner and a broker or other
nominee holder provides otherwise, brokers and other nominee holders of Common
Units will not have discretionary authorization to vote Common Units on any of
the matters to be voted thereon in the absence of instructions from the
beneficial owners of those Common Units. Beneficial owners are therefore urged
to provide instructions to those brokers or other nominees concerning how they
wish their Common Units to be voted. Abstentions and broker non-votes are each
included in the determination of the number of Common Units present for quorum
purposes. Abstentions and broker non-votes will in effect be votes against the
Star Proposals because approval thereof requires the affirmative vote of the
holders of a majority of all Common Units.
Cost of Solicitation of Proxies. Petro, which has agreed to reimburse the
Partnership for the expenses incurred by the Partnership in the Transaction,
will bear all costs relating to the solicitation of proxies from the Common
Unitholders and will reimburse banks, brokerage houses, custodians, nominees,
fiduciaries, and other persons holding Common Units in their names or in the
names of their nominees for their reasonable expenses in forwarding proxy
material to beneficial owners of Common Units. The Partnership has engaged
, a professional proxy solicitation firm (the
"Solicitation Agent"), to solicit proxies on behalf of the Partnership. The
Partnership will pay this firm a fee of $ , plus expenses, for so
acting. An additional fee of $ will be paid to this firm if the
Star Proposals are adopted. In addition, certain officers, directors and
regular employees of Star Gas may, without additional compensation, solicit
proxies by personal interview, telephone, telex, telegram, facsimile or similar
means of communication.
Voting Rights; Vote Required. Except for certain limitations discussed below,
each person deemed to be a "Record Holder" of Common Units on the Star Gas
Record Date will have a vote according to their percentage interest in the
Partnership on that date. Under the Partnership Agreement as currently in
effect, a "Record Holder" of Common Units means the person in whose name those
Common Units are registered on the books of the transfer agent for the Common
Units at the opening of business on the Star Gas Record Date, which includes
both persons who have been admitted to the Partnership as limited partners or
substitute limited partners and transferees of Common Units who have executed
and delivered to that transfer agent a transfer application as required by the
Partnership Agreement, but who have not yet been admitted to the Partnership as
substitute limited partners.
The Partnership Agreement also provides that Common Units held in nominee or
street name account will be voted by the broker (or other nominee) pursuant to
the instructions of the beneficial owner, unless the arrangement between the
beneficial owner and his nominee provides otherwise. The Partnership is
entitled to assume that the nominee is acting at the direction of the
beneficial owner without further inquiry.
The Partnership Agreement requires, in order to approve and adopt each of the
Star Proposals to be considered at the Unitholders Meeting, the affirmative
vote of at least a Unit Majority. "Unit
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Majority" is defined in the Partnership Agreement to mean those persons holding
at least a majority of the outstanding Common Units (other than Common Units
owned by Star Gas or any of its affiliates).
The Transaction cannot be effected without approval of each of the Star
Proposals by the Common Unitholders.
Holders of Common Units should not send any unit certificates with their
proxy cards.
Quorum; Adjournment. The Partnership Agreement provides that the presence at
the Unitholders Meeting, either in person or by proxy, of a Unit Majority is
necessary to constitute a quorum at the Unitholders Meeting. The Partnership
Agreement also provides that, in the absence of a quorum, the Unitholders
Meeting may be adjourned from time to time by the affirmative vote of the
holders of a majority of the Common Units represented either in person or by
proxy.
The Partnership Agreement provides that, when a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting and a
new record date need not be fixed if the time and place of the adjourned
meeting is announced at the meeting at which the adjournment is taken, unless
that adjournment is for more than 45 days. At an adjourned meeting, the
Partnership may transact any business that might have been transacted at the
original meeting.
No Dissenters' Rights. Common Unitholders do not have dissenters' rights for
matters to be voted on at the Common Unitholders meeting.
THE SPECIAL MEETING
Date, Time and Place. A special meeting of Common Stockholders (the "Special
Meeting") will be held on , 1999, at 10:00 a.m., New York City time, at
, New York, New York.
Purpose. The purpose of the Special Meeting is to consider and vote upon the
Acquisition Proposal.
Petro Record Date. The Petro Board has fixed the close of business on
, 1999, as the record date (the "Petro Record Date") for the
determination of stockholders entitled to notice of, and to vote at,
the Special Meeting. Accordingly, only holders of record of shares of Common
Stock at the close of business on the Petro Record Date will be entitled to
vote at the Special Meeting and any adjournment or postponement thereof. As of
the close of business on the Petro Record Date, there were issued and
outstanding 23,964,962 shares of Class A Common Stock, held by record
holders; and 2,597,519 shares of Class C Common Stock, held by 24 record
holders.
Petro Board Recommendation. The Petro Board has determined that the
Transaction is fair and in the best interests of the Public Common Stockholders
and has, therefore, approved a merger agreement (the "Merger Agreement"), under
which Petro will be merged with a subsidiary of the Partnership (the "Merger")
and Petro Common Stockholders will receive subordinated units of the
Partnership and an exchange agreement (the "Exchange Agreement"), under which
Petro Common Stockholders who are affiliates of Petro will exchange their
Common Stock for subordinated units of the Partnership (the "Exchange"), and
unanimously recommends that the Common Stockholders vote FOR the Acquisition
Proposal.
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Description of Proxies and Procedure for Voting and Revoking of Proxies. A
proxy card for voting at the Special Meeting is enclosed with this proxy
statement, which is being mailed to all Common Stockholders of record as of the
Petro Record Date. When a proxy card is returned, properly completed, signed
and dated, the shares of Common Stock represented thereby will be voted in
accordance with the instructions on the proxy card. If a Common Stockholder
does not attend the Special Meeting and does not return the signed proxy card,
that holder's shares will not be voted, and this will have the effect of a vote
"AGAINST" the matters to be voted on at the Special Meeting. Common
Stockholders are urged to mark the box on the proxy card to indicate how the
shares represented by the proxy card are to be voted. An executed proxy card
that does not indicate how the shares of Common Stock is to be voted will be
voted "FOR" approval of the Acquisition Proposal. The Petro Board does not
intend to bring any matters before the Special Meeting, other than approval of
the Acquisition Proposal, and does not know of any other matters sought to be
brought before the Special Meeting by others. If any business other than the
Acquisition Proposal is brought before the Special Meeting, the shares of
Common Stock represented by a proxy card will be voted by those persons
appointed by the Petro Board to vote the shares of Common Stock represented by
the proxy card according to their best judgment. The proxy card also confers
discretionary authority on the persons appointed by the Petro Board named on
the proxy card to vote the shares represented thereby on any other procedural
matter that is properly presented for action at the Special Meeting.
The execution of a proxy card will not affect a Common Stockholder's right to
attend the Special Meeting and vote in person. A Common Stockholder who has
given a proxy may revoke it at any time before it is exercised at the Special
Meeting by (a) delivering a written notice of revocation to the Secretary of
Petro, (b) executing and submitting a proxy card bearing a later date, or (c)
attending the Special Meeting and voting in person. However, the mere presence
at the Special Meeting by a person who has given a proxy will not revoke that
proxy.
Unless the arrangement between the beneficial owner and a broker or other
nominee holder provides otherwise, brokers and other nominee holders of Common
Stock will not have discretionary authorization to vote shares of Common Stock
on any of the matters to be voted upon in the absence of instructions from the
beneficial owners of that Common Stock. Beneficial owners are therefore urged
to provide instructions to those brokers or other nominees concerning how they
wish their Common Stock to be voted. Abstentions and broker non-votes are each
included in the determination of the number of shares of Common Stock present
for quorum purposes. Abstentions and broker non-votes will in effect be votes
against the Acquisition Proposal because approval thereof requires the
affirmative vote of the holders of a majority of all shares of Common Stock.
Cost of Solicitation of Proxies. Petro will bear all costs relating to the
solicitation of proxies from Common Stockholders and will reimburse banks,
brokerage houses, custodians, nominees, fiduciaries, and other persons holding
Common Stock in their names or in the names of their nominees for their
reasonable expenses in forwarding proxy material to beneficial owners of Common
Stock. Petro has engaged the Solicitation Agent to solicit proxies on behalf of
Petro. Petro will pay that firm a fee of $ , plus expenses, for so acting. An
additional fee of $ will be paid to that firm if a majority of the Common
Stockholders vote in favor of the Acquisition Proposal. In addition, certain
officers, directors and regular employees of Petro may, without additional
compensation, solicit proxies by personal interview, telephone, telex,
telegram, facsimile or similar means of communication.
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Voting Rights; Vote Required. All Common Stockholders of record at the close
of business on the Petro Record Date are entitled to vote at the Special
Meeting. Holders of each class of Common Stock, voting as a separate class,
will have one vote for each share with respect to the Acquisition Proposal. The
affirmative vote of the holders of a majority of the Class A Common Stock
outstanding as of the Petro Record Date, voting as a class, the affirmative
vote of the holders of the Class C Common Stock outstanding as of the Petro
Record Date, voting as a class, and the affirmative vote of the holders of a
majority of the Class A Common Stock outstanding as of the Petro Record Date
(other than shares held by the directors and officers of Petro and their
affiliates) is required to approve the Acquisition Proposal.
The directors and executive officers of Petro and affiliates beneficially
owned, as of the Record Date, 11,953,432 shares of Common Stock (excluding all
options to purchase shares of Class A Common Stock and Class C Common Stock).
The holders of % of the shares of Class A Common Stock and % of the shares
of Class C Common Stock have agreed to vote for the Acquisition Proposal at the
Special Meeting.
Directors and executive officers of Star Gas and their affiliates (other than
those persons who were also directors or executive officers of Petro) did not
beneficially own, as of the Petro Record Date, any shares of Common Stock and
no shares of Common Stock were owned by the Partnership or Star Gas.
The Transaction cannot be effected without approval of the Acquisition
Proposal by the Common Stockholders.
Holders of Common Stock should not send any stock certificates with their
proxy cards. If the Transaction is effected, Common Stockholders will be
provided with transmittal materials for the surrender of Petro stock
certificates in exchange for certificates representing Senior Subordinated
Units of the Partnership or cash payments, as applicable.
Voting Rights of Holders of Petro Preferred Stock. The Acquisition Proposal
also requires the approval of the holders of a majority of all shares of
Petro's Junior Preferred Stock, Public Preferred Stock and Private Preferred
Stock (collectively, the "Petro Preferred Stock"), outstanding as of the Petro
Record Date, voting separately as a class. The holders of 100% of the Petro
Preferred Stock outstanding as of the Petro Record Date have granted
irrevocable proxies to Petro or have agreed to vote their shares for the
Acquisition Proposal.
As of the Petro Record Date, no shares of Petro Preferred Stock were
beneficially owned by any of the directors and executive officers of Petro or
Star Gas or any of their affiliates or by the Partnership or Star Gas.
Class B Shares Will Remain Outstanding. There are 11,228 shares of Class B
Common Stock currently outstanding representing less than .1% of the issued and
outstanding shares of common stock of Petro, which will remain outstanding
following the effective time of the Merger (the "Effective Time").
Quorum; Adjournment. Petro's Restated Bylaws provide that the presence at the
Special Meeting, either in person or by proxy, of a majority of the Common
Stockholders is necessary to constitute a quorum at the Special Meeting.
Petro's Restated Bylaws also provide that, in the absence
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of a quorum, the Special Meeting may be adjourned from time to time by the
affirmative vote of the holders of a majority of shares of the Common Stock
represented either in person or by proxy.
Petro's Restated Bylaws provide that, when a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting and a new
record date need not be fixed if the time and place of the adjourned meeting is
announced at the meeting at which the adjournment is taken. At an adjourned
meeting at which a quorum is present, the Partnership may transact any business
that might have been transacted at the original meeting.
Dissenters' Rights. Under Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act (the "MBCA"), included in full as Annex F to this
Proxy Statement, Common Stockholders (other than those who have agreed to vote
for the proposal to acquire Petro or who have granted irrevocable proxies to
Petro to vote for the proposal to acquire Petro at the meeting of Common
Stockholders) have the right to dissent, and obtain payment for the "fair
value" of their shares, if certain corporate actions such as the Merger should
occur.
Common Stockholders who wish to exercise dissenters' rights must comply fully
with the requirements of Sections 302A.471 and 302A.473 of the MBCA.
Accordingly, Common Stockholders wishing to dissent are urged to read carefully
"Dissenters' Rights" in this Proxy Statement and its attached Annex F, and to
consult their own legal advisors.
Among other things, Section 302A.473 requires that a Common Stockholder
wishing to exercise dissenters' rights must:
(1) file with Petro, before the vote on the Transaction at the meeting of
Common Stockholders, a written notice of intent to demand payment of
fair value for that holder's Common Stock (a "Dissent Notice"), and
(2) not vote in favor of the proposal to acquire Petro.
If the proposal to acquire Petro is approved at the meeting of Common
Stockholders, Common Stockholders wishing to dissent from the Merger must
comply fully thereafter with a series of additional requirements under Section
302A.473 of the MBCA.
FAILURE TO FOLLOW THE PROCEDURES IN ANNEX F MAY RESULT IN A TERMINATION OR
LOSS OF DISSENTERS' RIGHTS UNDER SECTIONS 302A.471 AND 302A.473 OF THE MBCA.
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SPECIAL FACTORS
BACKGROUND OF THE TRANSACTION
The Genesis of the Transaction and Related Events
In May 1997, Mr. Kevin McCarthy, then of Smith Barney Inc., contacted Irik
Sevin, Chairman of the Board and Chief Executive Officer of Petro, to determine
Petro's interest in a strategic business combination with the Partnership (the
"Proposed Transaction"). Mr. McCarthy, who had previously been associated with
PaineWebber Incorporated ("PaineWebber"), had provided investment banking
services to, and was very familiar with, both Petro and the Partnership. The
initial contact was made at Mr. McCarthy's initiative based on his perception
that the two entities could benefit from a business combination transaction.
On May 2 and May 7, 1997, Mr. McCarthy and other Smith Barney bankers
presented the following concept to Mr. Sevin. In their view, Petro's Common
Stock was not fully valued in the public market place due to, in large measure,
a lack of research analyst coverage and investor interest resulting from a
number of factors. Mr. McCarthy noted that despite Petro's preeminent position
in the home heating oil industry, the public market had always had a difficult
time valuing its Common Stock due to (1) there being no other comparable
publicly traded companies, (2) its being a cash flow oriented company with no
earnings per share, which is a standard measure used to value publicly traded
common stocks, and (3) its small equity market capitalization. Mr. McCarthy
went on to note that while Petro was the principal consolidator of the home
heating oil industry, its capital structure was limiting its full growth
potential. He suggested that converting Petro into a publicly-traded limited
partnership format would address these various issues. He noted that Petro
would benefit from the relatively broad research coverage provided the
relatively large number of publicly-traded limited partnership. In addition,
these entities were valued on a cash flow basis, similar to Petro's financial
orientation, and that the combined Petro/Star publicly-traded limited
partnership would have a significantly increased market capitalization. Also of
significance was that the publicly-traded limited partnership format would give
Petro access to lower cost capital and increase its financial flexibility to
fund its growth-through-acquisition strategy.
Mr. McCarthy went on to note that he believed that combining the Partnership
and Petro could also significantly benefit the Partnership. While the
Partnership had been performing relatively well operationally, there had been a
significant increase in competition for propane acquisitions, the major source
of the Partnership's growth. This not only was impacting the number of
acquisitions the Partnership could make but was also increasing the purchase
price multiples paid for propane companies. Both of these factors combined to
limit the potential growth in the Partnership's annual cash flow from its
acquisition program. The combination with Petro could provide an additional
source of acquisition opportunities at lower purchase price multiples resulting
from Petro's preeminent position in the home heating oil industry and the
significantly lower level of competition in that industry for acquisitions.
Combining Petro's acquisition opportunities with the Partnership's access to
lower cost capital suggested the combination of the two companies made
strategic sense.
During May and June 1997, Mr. Sevin had several meetings and telephone calls
with representatives of Smith Barney and other financial and legal advisors
concerning various business, tax and regulatory aspects of the Proposed
Transaction.
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On June 5, 1997, at a Petro Board meeting, Mr. Sevin described the Proposed
Transaction and its benefits. In addition to the original benefits outlined by
Mr. McCarthy, the Proposed Transaction was now structured to refinance Petro's
relatively high-cost long-term debt and preferred stock with lower cost
Partnership equity and a new issue of debt further increasing the combined
entity's distributable cash flow.
Mr. Sevin informed the Petro Board that not all aspects of the Proposed
Transaction had been fully developed and that he had not made any presentation
concerning the combination to the Star Gas Board. After discussing the matter,
a consensus was reached that the Proposed Transaction seemed interesting and
that Mr. McCarthy should be invited to make a formal presentation to the Petro
Board.
Mr. McCarthy Presents the Proposed Transaction to the Petro Board
On July 24, 1997, the Petro Board met to hear Mr. McCarthy make a formal
presentation regarding the Proposed Transaction. Initially, Mr. McCarthy
explained that he had terminated his relationship with Smith Barney and had
reassociated with PaineWebber as a Managing Director in its Investment Banking
Division. Mr. McCarthy then reviewed the overall strategic rationale for the
proposed Transaction.
Mr. McCarthy went on to describe the Proposed Transaction's structure
indicating that it would have two fundamental components. The first was Petro's
becoming a wholly-owned subsidiary of the Partnership, by virtue of the Public
Common Stockholders and a limited number of affiliated Common Stockholders
exchanging their shares for publicly traded Senior Subordinated Units and a
certain number of Petro shares being exchanged for Junior Subordinated Units
that would not be publicly traded. He indicated that in order to provide the
Public Common Stockholders with a publicly traded Partnership unit with
sufficient earnings coverage, there needed to be a certain number of Units
junior to those securities. The second component of the Proposed Transaction
was the refinancing of Petro's outstanding, relatively high-cost debt and
preferred stock through the sale of lower-cost, new Partnership equity and
debt.
Mr. McCarthy then enumerated the benefits of the Proposed Transaction to
Common Unitholders as well as to the Partnership. Mr. McCarthy briefly outlined
the following benefits to the Partnership's Common Unitholders: (1) a
significant increase in distributable cash flow, (2) an increase in the
annualized Minimum Quarterly Distribution from $2.20 to $2.30, (3) improved
distribution coverage, (4) larger equity market capitalization and resulting
liquidity to Unitholders and (5) improved growth potential in an otherwise
relatively stagnant market. Mr. McCarthy went on to note that the most
important considerations in valuing MLPs are their growth, ability to make
distributions, and size. The combination of the Partnership and Petro would
improve the Partnership's measures in each of these areas.
After review and discussion by the Petro Board of this concept, it authorized
Mr. Sevin to consult further with PaineWebber concerning the Proposed
Transaction, and to present it to the Star Gas Board. In this regard, it was
determined that it would be most appropriate to approach the two members of the
Star Gas Board who were not officers, directors or employees of Petro to
ascertain their views about the Proposed Transaction, since the remaining
members of that Board were also directors or officers of Petro. The Petro Board
recognized that in light of the potential conflict of
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interest, the Proposed Transaction should be analyzed and approved by the non-
Petro members of the Star Gas Board.
The Petro Board also instructed Petro's management to closely monitor the
impact of Petro's recently instituted regionalization and product branding
programs as it believed that Petro's ability to operate more efficiently and
with more customer sensitivity would be an important element to the success of
any business combination.
PaineWebber Informally Discusses the Proposed Transaction with the Non-Petro
Directors of Star Gas
On September 2, 1997, at the request of Mr. Sevin, Mr. McCarthy had a meeting
with the non-Petro directors of the Star Gas Board, Mr. William Nicoletti and
Ms. Elizabeth Lanier, concerning the combination of Petro and the Partnership.
Mr. Nicoletti and Ms. Lanier indicated that they had a number of questions
concerning the Proposed Transaction, but that they believed that the
Partnership would be willing to consider such a combination.
Petro Considers Alternative Transactions
In December 1997 and January 1998, Petro also began to explore other
transactions. Mr. Sevin met with representatives of CNG Energy Services
Corporation, a subsidiary of Consolidated Natural Gas Company, a large natural
gas utility to explore the possibility of forming a joint venture acquisition
corporation. However, these discussions did not progress beyond the preliminary
stages. In addition, Mr. Sevin met with an investment banking firm which had a
relationship with Enron Capital and Trade Corp., a subsidiary of Enron Corp.,
that was seeking investment opportunities. Mr. Sevin believed that Petro's
large customer base would provide this company with cross-marketing potential
adding to the attractiveness of forming a joint venture acquisition corporation
with Petro. After discussions held in January 1998, this company indicated that
it was not interested in forming this joint venture with Petro.
PaineWebber Formally Presents the Proposed Transaction to the Star Gas Board
On January 26, 1998, Mr. McCarthy made a formal presentation concerning the
Proposed Transaction to the Star Gas Board. He first described the underlying
rationale of the Proposed Transaction.
Mr. McCarthy then detailed the Proposed Transaction's structure:
. Petro would combine with the Partnership, becoming a wholly-owned
subsidiary of the Operating Partnership.
. The Public Common Stockholders (as well as certain affiliated Common
Stockholders) would receive publicly traded Senior Subordinated Units.
. Certain affiliated Common Stockholders would be required to exchange
their shares for Junior Subordinated Units that would be junior to the
Senior Subordinated Units offered the Public Common Stockholders and
would not be publicly traded. Mr. McCarthy indicated that this condition
was required to provide sufficient earnings coverage of the Senior
Subordinated Units to make them sufficiently attractive in the
marketplace.
. In determining the exchange ratio for Petro's Common Stock and how many
Partnership Units would be given to the Common Stockholders, the
following values were used:
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--Petro's Common Stock was being valued at $3.15/share.
--The Senior Subordinated Units to be given to the Public Common
Stockholders were valued on the basis of their having an 11.5% yield
representing an approximately 10% discount from the Common Unit value.
--The Junior Subordinated Units and General Partner Units were valued at
an assumed 14% yield representing a 250 basis point premium over the
Senior Subordinated Units based on their additional level of
subordination and illiquidity.
. As a result of the anticipated immediate accretion in distributable cash
flow resulting from the Transaction, the Partnership would increase its
quarterly distributions per unit from $0.55 to $0.575 (from $2.20 per
unit or $2.30 per unit annually).
. The right to receive incentive payments, which has historically been
provided to the General Partner upon meeting certain performance tests,
would be reallocated to all Common Stockholders by distributing those
rights among the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units pro rata.
. The general partner of the Partnership would be a newly organized limited
liability company that would be owned by affiliates of Petro.
. The Senior Subordinated Units and Junior Subordinated Units would be
subordinated to the distribution and liquidation rights of the Common
Units until the Partnership earned $2.30 per Unit in distributable cash
flow for three years, at which time the subordination period would end.
Mr. McCarthy then described, as he had done with the Petro Board, the
benefits of the Proposed Transaction to the Public Common Unitholders and the
Public Common Stockholders.
In response to a question from the directors, Mr. McCarthy indicated that,
based on a preliminary review, he did not believe that a combined
propane/heating oil publicly-traded limited partnership would have a negative
perception in the public market. He considered growth and ability to make
distributions the key considerations for valuing a publicly-traded limited
partnership, and Petro's growth potential would more than offset any impact of
its having non-propane activities. In addition, he pointed out that several
diversified publicly-traded limited partnerships exist and perform favorably
compared to their peers.
In response to a question concerning Petro's operating performance, Mr.
McCarthy indicated that while the benefits of Petro's regionalization and
branding programs had begun to be realized, the implied value has yet to be
factored into Petro's stock price. However, these improvements should
ultimately benefit the combined entity and its future value.
The Star Gas Board Appoints the Special Committee to Consider the Proposed
Transaction
Based on this presentation and the ensuing discussion, the Star Gas Board
believed that there was a consensus to proceed with further consideration of
the Proposed Transaction. Because all of the directors of Star Gas were also
directors or officers of Petro, other than Mr. Nicoletti and Ms. Lanier, the
Star Gas Board assigned the task of exploring the proposal to them. It was
decided they should act as a Special Committee to ensure that the interests of
the Public Common Unitholders
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were independently represented in the Proposed Transaction. Ms. Lanier then
proposed that the Special Committee retain independent financial advisors and
legal counsel to assist in a review of the Proposed Transaction. The Star Gas
Board authorized the Special Committee to retain an independent financial
advisor and legal counsel as they deemed appropriate.
In January and February 1998, the Special Committee invited A.G. Edwards
along with one other investment banking firm to present its qualifications to
serve as financial advisor to the Special Committee. Following several meetings
and discussions with A.G. Edwards and the other candidate, on March 23, 1998
the Special Committee engaged A.G. Edwards as its financial advisor. The
Special Committee had previously retained Baker & Botts, L.L.P. as its legal
counsel.
On February 4, 1998, Petro's management met with investment bankers at
Donaldson Lufkin & Jenrette to discuss the proposed terms for the refinancing
or restructuring of Petro's public and private debt and preferred stock in the
Proposed Transaction.
Mr. Sevin Reviews the Status of the Proposed Transaction with the Petro Board
in February 1998
At a February 23, 1998 Petro Board meeting, Mr. Sevin updated the Petro Board
on the discussions with the Special Committee regarding the Proposed
Transaction, as well as developments with other energy companies.
The Petro Board agreed that Mr. Sevin should continue to pursue the Proposed
Transaction, as well as other investment alternatives. The Petro Board then
asked one of its members to assist Mr. Sevin in structuring these alternatives.
In March 1998, Mr. Sevin met with each of Petro's three commercial banks
separately to determine if the mergers and acquisitions or utility departments
of those institutions could identify any public utility that was seeking to
invest in deregulated energy activities or any other party that might be
interested in investing in or forming a joint venture with Petro.
Petro Commences Discussions with the Special Committee
On March 10, 1998, Petro's representatives met with the Special Committee to
discuss certain initial questions that had arisen from its discussions with
potential financial advisors. Petro's representatives wanted to review with the
Special Committee Petro's capitalization structure, the improvement in Petro's
customer attrition rate, and its ability to continue to increase its gross
profit margins and to acquire new businesses at historic rates.
Petro Continues to Pursue Other Investment Alternatives
In March and April 1998, Petro continued to pursue other investment
alternatives. In April 1998, Petro's management met with representatives of two
public utilities, AllEnergy Marketing Company L.L.C. ("AllEnergy") and
Connective Power Delivery ("Connective"), to discuss with each a possible joint
venture. While Connective indicated that it was not interested in pursuing the
matter, AllEnergy, which had previously expressed an interest in purchasing
Petro's heating oil operations, indicated that it could possibly be interested
in a joint venture. However, its conditions to pursuing further discussions of
such a venture were determined to be unacceptable and discussions were ended.
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During May and June 1998, Petro had several discussions and meetings with
representatives of Providence Energy Corporation concerning a proposed
investment in Petro either pursuant to a joint venture or the purchase of
certain of Petro's operations. However, this utility determined not to proceed
with this investment and Petro indicated it was not interested in divesting of
any operations.
Petro Retains Dain Rauscher Wessels to Provide a Fairness Opinion to Petro's
Public Common Stockholders
In April 1998, Petro began a search for an independent investment banking
firm with expertise in the area of MLPs which could render an opinion as to the
fairness, from a financial point of view, of the consideration to be received
by the Public Common Stockholders in the Proposed Transaction. On April 22,
1998, Mr. Sevin met with representatives of Dain Rauscher Wessels. On May 14,
1998, Dain Rauscher Wessels was formally engaged, and, on May 28 and May 29,
1998, Dain Rauscher Wessels met separately with the management of the
Partnership and Petro in order to begin its due diligence with respect to the
Partnership and Petro.
A.G. Edwards Prepares Preliminary Status Report
On April 28, 1998, A.G. Edwards met with the Special Committee and members of
the Partnership's management to discuss and present the status of A.G. Edwards'
due diligence efforts and preliminary conclusions. A.G. Edwards recommended
that the Special Committee proceed in its analysis and review of a potential
business combination with Petro and recommended that A.G. Edwards begin
preparation of a preliminary status report (the "Preliminary Status Report")
that could be shared with Petro and PaineWebber. The Preliminary Status Report
would include the Special Committee's preliminary views on the structure of a
potential transaction as well as its preliminary thoughts on a merger agreement
and required changes to the Partnership Agreement. The Special Committee
agreed.
On May 4, 1998, A.G. Edwards delivered the Preliminary Status Report and an
updated and revised preliminary financial analysis to the Special Committee.
The Special Committee authorized A.G. Edwards to discuss the Preliminary Status
Report with both Petro and PaineWebber.
On May 5, 1998, at a meeting of the Board of Directors of Star Gas, the
Special Committee advised the Board as to the status of the Preliminary Status
Report and indicated A.G. Edwards' preliminary views as to the valuation of
Petro.
The Special Committee and Petro Meet to Review the Preliminary Status Report
and to Negotiate the Proposed Transaction
On May 7, 1998, the Special Committee and A.G. Edwards met with Petro and
PaineWebber to discuss the Preliminary Status Report and to begin negotiations
over a potential combination.
The Special Committee took three firm negotiating positions at the May 7
meeting, which were reflected in the Preliminary Status Report. First, the
Special Committee required that the Minimum Quarterly Distribution to be paid
to Common Unitholders be raised from $2.20 annually to $2.30 annually. Second,
the Special Committee took the position that no distributions would be paid to
the holders of Senior Subordinated Units, Junior Subordinated Units and General
Partner Units following
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a transaction that were not earned by the actual performance of the combined
business following the Transaction. Third, the Special Committee took the
position that the $3.15 valuation per Petro share was too high, and that the
Special Committee would only look at a combination if the price was in the
$2.00 per share range. In support of this third position, A.G. Edwards
discussed with Petro and PaineWebber the basis for its analysis of Petro's
Common Stock at $2.00 per share.
Mr. Sevin responded that he could agree to the revised Minimum Quarterly
Distribution of $2.30 and to the proposal that during the Subordination Period
holders of Senior Subordinated Units, Junior Subordinated Units and General
Partner Units would only receive distributions out of distributable cash
generated following the closing of the Transaction. However, he indicated he
could not agree to valuing Petro's Common Stock at $2.00 per share, indicating
his belief that this valuation was unfairly low. He pointed out that while
there are many criteria that could be used in determining the appropriate
valuation for Petro's Common Stock, he believed the most important was the
accretion to the Partnership resulting from the acquisition of Petro. While Mr.
Sevin questioned certain of the assumptions upon which A.G. Edwards views were
based, he noted that even using the most conservative assumption, a $2.00 value
would (based on the projections available at the time) would result in
projected accretion of approximately $.62 per unit, which could grow to over
$1.00 per unit. Mr. Sevin indicated that this level of accretion was excessive
and unwarranted and that the approximate $.40 per unit projected accretion
resulting from a $3.15 per share price was certainly more appropriate and would
still make this combination significantly attractive to the Common Unitholders.
This was especially true given the greater growth potential provided by Petro
which would, over time, increase the accretion to over $1.00 per Unit even at a
$3.15 valuation.
PaineWebber also indicated to A.G. Edwards that the $3.15 per unit valuation
did not represent an excessive premium to market value (the "merger premium")
when Petro's average stock performance for the last twelve months was
considered. PaineWebber noted that the suspension of Petro's Common Stock
dividends following the unusually warm weather of the first quarter of 1998 had
lowered the short-term trading prices of Petro's Common Stock despite the
significant improvements in Petro's operating results. In addition, PaineWebber
asked A.G. Edwards to consider market statistics prepared by PaineWebber that
indicated that the merger premiums for stocks priced at less than $5.00 per
share were generally greater than the merger premiums for higher priced shares.
In an attempt to bridge the valuation gap, the parties discussed having the
Partnership issue additional Units to the Common Stockholders after the
Transaction if Petro met certain financial goals.
At the conclusion of this meeting, the parties agreed to review their
respective positions.
On May 19, 1998, representatives of A.G. Edwards met with representatives of
PaineWebber and Petro in an attempt to reach an agreement on the appropriate
price per share to be used to value the consideration paid to the Common
Stockholders. PaineWebber provided A.G. Edwards with information concerning
comparable acquisition multiples to demonstrate that a $3.15 per share price
was appropriate. In addition, PaineWebber indicated that Petro's first quarter
operating performance was better than the budgeted figures originally provided
A.G. Edwards, which further suggested that the $3.15 valuation was appropriate.
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In order to bridge the gap in valuation, the parties began discussing a $2.50
per share value with Petro's ability to obtain additional value through the
issuance of additional Senior Subordinated Units after the closing if it met
certain earnings criteria. The concept was that Petro would be able to receive
an additional total 909,000 Units, at a rate of 303,000 per year in each of
three years that Petro provided the Partnership with $.50 per unit of accretion
in distributable cash flow over the level the Partnership would earn had it not
combined with Petro. It was indicated that these additional Units, if earned,
would be issued pro rata to the holders of Senior Subordinated Units, Junior
Subordinated Units and General Partner Units.
A.G. Edwards Prepares a Preliminary Draft Proposal for the Transaction
On May 20, 1998, the Special Committee met by conference telephone call with
A.G. Edwards and Baker & Botts to discuss its preliminary analysis (updated by
A.G. Edwards) and the status of negotiations. The group also discussed a
preliminary draft proposal prepared by A.G. Edwards for submission to Petro.
The Special Committee instructed A.G. Edwards to revise the preliminary draft
proposal. On May 21, the Special Committee met again by conference telephone
call with Baker & Botts to review the proposal. A.G. Edwards submitted a
revised preliminary draft proposal to the Special Committee on May 26, 1998 and
the Special Committee instructed A.G. Edwards to submit the proposal to Petro.
The proposal dated May 26, 1998 (the "Preliminary Draft Proposal") included the
following principal terms:
. In exchange for all of Petro's issued and outstanding shares of Common
Stock, the Partnership would issue an aggregate of 2,718,000 Senior
Subordinated Units, 524,000 Junior Subordinated Units and 289,000 General
Partner Units (reflecting a valuation for the Petro Common Stock of $2.50
per share). In conjunction with the issuance of these new Units, the
Partnership would in effect cancel the existing 2,396,078 subordinated
units and the 2% combined general partner interest, both owned by Petro.
. The Partnership would issue up to 303,000 additional Senior Subordinated
Units per year (up to a maximum of 909,000 additional Senior Subordinated
Units) pro rata to the holders of the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units in each year that Petro
achieves certain levels of accretion in the future.
. The amount of new equity required to be raised by the Partnership and new
debt required to be raised by a subsidiary of the Partnership in order to
refinance Petro's existing debt and preferred stock could not exceed
certain maximum amounts and were subject to certain price and expense
limitations.
. The Partnership Agreement would be amended to prohibit the payment of
distributions to the holders of Senior Subordinated Units, Junior
Subordinated Units and the General Partner Units from any source other
than distributable cash generated during the last twelve months.
. The cost of refinancing Petro's outstanding debt and redeeming Petro's
preferred stock could not exceed specified limits.
The management of Petro believed that, with some further modifications, the
Preliminary Draft Proposal could form the basis of an agreement. With that in
mind, Petro began focusing its efforts on
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reaching an agreement with institutional holders of its long-term debt and
preferred stock on a basis that would comply with the terms of the Preliminary
Draft Proposal.
Petro Negotiates the Refinancing of its Public and Private Debt and Preferred
Stock
During June and July 1998, representatives of Petro undertook negotiations
with institutional holders of its public and private debt and preferred stock
to obtain the right to refinance these securities.
In August 1998, Petro reached an agreement with institutional holders of $149
million or 63.1% of Petro's 10 1/8% Subordinated Notes due 2003 ("10 1/8%
Notes"), 12 1/4% Subordinated Debentures due 2005 ("12 1/4% Debentures") and 9
3/8% Subordinated Debentures due 2006 ("9 3/8% Debentures," and together with
the 10 1/8% Notes and the 12 1/4% Debentures, the "Old Public Debt") and 12
7/8% Series B exchangeable preferred stock (the "Old Public Preferred Stock,"
and together with the Old Public Debt, the "Old Securities") (including the
holders of 100% of the Old Preferred Stock) to permit the redemption of those
securities at the closing of the proposed Transaction. This Agreement allows
Petro to redeem its 9 3/8% Debentures, 10 1/8% Notes and 12 1/4% Debentures at
100%, 100% and 103.5% of principal amount, respectively, and to redeem its 12
7/8% Preferred Stock at $23 per share. In consideration for this early
redemption right, Petro agreed to issue to those holders 3.3732 shares of newly
issued Junior Convertible Preferred Stock for each $1,000 in principal amount
or liquidation preference of such securities.
Petro subsequently offered to the remaining holders of its Old Public Debt
the same right of early redemption under the same terms and conditions as
agreed to by the consenting holders. This proposal was made through an exchange
offer that terminated on September 24, 1998 with an aggregate acceptance rate
of more than 95% of the Old Public Debt.
Other Activities Undertaken in Connection With the Proposed Transaction
Formal Financial Advisory Agreement with PaineWebber. On June 3, 1998,
following consultation with a number of Petro Board members, the management of
Petro entered into a formal financial advisory agreement with PaineWebber.
Meeting with Hanseatic on Terms of the Exchange. Also, on June 3, 1998, Mr.
Sevin met with the representatives of Hanseatic Americas LDC, a Bahamian
limited duration company indirectly controlled by Hanseatic Corporation, a
majority of the shares of capital stock of which were owned by Wolfgang Traber,
a Petro Board member, and in which another Petro Board member, Paul A.
Biddelman, acts as President. Hanseatic Americas and Hanseatic Corporation
(collectively, "Hanseatic") in the aggregate owned more than 1.9 million shares
of Common Stock. The purpose of the meeting was to determine Hanseatic's
willingness to exchange its Common Stock for Junior Subordinated Units and
General Partner Units, rather than the Senior Subordinated Units being
exchanged with the Public Common Stockholders. Certain other affiliates had
previously indicated an unwillingness to accept junior and illiquid securities
at the value suggested by PaineWebber. Hanseatic's assent was necessary, so
that when combined with the shares that Irik Sevin and Audrey Sevin were
prepared to convert into Junior Subordinated Units, and General Partner Units a
total of the approximately 5.3 million required by the Partnership's proposal
could be accumulated. While
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Mr. Traber indicated a willingness to undertake an exchange, in order to
accommodate completion of the Transaction he further wanted the independent
assent of Hanseatic's major investors. An agreement was reached that these
representatives would support the exchange.
Meeting with Star Gas Board of Directors on the Status of the Transaction. On
July 27, 1998, at a meeting of the Star Gas Board, Mr. Sevin (on behalf of
Petro) and the Special Committee informed the Board of the progress of the
discussions and negotiations between PaineWebber on behalf of Petro and A.G.
Edwards on behalf of the Special Committee. Mr. Sevin also informed the Star
Gas Board of the results of Petro's negotiations with the institutional holders
of its public and private debt and preferred stock.
Mr. Sevin advised the Star Gas Board that it was his understanding that A.G.
Edwards would produce a revised proposal in the form of a draft term sheet (the
"Revised Proposal") to reflect the discussions and negotiations.
Mr. Sevin also informed the Board that he had received a telephone call from
a director of Heritage Propane Partners, L.P., another publicly-traded propane
limited partnership, to inquire as to whether the Partnership would be
interested in being acquired by that publicly-traded limited partnership. The
purchase price indicated did not reflect any premium over the current market
price of the Common Units and the valuation of Petro's Subordinated Units and
general partner interests was not acceptable to Petro. After discussion, it was
decided that Mr. Sevin should respond that the Partnership was not interested
in the proposal.
A.G. Edwards Prepares and Forwards the Revised Proposal to Petro
On July 28, 1998, following additional telephonic discussions with
PaineWebber to further refine the terms of the Revised Proposal, A.G. Edwards,
on behalf of the Special Committee forwarded the Revised Proposal to the Star
Gas Board, the Petro Board and PaineWebber for each of their reviews and
consideration. The Revised Proposal clarified that the General Partner Units
would be subordinated to both the Common Units and Senior Subordinated Units,
but was otherwise similar to the Preliminary Draft Proposal.
On July 29, 1998, Dain Rauscher Wessels met with representatives of Petro to
review the Revised Proposal and for Dain Rauscher Wessels to undertake further
due diligence.
The Petro Board Reviews the Revised Proposal
On August 3, 1998, at a meeting of the Petro Board, which was attended
telephonically by Dain Rauscher Wessels as well as PaineWebber and legal
counsel, Mr. Sevin stated that it was important at this time to apprise the
directors of all of the details of the Revised Proposal and to answer any
questions that they may have, since the matter might be brought to a formal
vote within the next week to ten days.
The Petro Board then discussed various aspects of the Proposed Transaction as
well as the fiduciary obligations of the Petro Board and those of the Petro
directors who also serve as directors of Star Gas. In response to questions
regarding these responsibilities, Mr. Michael Rosenwasser, of Andrews & Kurth
L.L.P., co-counsel to Petro, indicated that the Special Committee would have
the
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overall responsibility for negotiating, reviewing and deciding whether to
recommend the Proposed Transaction to the Star Gas Board and to the public
Common Unitholders. Mr. Rosenwasser further indicated that the law firms of
Phillips Nizer Benjamin Krim & Ballon LLP and Andrews & Kurth would be
representing Petro and its Board and that the law firm of Baker & Botts would
be representing the Special Committee.
A question was raised as to whether it would be advisable to appoint an
independent committee of the Petro Board to represent the Public Common
Stockholders. After discussion, it was determined that there was doubt as to
whether an unquestionably independent committee could be constituted. Instead,
the Board determined that Petro would not proceed with the Proposed Transaction
without the approval of the holders of a majority of the shares of Petro's
Class A Common Stock owned by non-affiliates and unless Petro received a
favorable fairness opinion from Dain Rauscher Wessels as to the consideration
to be received by the Public Common Stockholders.
On August 10, 1998, Petro entered into an agreement with certain affiliated
Class C Common Stockholders to approve the transaction. Such approval was
required pursuant to a stockholders' agreement among the holders of Petro's
Class C Common Stock.
The Special Committee Approves the Revised Proposal
On August 11, 1998, the Star Gas Board by written consent authorized the
Special Committee to assume responsibility for all matters relating to the
Proposed Transaction, including the power and authority to negotiate the terms
of the transaction subject to those additional actions by the Star Gas Board as
may be necessary or advisable under applicable law. Following the grant of that
authority, the Special Committee approved the Revised Proposal and transmitted
the Revised Proposal to the Petro Board.
The Petro Board Approves the Revised Proposal
The Petro Board met on August 13, 1998 to consider and vote upon the Revised
Proposal. Mr. Sevin reviewed with the Petro Board certain minor changes which
had been made to that document subsequent to the August 3, 1998 meeting, and
indicated that it had been approved by the Special Committee earlier in the
week. After discussion, the Petro Board unanimously approved the Revised
Proposal.
On August 14, 1998, Petro and the Partnership issued a joint press release
announcing that they had reached an agreement-in-principle concerning the
Proposed Transaction.
During August, September and October 1998, the Special Committee, in
conjunction with its legal counsel and financial advisors, negotiated the terms
of a definitive Merger Agreement and Exchange Agreement with Petro and its
legal counsel and financial advisors. During the course of these negotiations,
the Special Committee required, and Petro ultimately agreed, as a condition of
the Transaction, that (i) no distributions could be made on any Subordinated
Units until August 15, 1999; (ii) certain earnings tests had to be achieved for
any distributions to be made on that date or on the next anticipated
distribution date of November 15, 1999; and (iii) as of the closing of the
Transaction, Petro had to have certain minimum working capital levels
substantially higher than was required in the Preliminary Draft Proposal.
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The Special Committee Recommends and the Star Gas Board Approves the
Definitive Transaction Documents
On October 16, 1998 the Special Committee met with its financial advisors and
legal counsel to consider the Transaction. At this meeting, A.G. Edwards
delivered its oral and written opinion that the Transaction was fair, from a
financial point of view, to the Public Common Unitholders. The Special
Committee then entered into a full discussion of the financial and legal
aspects of the Transaction with its financial and legal advisors. On October
19, 1998, the Special Committee met again with its financial and legal advisors
and, after discussion and based on the advice of its advisors and the fairness
opinion of A.G. Edwards, unanimously voted to recommend the Transaction to the
Star Gas Board for its approval subject to its legal advisors negotiating the
last remaining details of the Merger Agreement, none of which were deemed
material. On October 19, 1998, based on that recommendation, the Star Gas Board
approved the Merger Agreement and Exchange Agreement and authorized the
officers of Star Gas to execute and deliver the Merger Agreement and Exchange
Agreement.
The Petro Board Approves the Definitive Transaction Documents
On October 6, 1998, Dain Rauscher Wessels presented to the Petro Board its
opinion that the consideration to be provided to the Public Common Stockholders
pursuant to the Transaction was fair from a financial point of view.
PaineWebber and Petro's legal counsel attended that meeting.
On October 19, 1998, the Petro Board held a meeting to consider the
Transaction. Based on a variety of factors, including the Dain Rauscher Wessels
Opinion, the Petro Board unanimously approved the Merger Agreement and Exchange
Agreement and authorized and directed the officers of Petro to execute and
deliver the Merger Agreement and Exchange Agreement.
REASONS FOR THE TRANSACTION THAT THE SPECIAL COMMITTEE CONSIDERED;
RECOMMENDATION OF THE SPECIAL COMMITTEE
At a meeting of the Special Committee held on October 16, 1998, the Special
Committee received presentations concerning, and reviewed the terms of, the
Transaction with members of management and its legal counsel and financial
advisors. At the meeting, the Special Committee unanimously determined that the
Transaction is fair to, and in the best interests of, the Public Common
Unitholders. Accordingly, the Special Committee unanimously recommends that the
Unitholders vote FOR the Star Proposals at the Unitholders Meeting. Based on
the recommendation of the Special Committee, the Board of Directors of Star Gas
unanimously recommends that the Common Unitholders vote FOR the Star Proposals
at the Unitholders Meeting. All of the directors of Star Gas, except for the
members of the Special Committee, are also directors of Petro. These directors
have also determined that the Transaction is fair to, and in the best interests
of the Public Common Stockholders and have recommended that the Public Common
Stockholders vote for the Transaction Proposal at the Stockholders Meeting. See
"--Background of the Transaction" and "Parties and Conflicts--Conflicts of
Interest--Certain Persons Have Interests in the Transaction that Conflict, or
May be Perceived to Conflict, with the Interests of Common Stockholders and
Common Unitholders."
During the course of its deliberations, the Special Committee, with the
assistance of management and its legal and financial advisors, considered a
number of factors, including the following potential advantages of the
Transaction:
. The Special Committee believes the acquisition of Petro will increase the
Partnership's ability to grow through further acquisitions in the home
heating oil business. Petro is the largest
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retail distributor of home heating oil in the country. In addition, Petro
has been the principal consolidator of that highly fragmented industry,
having purchased over 180 retail home heating oil companies since 1979.
The primary source of growth in the propane industry is acquisitions.
Competition for acquisitions in the propane industry has intensified,
decreasing the opportunities available, and increasing the prices paid,
for propane companies. The Special Committee believes Petro's strong
position in the home heating oil industry will provide the Partnership
with an additional source of attractive acquisition and expansion
opportunities.
. The Special Committee believes the Transaction will be accretive to the
Partnership's distributable cash flow per Unit. The expected increase in
distributable cash flow per Unit resulting from the Transaction will
enable the Partnership to raise the Minimum Quarterly Distribution from
$0.55 to $0.575 (or from $2.20 to $2.30 on an annual basis). If the
expected increase in distributable cash flow is realized, it will provide
greater protection of the Minimum Quarterly Distribution and improves the
possibility of future distribution increases.
. The Transaction will increase the Partnership's market capitalization and
should provide greater Common Unit liquidity, investment community
awareness and the ability to attract securities analyst research
coverage.
. Common Stockholders will receive Senior Subordinated Units which are
subordinated to the distributions on Common Units for a minimum of three
years. The Senior Subordinated Units will remain subordinated to the
Common Units until the Partnership has earned and paid the Minimum
Quarterly Distribution of $2.30 on all Units for three consecutive four-
quarter periods. In addition, the Subordination Period has been extended
at least 21 months from January 1, 2001 to October 1, 2002.
. During the Subordination Period, distributions on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units will be
generally limited to the amount of distributable cash generated after the
Transaction is effective.
. Overall, the Special Committee believes that the Transaction represents
an opportunity to acquire a company that is expected to significantly
increase the Partnership's size and scope of operations, growth prospects
and ability to increase its distributions to Unitholders.
During the course of its deliberations, the Special Committee also
considered the following potential disadvantages of the Transaction:
. The Partnership is acquiring an entity which, based on 1997 revenues, is
several times its size. Therefore, the nature of the Partnership's
business will be significantly changed.
. Petro has a history of operational and financial difficulties (including
high leverage and recent substantial net losses).
. The success of the acquisition depends upon the Partnership's ability to
(i) continue to make heating oil acquisitions at attractive prices; (ii)
continue to reduce Petro's customer attrition rate; and (iii) continue to
improve Petro's profit margins on a per gallon basis. There can be no
assurance that each of the three will occur.
. The Partnership is making a large investment in a business which, like
the Partnership's propane operations, is negatively affected by warm
weather during the winter months.
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. The income of Petro, unlike the income of the Partnership, will be
subject to corporate tax prior to distributions and dividend income from
Petro cannot be offset with past or future losses generated by the
Partnership's propane operations.
. The ratio of taxable income to cash distributions to be made to the
existing Common Unitholders will increase over time at a greater rate
than if the Transaction does not occur.
. The home heating oil business is not a growth business as a result of
competition from alternative energy sources.
. In the Transaction, the proportion of Subordinated Units to total Units
will decline from 37.5% to 25%, and the support to Common Units will
therefore be reduced.
. The number of Common Units will increase from approximately 3.9 million
to 10.8 million representing a potential significant dilution.
The Special Committee also considered the following factors:
. The Special Committee placed significant weight on the A.G. Edwards
Opinion, that the Transaction is fair, from a financial point of view, to
the Public Common Unitholders. The Special Committee considered valuation
methods used by A.G. Edwards in rendering the A.G. Edwards Opinion to be
appropriate and relied upon them in reaching their determination as to
the fairness of the Transaction to the Public Common Unitholders. The
Special Committee did not perform its own financial analysis (see
page ).
. The projections prepared by the Partnership and Petro (see page ).
. The terms of the Exchange Agreement, Merger Agreement and Amendment to
the Partnership Agreement (see pages , and ).
. The conditions to the completion of the Transaction (see page ).
. The background which resulted in the development of the structure of the
Transaction (see page ).
. The conflicts of interest in structuring the Transaction (see page ).
. Recent trading prices of the Common Units and the Common Stock (see
page ).
The foregoing discussion of information and factors considered and given
weight by the Special Committee is not intended to be exhaustive. Except for
the A.G. Edwards Opinion on which it placed significant weight, in view of the
wide variety of factors considered in its evaluation of the Transaction, the
Special Committee did not find it practicable to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors considered
in reaching their determination. In addition, individual members of the Special
Committee may have given different weights to different factors.
THE SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDS THAT THE PUBLIC COMMON
UNITHOLDERS VOTE FOR THE STAR PROPOSALS.
OPINION OF A.G. EDWARDS
On March 23, 1998, the Special Committee engaged A.G. Edwards to serve as its
financial advisor and to render an opinion as to the fairness, from a financial
point of view, of the Transaction to the Public Common Unitholders.
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A.G. Edwards, as part of its investment banking business, is regularly
engaged in, among other things, the valuation of businesses and their
securities in mergers and acquisitions, initial public offerings, secondary
distribution of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. A.G. Edwards is familiar
with the Partnership through acting as exclusive financial advisor and
placement agent in the Partnership's private placement of 7.17% First Mortgage
Notes due 2010 (the "First Mortgage Notes") and through its securities research
coverage of the Partnership. A.G. Edwards is not aware of any relationship
between A.G. Edwards and the Partnership, Star Gas or Petro, which in its
opinion, would affect its ability to render a fair and independent opinion in
this matter.
On October 16, 1998, A.G. Edwards rendered its written opinion to the Special
Committee that, as of that date, the Transaction was fair, from a financial
point of view, to the Public Common Unitholders.
Subsequent to delivering its opinion, A.G. Edwards was invited to serve as
one of seven co-managers of the equity offering.
THE FULL TEXT OF THE A.G. EDWARDS OPINION, WHICH SETS FORTH ITS PRINCIPAL
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS OF
THE SCOPE OF THE REVIEW UNDERTAKEN BY A.G. EDWARDS IN RENDERING ITS OPINION, IS
ATTACHED AS ANNEX D TO THIS PROXY STATEMENT. THE PUBLIC COMMON UNITHOLDERS ARE
URGED TO, AND SHOULD, READ THE A.G. EDWARDS OPINION CAREFULLY AND IN ITS
ENTIRETY. THE A.G. EDWARDS OPINION WAS DIRECTED TO THE SPECIAL COMMITTEE AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE TRANSACTION
TO THE PUBLIC COMMON UNITHOLDERS, AND DOES NOT CONSTITUTE TAX ADVICE OR A
RECOMMENDATION TO ANY PUBLIC COMMON UNITHOLDER AS TO HOW TO VOTE WITH RESPECT
TO THE TRANSACTION. THE SUMMARY OF THE A.G. EDWARDS OPINION IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
A.G. EDWARDS OPINION.
For purposes of the A.G. Edwards Opinion on the Transaction, A.G. Edwards
has assumed that the Partnership will be able to complete Petro's debt offering
(the "Debt Offering"), in which Petro will sell to the public approximately
$120.0 million of notes and the Partnership's equity offering (the "Equity
Offering"), in which it will offer for sale to the public approximately 6.8
million Common Units and the redemption of certain debt and preferred stock of
Petro (the "Refinancing Transactions") and understands that the Transaction
will not be completed if the Partnership is unable to complete the Refinancing
Transactions in accordance with the terms of the Merger Agreement. We have also
assumed that the withdrawal of Star Gas as general partner of the Partnership
and the related admission of a successor general partner will have no financial
impact on the Public Common Unitholders.
In connection with rendering the A.G. Edwards Opinion, A.G. Edwards reviewed
(1) the most recently available drafts of the Partnership's Registration
Statement on Form S-4 and its exhibits including the Merger Agreement, the
Exchange Agreement, the Amended and Restated Partnership Agreement and the
Conveyance and Contribution Agreements; (2) certain publicly available
historical audited financial statements and certain unaudited interim financial
statements of the Partnership and Petro; (3) certain financial analyses and
forecasts of the Partnership prepared by, and reviewed with, management of Star
Gas and the views of management of Star Gas regarding the Partnership's past
and current business operations, results thereof, financial condition and
future
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prospects, including the impact of the Transaction, as well as information
relating to the retail propane distribution industry and the potential
strategic, financial and operational benefits and challenges anticipated from
the Transaction; (4) certain financial analyses and forecasts of Petro prepared
by, and reviewed with, management of Petro and the views of management of Petro
regarding Petro's past and current business operations, results thereof,
financial condition and future prospects, including the impact of the
Transaction, as well as information relating to the home heating oil
distribution industry and the potential strategic, financial and operational
benefits and challenges anticipated from the Transaction; (5) the pro forma
impact of the Transaction on the Partnership and Petro; (6) the publicly
reported historical price and trading activity for the Common Units and the
Class A Common Stock, including a comparison of certain financial and stock
market information for the Partnership with similar publicly available
information for certain other companies, the securities of which are publicly
traded; (7) the current market environment generally, and the retail propane
distribution environment and the home heating oil distribution environment in
particular; (8) information relating to the financial terms of certain
transactions, including selected merger and acquisition transactions; and (9)
any other information, financial studies, analyses and investigations, and
financial, economic and market criteria that A.G. Edwards considered relevant.
A.G. Edwards did not perform an analysis related to the net book value or the
liquidation value of Petro as it considered these analyses inappropriate under
the circumstances of the Transaction. In rendering the A.G. Edwards Opinion,
A.G. Edwards has assumed that the Transaction will be completed on the terms
contained in the Merger Agreement, without any waiver of any material terms or
conditions by the Partnership or Petro.
In rendering the A.G. Edwards Opinion, A.G. Edwards has relied upon and
assumed, without independent verification, the accuracy and completeness of all
financial and other information, publicly available, furnished to, or otherwise
discussed with A.G. Edwards for the purposes of the A.G. Edwards Opinion. With
respect to financial projections and other information provided to or otherwise
discussed with A.G. Edwards, A.G. Edwards assumed and was advised by the
management of Star Gas and Petro, respectively, that the projections and other
information were reasonably prepared on a basis that reflects the best
currently available estimates and judgments of the management of Star Gas and
Petro, respectively. A.G. Edwards did review numerous sets of Petro's
projections and analyzed what it believed were certain of the major assumptions
embedded within Petro's projections, which are detailed in "--Certain
Projections of Petro and the Partnership." A.G. Edwards requested that Petro
make changes to two of its assumptions and furnish A.G. Edwards with the
resulting projections based on both 15-year weather ("Adjusted 15-Year Weather
Projections for Petro") and 30-year weather ("Adjusted 30-Year Weather
Projections for Petro"), collectively referred to as "Adjusted Projections for
Petro." The two assumptions that A.G. Edwards requested that Petro change were
as follows: (1) A.G. Edwards assumed retail margin growth of $0.01 per gallon
in 1999 and $0.005 per gallon thereafter; and (2) A.G. Edwards assumed that
Petro would complete $30.0 million of home heating oil company acquisitions
annually at a purchase price of 4.75x the first year earnings before interest
expense, income taxes, depreciation and amortization and any infrequent
revenues and expenses ("EBITDA"). The Adjusted 30-Year Weather Projections for
Petro resulted in heating oil EBITDA projections that were lower than
the heating oil EBITDA projections from Petro's 30-year weather projections by
the following percentages for 1999, 2000, 2001 and 2002, respectively: 0.4%,
4.4%, 7.7% and 10.5%. The Adjusted 15-Year Weather
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Projections for Petro resulted in heating oil EBITDA projections that were
higher than the heating oil EBITDA projection from Petro's 15-year weather
projections for 1999 by 0.8%, and lower than the heating oil EBITDA projections
from Petro's 15-year weather projections by the following percentages for 2000,
2001 and 2002, respectively: 1.4%, 3.4% and 5.2%.
The Special Committee did not, however, engage A.G. Edwards to, and therefore
A.G. Edwards did not, verify the accuracy or completeness of any information.
A.G. Edwards has relied upon the assurances of the management of Star Gas and
Petro that the respective managements are not aware of any facts that would
make the information inaccurate or misleading. A.G. Edwards did not conduct a
physical inspection of the properties or facilities of the Partnership or Petro
nor did it make or obtain any independent evaluation or appraisals of those
properties or facilities or assets and liabilities. A.G. Edwards assumed that
the Transaction will be accounted for as a purchase transaction under generally
accepted accounting principles. A.G. Edwards also assumed that the final form
of the Partnership's Registration Statement on Form S-4, the Agreement and Plan
of Merger, the Exchange Agreement, the Amended and Restated Partnership
Agreement and the Conveyance and Contribution Agreements would be substantially
similar to the last draft reviewed by A.G. Edwards, except for changes
requested by the Special Committee. The A.G. Edwards Opinion is necessarily
based on economic, market and other conditions as in effect on, and the
information made available to A.G. Edwards as of October 16, 1998.
The preparation of a fairness opinion is a complex process and is not readily
susceptible to partial analysis or summary description. In rendering the A.G.
Edwards Opinion, A.G. Edwards applied its judgment to a variety of complex
analyses and assumptions, considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying the A.G. Edwards Opinion. In addition, A.G. Edwards may have given
various analyses and factors more or less weight than other analyses and
factors, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be A.G. Edwards'
view of the actual value of the Partnership or Petro. In performing its
analyses, A.G. Edwards made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of the Partnership or Petro. The assumptions
made and judgments applied by A.G. Edwards in rendering the A.G. Edwards
Opinion are not readily susceptible to description beyond that in the written
text of the A.G. Edwards Opinion itself. Any estimates are not necessarily
indicative of future results or actual values, which may be significantly more
or less favorable than those suggested by the estimates. A.G. Edwards does not
assume responsibility if future results are different from those projected. The
analyses performed were prepared solely as part of A.G. Edwards' analysis of
the fairness, from a financial point of view, to Public Common Unitholders of
the Transaction and were conducted for the delivery of the A.G. Edwards
Opinion. As described above, the A.G. Edwards Opinion to the Special Committee
was one of the many factors taken into consideration by the Special Committee
in making its determination to recommend the Transaction. The decision to enter
into the Transaction was solely that of the Special Committee and the Star Gas
Board.
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The following is a summary of the material analyses performed by A.G. Edwards
in arriving at the A.G. Edwards Opinion:
Implied Unit Analysis
The consideration being paid to the Common Stockholders pursuant to the
Transaction will consist of Senior Subordinated Units, Junior Subordinated
Units and General Partner Units. As of the date of the A.G. Edwards Opinion, a
market price did not exist for these Units; subsequent to the Transaction, a
market price will exist only for the Senior Subordinated Units. In A.G.
Edwards' judgment, an analysis of the value per unit of each of the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units was
necessary to evaluate the fairness of the Transaction. In analyzing the value
of the Senior Subordinated Units, A.G. Edwards reviewed estimated ranges of
discount rates, trading yields and relative valuations compared to the price of
the publicly traded Common Units. In determining these estimated ranges, A.G.
Edwards considered, among other factors: (1) during the Subordination Period,
Common Unitholders will have priority in payment of the full Minimum Quarterly
Distribution plus arrearages before any distributions are made to the Senior
Subordinated Unitholders; (2) the earliest date on which the Subordination
Period would expire is July 1, 2002; (3) the Subordination Period would only
expire if the Adjusted Operating Surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equaled or exceeded
the sum of the increased Minimum Quarterly Distribution of $2.30 on an
annualized basis on all outstanding Units during that period; (4) during the
Subordination Period, distributions on the Senior Subordinated Units will be
limited to the amount of distributable cash generated; (5) the Senior
Subordinated Units will be entitled to receive a distribution of additional
Senior Subordinated Units, but only if Petro achieves certain financial goals
during the five year period following the closing of the Transaction; and (6)
the Senior Subordinated Units will receive a pro rata distribution of the
rights to receive Incentive Distributions previously held by the general
partner. A.G. Edwards' analysis resulted in an implied valuation range for a
Senior Subordinated Unit of $17.04 to $20.00 per unit, of which A.G. Edwards
used the midpoint value of $18.52.
In analyzing the value of the Junior Subordinated Units and General Partner
Units, A.G. Edwards considered, among other factors, certain of the differences
between the Senior Subordinated Units, on the one hand, and the Junior
Subordinated Units and General Partner Units, on the other hand, including:
(1) the lack of marketability of the Junior Subordinated Units and General
Partner Units; (2) the authority given the General Partner under the Amended
and Restated Partnership Agreement (and reflected in the General Partner Units)
to control the affairs of the Partnership; and (3) during the Subordination
Period, both the Common Units and Senior Subordinated Units will have priority
in payment of the full Minimum Quarterly Distribution before any distributions
are made on the Junior Subordinated Units and General Partner Units. A.G.
Edwards' analysis resulted in an implied valuation range for the Junior
Subordinated Units and General Partner Units of $14.38 to $16.43 per unit, of
which A.G. Edwards used the midpoint value of $15.41. Based on a value of
$18.52 for each Senior Subordinated Unit and $15.41 for each Junior
Subordinated Unit and General Partner Unit, A.G. Edwards calculated that the
implied consideration paid for each Petro share averaged $2.43.
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A.G. Edwards did not express an opinion as to what the value of the Senior
Subordinated Units, Junior Subordinated Units or General Partner Units will be
when issued to the Common Stockholders pursuant to the Transaction, or the
price at which the Common Units or Senior Subordinated Units will trade
subsequent to the Transaction.
Pro Forma Acquisition Analysis
A.G. Edwards analyzed the impact of the Transaction on the Partnership's
distributable cash flow (EBITDA less interest expense, maintenance capital
expenditures and cash taxes) ("DCF") per unit (DCF divided by the total number
of Common Units, Senior Subordinated Units, Junior Subordinated Units and
General Partner Units), the related accretion, the Partnership's Common
Unit coverage (DCF per common unit divided by the annualized Minimum Quarterly
Distribution of $2.20, or $2.30 on a pro forma basis) and the Partnership's
total unit coverage (DCF per total unit divided by the annualized Minimum
Quarterly Distribution of $2.20, or $2.30 on a pro forma basis). Based on the
Adjusted 15-Year Weather Projections for Petro and the General Partners'
management projections for 15-year weather, as well as other assumptions
including certain assumptions regarding the Refinancing Transactions, A.G.
Edwards calculated, pro forma for the Transaction, projected DCF per Unit,
Common Unit coverage and total unit coverage under three scenarios: (1)
adjusted for actual 1998, which was based on historical results of operations
through July 31, 1998 and assumed normal weather for the remainder of 1998, (2)
normalized 1998, which was based on the 1998 budget and assumed normal weather
and (3) projected 1999, which assumed normal weather. Under these three
scenarios: (1) DCF per unit would increase by $0.26, $0.53 and $0.54,
respectively; (2) Common Unit coverage would decrease from 0.96x to 0.89x,
increase from 1.22x to 1.25x and increase from 1.30x to 1.33x, respectively;
and (3) total unit coverage would increase from 0.58x to 0.66x, increase from
0.74x to 0.94x and increase from 0.81x to 1.00x, respectively. Based on the
Adjusted 30-Year Weather Projections for Petro and Star Gas' management
projections for 30-year weather, as well as other assumptions including certain
assumptions regarding the Refinancing Transactions, A.G. Edwards calculated pro
forma for the Transaction, projected DCF per Unit, Common Unit coverage and
total unit coverage, based on adjusted for actual 1998, normalized 1998 and
projected 1999. Under these three scenarios (1) DCF per unit would increase by
$0.26, $0.56 and $0.58, respectively; (2) Common Unit coverage would decrease
from 0.96x to 0.89x, increase from 1.38x to 1.39x and remain constant at 1.51x,
respectively; and (3) total unit coverage would increase from 0.58x to 0.66x,
increase from 0.84x to 1.05x and increase from 0.92x to 1.13x, respectively.
Analysis of Acquisition Premiums to Market Value
A.G. Edwards analyzed the premium of the implied consideration to be received
by Common Stockholders using the implied consideration of $2.43 for each Petro
share to the market value of the Class A Common Stock one day, one week, four
weeks, three months and one year prior to August 14, 1998, the day the
agreement in principle relating to the Transaction was announced (the
"Transaction Premiums"). A.G. Edwards reviewed three groups of selected merger
and acquisition transactions of majority or remaining interests involving
domestic public companies, excluding banks, thrifts and trusts, and compared
these transactions with the Transaction. The first group included 551 mergers
and corporate transactions announced and completed since January 1, 1996
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through October 9, 1998 in which the selling company's share price was equal to
or greater than $10 per share one week prior to the announcement (the "$10 and
Greater Transactions"). The second group included 125 mergers and corporate
transactions announced and completed since January 1, 1996 through October 9,
1998 in which the selling company's share price was less than $10 per share but
greater than $5 per share one week prior to the announcement (the "Greater than
$5 and Less than $10 Transactions"). The third group included 91 mergers and
corporate transactions completed since January 1, 1996 through October 9, 1998
in which the selling company's share price was equal to or less than $5 per
share one week prior to announcement (the "$5 and Less Transactions"). A.G.
Edwards compared the mean values for the $10 and Greater Transactions, the
Greater than $5 and Less than $10 Transactions, and the $5 and Less
Transactions, respectively, to the Transaction Premiums. The premium to the
stock price one day prior to the announcement date was 28.1%, 34.3% and 39.7%,
respectively, compared to 29.6% for the Class A Common Stock. The premium to
the stock price one week prior to the announcement date was 32.7%, 42.3% and
48.8%, respectively, compared to 38.9% for the Class A Common Stock. The
premium to the stock price four weeks prior to the announcement date was 39.6%,
48.5% and 55.4%, respectively, compared to 17.8% for the Class A Common Stock.
The premium to the stock price three months prior to the announcement date was
77.9%, 58.0% and 67.1%, compared to 52.5% for the Class A Common Stock. The
premium to the stock price one year prior to the announcement date was 53.2%,
45.8% and 53.8%, compared to a discount of 19.0% for the Class A Common Stock.
A.G. Edwards observed that the Class A Common Stock price has declined since
the announcement of the agreement in principle of the Transaction and that the
premium of the implied consideration to be received by Common Stockholders,
based on the Class A Common Stock price as of October 14, 1998, was 135.6%.
Contribution Analysis
A.G. Edwards analyzed the relative pro forma contribution of each of the
Partnership and Petro to the ownership of capital in the Partnership pro forma
for the Transaction based on the Partnership's and Petro's historical results
of operations and the General Partner's management projections and the Adjusted
Projections for Petro. For comparative purposes, A.G. Edwards converted Petro's
historical December 31 fiscal year-end to a September 30 year-end using Petro's
quarterly statements to conform to the Partnership's September 30 year-end.
This analysis indicated, among other things, that the Partnership would have
contributed 24.3% and 31.3% of gross profit and EBITDA, respectively, in fiscal
year 1996, and 29.4% and 39.8% of gross profit and EBITDA, respectively, in
fiscal year 1997. The analysis indicated that the Partnership would contribute
28.6% and 31.7% of gross profit and EBITDA, respectively, for 15-year weather
and 28.4% and 32.1% of gross profit and EBITDA, respectively, for 30-year
weather in normalized 1998 and 29.3% and 33.1% of gross profit and EBITDA,
respectively, for 15-year weather and 29.1% and 33.5% of gross profit and
EBITDA, respectively, for 30-year weather in projected 1999. A.G. Edwards
compared these figures to the percentage of the implied firm value attributable
to the Partnership of 37.1%, which was calculated by subtracting the implied
aggregate purchase price of Petro's heating oil assets, as described in the
Comparable Transactions Analysis, from the pro forma market capitalization of
the Partnership (pro forma Common Units multiplied by the market price of the
Common Units plus the pro forma Senior Subordinated Units, Junior Subordinated
Units and General Partner Units multiplied by their implied values based on the
Implied Unit Analysis plus the pro
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forma book value of debt less pro forma cash) divided by the pro forma market
capitalization of the Partnership.
Discounted Cash Flow Analyses
A.G. Edwards performed discounted cash flow analysis using the Adjusted
Projections for Petro (the "Petro Cash Flow Analysis"). In performing the Petro
Cash Flow Analysis, A.G. Edwards discounted back to December 31, 1998, using a
discount rate range of 13.4% to 13.9% based upon Petro's weighted average cost
of capital, the sum of (1) the projected tax-adjusted operating cash flows for
1999 to 2002; and (2) the terminal value for 2002 (the "Petro Terminal Value").
The Petro Terminal Value was determined based on projected 2002 EBITDA and a
terminal EBITDA multiple range of 6.0x to 8.0x. The Petro Cash Flow Analysis
indicated a present value of the equity of Petro in the range of $44.8 million
to $113.5 million for 15-year weather and $60.1 million to $131.9 million for
30-year weather, respectively. A.G. Edwards compared the results from the Petro
Cash Flow Analysis to the equity value being paid for Petro's heating oil
business, which A.G. Edwards calculated to be $25.5 million based on the
implied consideration being paid to each of the Common Stockholders less the
implied value of the Subordinated Units and the general partner interest
currently owned by Petro that will be effectively retired as part of this
Transaction.
A.G. Edwards also performed discounted cash flow analyses of the Partnership
based on the General Partner's management projections and the Partnership pro
forma for the Transaction based on the General Partner's management projections
and the Adjusted Projections for Petro (the "Partnership Cash Flow Analyses").
In performing the Partnership Cash Flow Analyses, A.G. Edwards discounted back
to September 30, 1998, using a discount rate range of 6.8% to 7.2% for the
Partnership and 7.3% to 7.7% for the Partnership pro forma for the Transaction
based upon the weighted average cost of capital for each, respectively, the sum
of (1) the projected tax-adjusted operating cash flows for 1999 to 2002; and
(2) the terminal values for 2002 (the "Partnership Terminal Values"). The
Partnership Terminal Values were determined based on 2002 projected EBITDAs and
a terminal EBITDA multiple range of 9.0x to 11.0x. Based on the Partnership
Cash Flow Analyses and the ratio of the Common Units outstanding as of the date
of the A.G. Edwards Opinion (the "Original Partnership Common Units") to total
Units (including the general partner interest) outstanding as of that date,
A.G. Edwards calculated the net present value attributable to the Original
Partnership Common Units and compared it to the present value attributable to
the Original Partnership Common Units pro forma for the Transaction. The range
of values were $90.8 million to $118.3 million for 15-year weather and $101.4
million and $130.7 million for 30-year weather, respectively, for the
Partnership and $126.0 million to $161.1 million for 15-year weather and $136.9
million to $173.9 million for 30-year weather, respectively, for the
Partnership pro forma for the Transaction.
Comparable Transactions Analysis
A.G. Edwards noted that, because Petro is the only publicly traded home
heating oil distribution company, public disclosure regarding transactions in
the home heating oil distribution industry was extremely limited. A.G. Edwards
analyzed the financial terms related to divestitures by Petro of three of its
heating oil branches and compared them to the implied multiples of the implied
aggregate purchase price of Petro's heating oil assets. The analyzed
divestitures were (1) Punderson, a division
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of Petro located in Springfield, Massachusetts, (2) New Hampshire, a division
of Petro located in southern New Hampshire and (3) TLC, a division of Petro's
subsidiary Ocennet located in Hartford, Connecticut. Petro has sold three
branches for a range of 8.0x to 9.8x purchase price to EBITDA multiple. In
analyzing the implied EBITDA multiple paid for Petro's heating oil assets, A.G.
Edwards considered the following: (1) the implied consideration paid for
the Common Stock; (2) the implied valuation of the Subordinated Units and
general partner interest of the Partnership currently owned by Petro; (3) the
redemption value of certain of Petro's indebtedness and preferred stock; (4)
the value of certain of Petro's indebtedness that will remain outstanding
subsequent to the Transaction; (5) consent fees paid to certain of Petro's debt
holders; (6) an estimate of all of the transaction costs associated with the
Transaction; and (7) Petro's normalized 1997 EBITDA, normalized 1998 EBITDA and
projected 1999 EBITDA based on the Adjusted Projections for Petro. Based on
this information, the normalized 1997 EBITDA, normalized 1998 EBITDA and
projected 1999 EBITDA implied multiples paid for Petro's heating oil assets
were 8.3x, 8.0x and 7.7x for 15-year weather, respectively, and 8.3x, 7.6x and
7.3x for 30-year weather, respectively.
Analysis of Selected Publicly Traded Companies
A.G. Edwards used publicly-available information to compare selected
financial and market trading information for the Partnership to the Partnership
pro forma for the Transaction and to a group of selected retail propane
distributors, all of which are also master limited partnerships (the
"Partnership Comparable Group"). The retail propane distributors in the
Partnership Comparable Group were selected by A.G. Edwards based on the
similarity of their businesses to that of the Partnership. The Partnership
Comparable Group was comprised of: AmeriGas Partners, L.P., Cornerstone Propane
Partners, L.P., Ferrellgas Partners, L.P., Heritage Propane Partners, L.P.,
National Propane Partners, L.P., and Suburban Propane Partners, L.P. No
partnership used in A.G. Edwards' analysis is identical to the Partnership.
A.G. Edwards' analysis involves complex considerations and judgments concerning
differences in the potential financial and operating characteristics of the
Partnership Comparable Group and other factors regarding the trading values of
the Partnership Comparable Group. The financial information reviewed included,
among other things: (1) market capitalization (equity market value (common
units plus subordinated units and implied general partner units multiplied by
the market price of the common units) plus the book value of debt plus minority
interest less cash) to latest twelve month ("LTM") EBITDA and 1999 estimated
EBITDA based on currently available research estimates; (2) equity market value
to LTM DCF and 1999 estimated DCF based on currently available research
estimates; and (3) distribution yield. Such analysis for the Partnership and
the Partnership pro forma for the Transaction was based on the General
Partner's management projections and the Adjusted Projections for Petro. A.G.
Edwards compared the market capitalization to LTM EBITDA and 1999 EBITDA of the
Partnership of 12.5x and 10.2x for 15-year weather and 12.5x and 9.6x for 30-
year weather, respectively, to the Partnership pro forma for the Transaction of
10.0x and 8.1x for 15-year weather and 10.0x and 7.7x for 30-year weather,
respectively, and to the range and median of the Partnership Comparable Group
of 9.0x to 12.7x with a median of 11.6x, and 8.4x to 11.1x with a median of
9.2x, respectively. A.G. Edwards compared the equity market value to LTM DCF
and 1999 DCF of the Partnership of 15.4x and 10.6x for 15-year weather and
15.4x and 9.6x for 30-year weather, respectively, to the Partnership pro forma
for the Transaction of 12.5x and 8.1x for 15-year weather and 12.5x and 7.4x
for 30-year weather, respectively, and to the range and median of the
Partnership Comparable Group
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of 8.1x to 15.3x with a median of 13.4x, and 4.9x to 12.2x with a median of
9.8x, respectively. Using the closing price of the Partnership's price per
Common Unit on October 14, 1998 of $19.56, A.G. Edwards compared the
distribution yield of the Partnership, assuming a $2.20 annualized Minimum
Quarterly Distribution, of 11.2% to the Partnership pro forma for the
Transaction, assuming a $2.30 annualized Minimum Quarterly Distribution, of
11.8% and to the range and median of the Partnership Comparable Group of 9.1%
to 22.3% with a median of 10.1%, respectively.
Terms of A.G. Edwards' Engagement
The terms of the engagement of A.G. Edwards by the Special Committee are
described in a letter agreement between A.G. Edwards and the Special Committee
(the "Engagement Letter"). Pursuant to the terms of the Engagement Letter, as
compensation for rendering its financial advisory services and the A.G. Edwards
Opinion to the Special Committee, the Partnership agreed to pay A.G. Edwards a
fee of $575,000, of which $75,000 has been paid; $250,000 was due upon the
delivery of the A.G. Edwards Opinion; and $250,000 will be due upon the closing
of the Transaction. The Partnership has agreed to reimburse A.G. Edwards for
all travel and out-of-pocket expenses incurred in its engagement. The
Partnership has also agreed to indemnify A.G. Edwards against certain
liabilities in the engagement of A.G. Edwards.
REASONS FOR THE TRANSACTION THAT THE PETRO BOARD CONSIDERED; RECOMMENDATION OF
THE PETRO BOARD
At a special meeting of the Petro Board held on October 6, 1998, the Petro
Board received presentations concerning, and reviewed the terms of, the
Transaction with members of Petro's management and its legal counsel and
financial advisors. At a special meeting held on October 19, 1998, the Petro
Board unanimously determined that the Transaction is fair to, and in the best
interests of, the Public Common Stockholders. Accordingly, the Petro Board has
unanimously approved the Merger Agreement and Exchange Agreement and
unanimously recommends that the Common Stockholders vote FOR the approval of
the Acquisition Proposal at the Special Meeting. See "--Background of the
Transaction" and "Parties and Conflicts--Conflicts of Interest."
During the course of its deliberations, the Petro Board with the assistance
of management and its legal and financial advisors, considered the following
potential advantages of the Transaction:
. Petro is the largest home heating oil distributor in the U.S. and
the principal consolidator of that highly fragmented industry. However,
Petro does not have the financial flexibility to fully capitalize upon
the acquisition, operating and corporate branding opportunities resulting
from this position. This Transaction will recapitalize Petro providing it
with access to lower cost capital to better realize these growth
opportunities.
. As part of a publicly-traded limited partnership, Petro's home heating
oil operations should receive an improved market valuation. Due to high
financing costs and amortization of customer lists, Petro does not
currently generate net income for financial reporting purposes. Since
publicly-traded limited partnerships are cash flow oriented and are
valued primarily on a cash distribution basis, the publicly-traded
limited partnership structure corresponds more closely with Petro's focus
on cash flow. The Petro Board also believes the Partnership will have
greater investment community awareness as compared to Petro. As the only
public home heating oil company, Petro has had limited securities analyst
research coverage.
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. Based on information provided by its financial advisors, the Petro Board
expects the Common Stockholders to receive partnership units that are
expected to trade at an attractive price compared to the recent trading
price of the Common Stock. The actual trading price of the Senior
Subordinated Units will depend on a variety of factors, including overall
market conditions for publicly-traded limited partnerships, the trading
level of the Common Units, the weather in the Partnership's areas of
operations and the actual and expected levels of Available Cash generated
by the Partnership's activities.
. The Petro Board believes that the Transaction has been structured so the
Common Stockholders will continue to participate in the expected benefits
from Petro's operating and corporate branding opportunities. If Petro
achieves certain financial goals within the five-year period after
closing, the holders of Senior Subordinated Units, Junior Subordinated
Units and General Partner Units will receive up to an additional 909,000
Senior Subordinated Units. This enables Common Stockholders to continue
to participate in Petro's future performance. While there is no assurance
these goals will be achieved, the Petro Board believes that they are
realistic and, if achieved, could provide significant additional value
to Common Stockholders.
. Although Petro has historically paid cash dividends to its Common
Stockholders, these dividends have been suspended. The Partnership
generally distributes to its partners the cash it generates from its
operations. While there can be no assurance, this should give Common
Stockholders an increased probability of a resumption of annual
distributions.
. The Senior Subordinated Units will be allocated certain Incentive
Distribution rights previously held by the General Partner. To the extent
that the Partnership generates cash above certain target distribution
levels, the holders of Senior Subordinated Units may receive increased
cash distributions.
. The Public Common Stockholders will receive Senior Subordinated Units
that must receive their full Minimum Quarterly Distribution prior to any
payments being made on the Junior Subordinated Units and the General
Partner Units.
During the course of its deliberations, the Petro Board also considered the
following potential disadvantages of the proposed Transaction:
. Unitholders in the Partnership have substantially different, and probably
fewer, legal rights than Common Stockholders.
. There is no current trading market for the Senior Subordinated Units and
even though they will be listed on the New York Stock Exchange, there are
no assurances that any active trading market will exist after the closing
of the Transaction. It is expected that the Senior Subordinated Units
will trade at a lower price than the Common Units.
. Distributions on the Senior Subordinated Units, Junior Subordinated Units
and General Partner Units are not guaranteed and are subordinated to
distributions on the Common Units. Further, distributions on the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units
are in general limited to the amount of distributable cash generated
after the Transaction. Therefore, there is significant uncertainty as to
the amount and timing of those distributions.
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. Star Gas LLC, the new general partner in the Partnership, may have a
greater number of conflicts of interest than the directors of Petro.
. The Partnership's propane operations, like Petro's home heating oil
business, is negatively affected by warm weather during the winter
months.
. The Partnership may face difficulties in the future in making attractive
acquisitions in the propane industry because of the highly competitive
nature of the industry.
. Common Stockholders that are tax-exempt entities, regulated investment
companies or foreign taxpayers may determine that holding an interest in
the Partnership may be unattractive from a tax perspective. If certain of
these investors sell their Senior Subordinated Units following
the transaction, the market price of the Senior Subordinated Units could
fall substantially.
The Petro Board also considered the following factors:
. The Petro Board placed significant weight on the Dain Rauscher Wessels
Opinion, that the Transaction is fair, from a financial point of view, to
the Public Common Stockholders. The Petro Board considered the valuation
methods used by Dain Rauscher Wessels in rendering the Dain Rauscher
Wessels Opinion to be appropriate and relied upon them in reaching their
determination as to the fairness of the Transaction to the Public Common
Stockholders. The Petro Board did not perform its own financial analysis.
(see page ).
. The projections prepared by the Partnership and Petro (see page ).
. The terms of the Exchange Agreement, Merger Agreement and Amendment to
the Partnership Agreement (see pages , and ).
. The conditions to the completion of the Transaction (see page ).
. The background which resulted in the development of the structure of the
Transaction (see page ).
. The conflicts of interest in structuring the Transaction (see page ).
. Recent trading prices for the Common Units and the Common Stock (see page
).
The foregoing discussion of information and factors considered and given
weight by the Petro Board is not intended to be exhaustive. In view of the wide
variety of factors considered in its evaluation of the Transaction, the Petro
Board did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered
in reaching their determination. In addition, individual members of the Petro
Board may have given different weights to different factors.
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THE PETRO BOARD UNANIMOUSLY RECOMMENDS THAT THE COMMON STOCKHOLDERS VOTE FOR
THE ACQUISITION PROPOSAL AT THE SPECIAL MEETING.
OPINION OF DAIN RAUSCHER WESSELS
On May 14, 1998, the Petro Board retained Dain Rauscher Wessels to render an
opinion to the Petro Board concerning the fairness, from a financial point of
view, of the consideration to be received by the Public Common Stockholders
pursuant to the Merger. On October 6, 1998, Dain Rauscher Wessels rendered to
the Petro Board the Dain Rauscher Wessels Opinion that, as of the date of the
opinion, and based upon and subject to the factors and assumptions set forth
therein, the consideration to be received by the Public Common Stockholders
pursuant to the Merger was fair, from a financial point of view, to the Public
Common Stockholders.
The full text of the Dain Rauscher Wessels Opinion, which describes the
principal assumptions made, matters considered and qualifications and
limitations on the review undertaken by Dain Rauscher Wessels in rendering its
opinion, is attached as Annex E to the proxy statement and is incorporated by
reference. The summary of the Dain Rauscher Wessels Opinion in this proxy
statement is qualified in its entirety by reference to the full text of the
opinion. Common Stockholders are urged to read the opinion carefully and in its
entirety. The Dain Rauscher Wessels Opinion was provided to the Petro Board for
its information and is directed only to the fairness from a financial point of
view of the consideration to be received by the Public Common Stockholders from
the Merger. The Dain Rauscher Wessels Opinion does not address the merits of
the underlying decision by Petro to engage in the Merger and does not
constitute a recommendation to any Common Stockholder as to how that holder
should vote on the approval and adoption of the Merger Agreement or any matter
related to it.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Dain Rauscher Wessels Opinion or the presentation
made by Dain Rauscher Wessels to the Petro Board. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and
the application of those methods to the particular circumstances. Therefore,
this opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Dain Rauscher Wessels did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Dain Rauscher Wessels believes that its
analyses must be considered as a whole and that selecting portions of its
analyses, without considering all of its analyses, would create an incomplete
view of the process underlying the Dain Rauscher Wessels Opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Dain
Rauscher Wessels, Petro or the Partnership. Any estimates contained in the
analyses performed by Dain Rauscher Wessels are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by the analyses. Additionally, estimates of the value
of businesses or securities do not purport to be appraisals or to reflect the
prices at which those businesses or securities might actually be sold.
Accordingly, the analyses and estimates are inherently subject to substantial
uncertainty. The Dain
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Rauscher Wessels Opinion and Dain Rauscher Wessels' presentation to the Petro
Board were among several factors taken into consideration by the Petro Board in
making its determination to approve the Merger Agreement. Consequently, the
Dain Rauscher Wessels' analyses described below should not be viewed as
determinative of the decision of the Petro Board or Petro's senior management
to engage in the Merger.
In arriving at the Dain Rauscher Wessels Opinion, Dain Rauscher Wessels
reviewed the most recently available drafts of the Merger Agreement, the
Amended and Restated Partnership Agreement, the proxy statement of Petro and
the Partnership filed as a part of the Registration Statement on Form S-4 of
the Partnership, and certain publicly available financial information
concerning Petro and the Partnership. In addition, Dain Rauscher Wessels
reviewed certain internal analyses, forecasts and other internal information
concerning the businesses and operations of Petro and the Partnership prepared
by the respective senior managements of Petro and the Partnership. Dain
Rauscher Wessels also met with the senior managements of Petro and the
Partnership to discuss the businesses, operations and prospects of Petro and
the Partnership. Dain Rauscher Wessels also considered certain long-term
strategic benefits of the Merger, both operational and financial, that were
described to Dain Rauscher Wessels by the senior managements of Petro and the
Partnership. Dain Rauscher Wessels reviewed the terms of the Transaction in
relation to, among other things, current and historical market prices and
trading volume for the Class A Common Stock and the Common Units; the
respective companies' cash flow, net income and book value per share/unit;
the capitalization and financial condition of Petro and the Partnership; the
pro forma financial impact of the Merger on Petro and the Partnership,
including the potential relative ownership of various classes of Units of the
Partnership after the Merger by the current holders of Common Stock and
the current unitholders of the Partnership; and, to the extent publicly
available, the terms of recent merger and acquisition transactions involving
comparable companies. In addition, Dain Rauscher Wessels reviewed the merger
premiums paid in recent stock-for-stock acquisitions of public companies
generally, and energy industry companies in particular. Dain Rauscher Wessels
also analyzed certain financial, stock market and other publicly available
information relating to the business of other companies and partnerships whose
operations Dain Rauscher Wessels considered comparable to the respective
operations of Petro and the Partnership. In addition to the foregoing, Dain
Rauscher Wessels considered other information, financial studies, analyses and
investigations and financial, economic and market criteria as Dain Rauscher
Wessels deemed relevant in arriving at the Dain Rauscher Wessels Opinion.
In preparing the Dain Rauscher Wessels Opinion, Dain Rauscher Wessels did not
independently verify any of the foregoing information, and relied upon the
information being complete and accurate in all material respects. Dain Rauscher
Wessels assumed, with Petro's consent, that the financial forecasts provided to
Dain Rauscher Wessels and discussed with Dain Rauscher Wessels were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the senior managements of Petro and the Partnership as to the
respective expected future performance of Petro and the Partnership, and of the
combined companies subsequent to the proposed Merger. In addition, Dain
Rauscher Wessels did not conduct a physical inspection or make an independent
evaluation or appraisal of the assets of Petro or the Partnership, nor was Dain
Rauscher Wessels furnished with any evaluation or appraisal. Dain Rauscher
Wessels assumed that the Merger will be accounted for as a purchase transaction
under generally accepted accounting principles, and
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will be a taxable event to the Public Common Stockholders. In rendering the
Dain Rauscher Wessels Opinion, Dain Rauscher Wessels assumed that in the course
of obtaining the necessary regulatory and governmental approvals for the
proposed Merger, no restriction will be imposed that will have a material
adverse effect on the contemplated benefits of the proposed Merger. Dain
Rauscher Wessels also assumed that the final form of the Merger Agreement would
be substantially similar to the last draft reviewed by Dain Rauscher Wessels.
The Dain Rauscher Wessels Opinion is based on circumstances as they existed and
could be evaluated on, and the information made available to Dain Rauscher
Wessels, as of the date of the Dain Rauscher Wessels Opinion.
For purposes of rendering the Dain Rauscher Wessels Opinion, Dain Rauscher
Wessels assumed, in all respects material to its analyses, that the
representations and warranties of each party to the Merger Agreement and all
related documents and instruments contemplated by it were true and correct in
all material respects, that each party to those documents will perform all of
the covenants and agreements required to be performed by that party under such
documents, and that all conditions to the Merger will be satisfied without
waiver thereof.
The following is a brief summary of the material analyses performed by Dain
Rauscher Wessels in its preparation of the Dain Rauscher Wessels Opinion.
Unit Reference Value Analysis
Dain Rauscher Wessels performed a unit reference value analysis to determine
ranges of reference values for the Common Units, Senior Subordinated Units and
Junior Subordinated Units/ General Partner Units. In Dain Rauscher Wessels'
judgment, this analysis was required because the Senior Subordinated Units and
Junior Subordinated Units/General Partner Units are newly-created classes of
Units for which no prior market trading data exists. A range of reference
values was calculated for the Common Units in order that they could be
evaluated on a basis consistent with the other classes of Units. Moreover, the
determination of reference values for the Senior Subordinated Units and Junior
Subordinated Units/General Partner Units was required in order for Dain
Rauscher Wessels to analyze the absolute and relative values of each class of
unit, as well as to evaluate the aggregate value of the consideration being
received by holders of Common Stock pursuant to the Merger.
To determine a reference range of values for each class of unit, Dain
Rauscher Wessels employed a discounted distribution model based upon Petro
senior management's forecasts for the pro forma combined entity from the year
ended September 30, 1998 through the year ended September 30, 2002, assuming
15-year weather ("15-Year Weather Case") and 30-year weather ("30-Year Weather
Case"). Dain Rauscher Wessels also examined a case in which distributions per
unit remained at $2.30 over the forecast period (the "Downside Case"), and a
case in which distributions increased at a slower rate than in the 15-Year
Weather Case and the 30-Year Weather Case (the "Dain Rauscher Wessels Case").
Factors examined included the Indicated Distributions (the Minimum Quarterly
Distribution and other distributions of Available Cash from Operating Surplus);
the additional Senior Subordinated Units to be issued based upon the
performance of Petro; and the Incentive Distributions which are to be shared
pro rata by the Senior Subordinated Units and Junior Subordinated Units/General
Partner Units if distributions of Available Cash exceed Target Distribution
Levels. Dain Rauscher Wessels discounted projected distributions for each class
of Units
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to a net present value employing discount rates which, in Dain Rauscher
Wessels' professional judgment, reflected (1) prevailing market yields for the
Common Units and publicly-traded Units of other propane distribution master
limited partnerships; (2) the structural subordination of the various classes
of Units; and (3) the relative risks associated with the Indicated
Distributions, the additional Senior Subordinated Units to be issued based upon
the performance of Petro and the Incentive Distributions. For each class of
unit, net present terminal values were calculated employing a perpetuity
valuation based upon the discount rate employed for a given class of
distribution and the amount of the projected distributions in the year ending
September 30, 2002. To reflect the lack of marketability of the Junior
Subordinated Units/ General Partner Units, Dain Rauscher Wessels considered a
range of discounts and applied a discount of 22% to the net present values
calculated for the Junior Subordinated Units/General Partner Units.
Common Units. For the Common Units, discount rates of 9.0%-11.3% were applied
to the projected Indicated Distributions. The calculated reference values for
the Downside Case, 15-Year Weather Case, 30-Year Weather Case and Dain Rauscher
Wessels Case were $20.75, $26.33, $31.55 and $22.54 per Common Unit,
respectively.
Senior Subordinated Units. For the Senior Subordinated Units, discount rates
of 9.8%-13.3% were applied to the projected Indicated Distributions, discount
rates of 12.5%-14.3% were applied to the projected additional Senior
Subordinated Units to be issued based upon the performance of Petro and
discount rates of 13.0%-14.8% were applied to the projected Incentive
Distributions. The calculated reference values for the Downside Case, 15-Year
Weather Case, 30-Year Weather Case and Dain Rauscher Wessels Case were $17.74,
$26.90, $35.62 and $22.76 per Senior Subordinated Unit, respectively.
Junior Subordinated Units / General Partner Units. For the Junior
Subordinated Units/General Partner Units, discount rates of 10.5%-14.3% were
applied to the projected Indicated Distributions, discount rates of 12.5%-14.3%
were applied to the projected additional Senior Subordinated Units to be issued
based on the performance of Petro and discount rates of 13.0%-14.8% were
applied to the projected Incentive Distributions. The calculated reference
values for the Downside Case, 15-Year Weather Case, 30-Year Weather Case and
Dain Rauscher Wessels Case were $12.91, $19.53, $26.16 and $16.67 per Junior
Subordinated Unit/General Partner Unit, respectively.
For purposes of performing its other analyses, Dain Rauscher Wessels employed
the unit reference values implied by the Dain Rauscher Wessels Case as
reference values for the subject Units. Dain Rauscher Wessels multiplied the
exchange ratio of .13064 by the $22.76 reference value for the Senior
Subordinated Units to calculate an implied merger value ("Implied Merger
Value") of $2.97 per share of Common Stock held by the Public Common
Stockholders. Dain Rauscher Wessels calculated that the $2.97 Implied Merger
Value was comprised of the sum of net present values of $2.54 attributable to
the Indicated Distributions and $0.43 attributable to the additional Senior
Subordinated Units to be issued based on the performance of Petro and Incentive
Distributions. Dain Rauscher Wessels also multiplied an exchange ratio of
.15913 (the ratio of the number of Junior Subordinated Units/General Partner
Units to be received by holders of Common Stock other than the Public Common
Stockholders ("Affiliate Common Stockholders") to the number of shares of
Common Stock to be exchanged by those holders) by the $16.67 reference value
for the Junior
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Subordinated Units/General Partner Units to calculate an Implied Merger Value
of $2.65 per share of Common Stock held by the Affiliated Common Stockholders.
Dain Rauscher Wessels calculated that the $2.65 Implied Merger Value was
comprised of the sum of net present values of $2.24 attributable to the
Indicated Distributions and $0.41 attributable to the additional Senior
Subordinated Units to be issued based on the performance of Petro and Incentive
Distributions.
Discounted Cash Flow Analysis
Dain Rauscher Wessels performed a discounted cash flow analysis to calculate
the implied price per share of Petro Common Stock based upon senior
management's projections assuming 15-year weather and 30-year weather from June
30, 1998 through December 31, 2002, and no acquisitions. Using this
information, Dain Rauscher Wessels calculated the net present value of Petro's
unlevered free cash flows from June 30, 1998 through December 31, 2002 using
discount rates ranging from 12.0% to 16.0%. Dain Rauscher Wessels also
calculated the net present terminal value of Petro at December 31, 2002 based
upon multiples of 6.5x to 8.5x EBITDA (earnings before interest, taxes,
depreciation and amortization) in the year ending December 31, 2002, and
discount rates ranging from 12.0% to 16.0%. Dain Rauscher Wessels employed the
capital asset pricing model to determine a weighted average cost of capital for
Petro, and also employed its professional judgment in determining a range of
discount rates for use in the analysis. The sum of the net present values of
the free cash flows and terminal values, less outstanding debt and preferred
stock (net of excess cash), yielded an implied net present value per share of
Common Stock ranging from $(1.81) to $2.56.
Inherent in any discounted cash flow analysis are the use of a number of
assumptions, including the accuracy of management's projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations
in any of these assumptions or judgments and variables beyond management's
control, such as the general and regional economies, worldwide oil and gas
prices, adverse weather conditions and the availability of personnel and
equipment, could significantly alter the results of a discounted cash flow
analysis.
Relative Contribution Analysis
Dain Rauscher Wessels performed a relative contribution analysis to examine
the relationship between the percentage ownership of the Partnership that the
Common Stockholders would receive pursuant to the Merger, and the relative
contribution of Petro to the distributable cash flow of the Partnership on a
pro forma combined basis. In considering the percentage ownership of the
Partnership that the Common Stockholders would receive pursuant to the Merger,
Dain Rauscher Wessels performed calculations on both a gross Units basis,
treating all classes of Units as identical, as well as an adjusted Units basis,
in which the number of Units to be received by the Common Stockholders was
adjusted to reflect the different values of various classes of Units implied by
Dain Rauscher Wessels' Unit Reference Value Analysis. In calculating the
relative contributions of Petro and the Partnership to the distributable cash
flow of the Partnership on a pro forma combined basis, Dain Rauscher Wessels
considered that Petro, as the owner of Star Gas and all of the Partnership's
outstanding subordinated units prior to the Merger, was the contributor of the
distributable cash flow accruing to that ownership position.
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Based upon senior management's normalized estimates for fiscal 1998 for Petro
and the Partnership, and the 15-Year Weather Case assumptions for the
Partnership on a pro forma combined basis for fiscal 1999, Dain Rauscher
Wessels calculated that Petro would provide 46.8% and 56.8% of the
distributable cash flow of the Partnership on a pro forma combined basis in
fiscal 1998 and 1999, respectively. Dain Rauscher Wessels determined that,
pursuant to the Merger, the Common Stockholders would receive 48.6% of the
ownership of the pro forma combined entity on a gross Units basis, and 47.5% on
an adjusted Units basis. Dain Rauscher Wessels also noted that, based on the
exchange ratio of .13064 and assuming that (i) the Minimum Quarterly
Distribution is $0.575 following the Merger and (ii) the Minimum Quarterly
Distribution is paid to holders of Senior Subordinated Units, the Public Common
Stockholders who receive Senior Subordinated Units would receive an annual
distribution of $0.30 for each share of Common Stock exchanged pursuant to the
Merger. Dain Rauscher Wessels noted that Common Stock does not presently pay a
dividend.
Net Asset Value Analysis
Dain Rauscher Wessels performed a net asset value analysis to examine values
which might be realized by the Common Stockholders if Petro pursued orderly
liquidations of its home heating oil business and investment in the
Partnership, and satisfied Petro's obligations to its creditors and preferred
stockholders. For purposes of this analysis, Dain Rauscher Wessels selected six
criteria for valuing Petro's home heating oil business: (1) the mean EBITDA
multiple paid by Petro in its ten largest acquisitions of home heating oil
businesses in 1996-1997, adjusted for a 10% size premium; (2) the mean price
per gallon of target annual volume paid by Petro in those acquisitions,
adjusted for a 10% size premium; (3) the mean price per target customer paid by
Petro in those acquisitions, adjusted for a 10% size premium; (4) the mean
EBITDA multiple paid by the Partnership in its acquisitions of eleven propane
retailers in 1994-1997, adjusted for a 10% size premium; (5) the mean EBITDA
multiple paid in the Selected Transactions examined in Dain Rauscher Wessels'
Comparable Transactions Analysis; and (6) a growth rate-adjusted EBITDA
multiple implied by an analysis of the public market multiples of companies
engaged in consolidating fragmented industries. In each scenario, Dain Rauscher
Wessels valued Petro's current investment in the Partnership by multiplying the
number of subordinated Units and implied General Partner Units by the most
recent Common Unit price, less a 15% discount to reflect structural
subordination. Outstanding debt and preferred stock were assumed to be
liquidated at par or liquidation value, plus applicable prepayment penalties,
and the analysis further assumed $5.0 million of transaction costs. The values
per share of Common Stock implied by these analyses ranged from $0.00 to $5.47,
with a median of $1.04 and a mean of $1.64. Dain Rauscher Wessels noted that
excluding criteria (3) above, the values per share of Common Stock implied by
these analyses ranged from $0.00 to $2.28, with a median of $0.21 and a mean of
$0.87. Dain Rauscher Wessels believes that criteria (3) is less reliable as a
means of valuing Petro's home heating oil business due to a lack of consistency
in the price per target customer paid by Petro in such acquisition. Dain
Rauscher Wessels applied its subjective professional judgment in comparing
these values to the Implied Merger Value to be received pursuant to the Merger
by the Public Common Stockholders.
Comparable Company Trading Analysis
Using publicly available information, Dain Rauscher Wessels compared, based
upon market trading values as of September 25, 1998, multiples of certain
financial criteria, including net income,
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EBITDA, EBIT (earnings before interest and taxes), Cash Flow from Operations
(net income plus depreciation and amortization, deferred taxes and other non-
cash items, but not including changes in working capital accounts), revenues
and the tangible book value of equity of Petro to certain other companies
which, in Dain Rauscher Wessels' judgment, were comparable to Petro for
purposes of this analysis. Dain Rauscher Wessels noted that Petro is the only
publicly-traded company engaged primarily in the distribution of home heating
oil. Accordingly, Dain Rauscher Wessels selected for comparison companies
engaged to varying degrees in the wholesale and retail marketing and
distribution of energy and fuel. Other factors considered by Dain Rauscher
Wessels in selecting companies for comparison included size, financial
condition and geographic scope of operations. The group of companies used in
the comparison included Adams Resources & Energy, Inc., Bay State Gas Company,
Halstead Energy Corp., Meteor Industries, Inc., Midcoast Energy Resources,
Inc., National Gas & Oil Company, Streicher Mobile Fueling, Inc.,
TransMontaigne Inc. and World Fuel Services Corporation.
For the group of comparable energy and fuel marketing and distribution
companies, the range, median and mean for equity market value as a multiple of
each of the indicated statistics were as follows: (a) latest twelve months net
income--7.6x to 47.4x, with a median of 13.8x and a mean of 20.8x; (b) latest
twelve months Cash Flow from Operations--2.8x to 21.9x, with a median of 11.1x
and a mean of 11.5x; and (c) tangible book value of common equity--0.3x to
2.5x, with a median of 1.7x and a mean of 1.6x. Net Market Capitalization
(defined as equity market value plus the book value of debt and preferred
stock, less cash and equivalents in excess of a 1.0 working capital ratio) as a
multiple of latest twelve months EBIT ranged from 5.6x-24.1x, with a median of
12.1x and a mean of 14.5x. Dain Rauscher Wessels was unable to calculate
meaningful mathematical comparisons between these comparable company multiples
and corresponding multiples for Petro because Petro (a) generated negative net
income and Cash Flow from Operations for the latest twelve months ended June
30, 1998; (b) generated EBIT for the latest twelve months ended June 30, 1998
at a level which rendered the resultant multiple (478.1x) not meaningful in
Dain Rauscher Wessels' judgment; and (c) had a net stockholders' deficiency at
June 30, 1998. In addition, Dain Rauscher Wessels examined certain other market
valuation criteria for which comparisons could be drawn. The comparable
companies' Net Market Capitalization as a multiple of latest twelve months
EBITDA ranged from 2.7x-19.7x, with a median of 10.7x and a mean of 11.2x,
which compared to 9.8x for Petro. Net Market Capitalization as a multiple of
latest twelve months revenues ranged from 0.2x-1.8x, with a median of 0.5x and
a mean of 0.7x, which compared to 0.8x for Petro. Dain Rauscher Wessels applied
its subjective professional judgment in evaluating Petro's results of
operations for the twelve months ended June 30, 1998 in relation to the
comparable company trading multiples.
In addition, Dain Rauscher Wessels used publicly available information, based
upon market trading values as of September 25, 1998, to compare certain
financial criteria (including multiples of latest twelve months EBITDA and Cash
Flow from Operations, distribution yields and debt to book capitalization
ratios), among a group of propane distribution master limited partnerships
which Dain Rauscher Wessels considered to be comparable to the Partnership. For
purposes of analysis, this group was composed of Amerigas Partners, L.P.,
Cornerstone Propane Partners, L.P., Ferrellgas Partners, L.P., Heritage Propane
Partners, L.P., National Propane Partners, L.P., and Suburban Propane Partners,
L.P. Dain Rauscher Wessels calculated an Adjusted Equity Market Value for
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each propane distribution master limited partnership by valuing the common
units of each limited partnership at market value, the subordinated units at
65% of the common unit market value, and the general partner units at 85% of
the common unit market value. Dain Rauscher Wessels also calculated an Adjusted
Market Capitalization for each limited partnership as the sum of Adjusted
Equity Market Value plus the book value of debt, less cash and equivalents in
excess of a 1.0 working capital ratio.
For the group of propane distribution master limited partnerships, Adjusted
Market Capitalization as a multiple of latest twelve months EBITDA ranged from
8.6x-14.0x, with a median of 10.2x and a mean of 10.5x, which compared to 11.9x
for the Partnership. Adjusted Equity Market Value as a multiple of latest
twelve months Cash Flow from Operations ranged from 7.4x-9.6x, with a median of
9.2x and a mean of 8.7x, which compared to 10.1x for the Partnership. Common
unit distribution yields ranged from 8.7%-15.6%, with a median of 10.2% and a
mean of 11.0%, which compared to 10.6% for the Partnership. The ratio of debt
to book capitalization ranged from 46.3%-96.5%, with a median of 77.5% and a
mean of 76.5%, which compared to 65.8% for the Partnership.
The comparable company trading analysis is a valuation methodology used by
Dain Rauscher Wessels to determine whether Petro and the Partnership were
reasonably valued by the public trading market, at existing market prices, in
relation to the public trading markets' valuation of similar companies and
partnerships. Dain Rauscher Wessels did not establish any specific valuation
for Petro or the Partnership in this analysis.
No public company utilized as a comparison is identical to Petro, the
Partnership or the business segment for which a comparison is being made. An
analysis of the results of such a comparison is not mathematical; rather, it
involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and
other factors that could affect the public trading value of the comparable
companies to which Petro and the Partnership were being compared.
Comparable Transactions Analysis
Dain Rauscher Wessels conducted a comparable transactions analysis whereby it
examined the terms of recent publicly disclosed acquisitions of businesses and
assets related to the energy marketing and distribution industry. With respect
to the significant majority of these transactions, public disclosure regarding
purchase price and target financial results was insufficient to permit Dain
Rauscher Wessels to draw conclusions regarding value. Sufficient data did exist
with respect to ten transactions (the "Selected Transactions") which Dain
Rauscher Wessels considered reasonably comparable to the Merger:
(Acquisitor/Target) Valero Energy Corporation/Valero Natural Gas Partners,
L.P.; Associated Natural Gas Corporation/Grand Valley Gas Company; K N Energy,
Inc./American Oil & Gas Company; Panhandle Eastern Corp./Associated Natural Gas
Corporation; Natural Gas Clearinghouse/Trident NGL Holding, Inc.; LG&E Energy
Corporation/ Hadson Corporation; El Paso Natural Gas Company/Eastex Energy
Inc.; PacifiCorp Holdings, Inc./TPC Corporation; Enron Corp./Enron Global Power
& Pipelines, L.L.C.; and Kinder Morgan Energy Partners, L.P./ Santa Fe Pacific
Pipeline Partners, L.P.
For the Selected Transactions, total consideration paid for the equity of the
target company as a multiple of target company net income ranged from 15.4x-
55.3x, with a median of 37.2x and a mean
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of 36.4x. Equity consideration as a multiple of the target company's tangible
book value of equity ranged from 1.4x-4.3x, with a median of 2.5x and a mean of
2.8x. Total transaction value as a multiple of the target company's latest
twelve months EBIT ranged from 10.9x-23.3x, with a median of 16.7x and a mean
of 17.1x. Dain Rauscher Wessels was unable to calculate meaningful mathematical
comparisons between these comparable transactions multiples and the Implied
Merger Value to be received pursuant to the Merger by the Public Common
Stockholders because Petro (a) generated a net loss for the latest twelve
months period ended June 30, 1998; (b) had a net tangible stockholders'
deficiency at June 30, 1998; and (c) generated EBIT for the latest twelve
months ended June 30, 1998 at a level which rendered the resultant multiple
(515.4x) not meaningful in Dain Rauscher Wessels' judgment. For the Selected
Transactions, total transaction value as a multiple of the target company's
latest twelve months EBITDA ranged from 7.3x-14.6x, with a median of 10.9x and
a mean of 11.4x, which compared to 10.6x for Petro. Dain Rauscher Wessels
applied its subjective professional judgment in evaluating the Implied Merger
Value to be received pursuant to the Merger by the Public Common Stockholders
in relation to Petro's results of operations for the latest twelve months
period.
Dain Rauscher Wessels also examined multiples paid by Petro in the
acquisitions of retail distributors of home heating oil during 1996-1997. For
all Petro acquisitions during that period (excluding the ten largest),
transaction value as a multiple of target EBITDA ranged from 3.4x-4.9x, with a
median of 3.9x and a mean of 4.1x. Transaction value per target gallon of
annual volume ranged from $0.37-$0.87, with a median of $0.55 and a mean of
$0.55. Transaction value per target customer ranged from $334-$1,037, with a
median of $533 and a mean of $630. To examine the effect of target size on
transaction multiples, Dain Rauscher Wessels examined the acquisition multiples
paid by Petro in the ten largest acquisitions in the 1996-1997 period. For this
group of transactions, transaction value as a multiple of target EBITDA ranged
from 3.4x-4.6x, with a median of 4.2x and a mean of 4.2x. Transaction value per
target gallon of annual volume ranged from $0.58-$1.02, with a median of $0.89
and a mean of $0.84. Transaction value per target customer ranged from $658-
$2,010, with a median of $1,055 and a mean of $1,194. Based upon the Implied
Merger Values and certain assumptions regarding the value of Petro's current
investment in the Partnership, Dain Rauscher Wessels calculated that the
comparable multiples and values for Petro's home heating oil business implied
in the Merger were 7.4x EBITDA, $0.87 per gallon and $994 per customer,
assuming senior management normalized estimates for fiscal 1998. Dain Rauscher
Wessels noted that Petro generally paid higher multiples and values in its
larger acquisitions and that Petro's home heating oil business is significantly
larger than any similar business acquired by Petro.
Merger Premiums Analysis
Dain Rauscher Wessels examined percentage premiums paid in all publicly-
disclosed stock-for-stock transactions with transaction values of $100-$500
million since January 1, 1998. The analysis indicated median percentage
premiums to the target company's stock price one day, one week and four weeks
prior to announcement, of 20.2%, 30.2%, and 33.3%, respectively. Dain Rauscher
Wessels also examined median percentage premiums paid in all publicly-disclosed
stock-for-stock energy industry transactions with transaction values of $100-
$500 million since January 1, 1994. This analysis indicated median percentage
premiums to the target company's stock price one day, one week and four weeks
prior to the announcement, of 13.7%, 17.6%, and 22.6%, respectively.
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Dain Rauscher Wessels calculated that the Implied Merger Value to be received
pursuant to the Merger by the Public Common Stockholders of $2.97 represented
premiums to the market price of the Class A Common Stock one day, one week and
four weeks prior to announcement of 58.6%, 90.3%, and 64.1%, respectively. Dain
Rauscher Wessels further calculated that the portion of the Implied Merger
Value attributable to the net present value of the Indicated Distributions, or
$2.54, represented premiums to the market price of the Class A Common Stock one
day, one week and four weeks prior to announcement of 35.6%, 62.7% and 40.3%.
Dain Rauscher Wessels' Engagement Agreement
Dain Rauscher Wessels was retained to render the Dain Rauscher Wessels
Opinion on the basis of Dain Rauscher Wessels' experience with mergers and
acquisitions in the energy industry, and on the basis of Dain Rauscher Wessels'
experience with energy industry master limited partnerships. Dain Rauscher
Wessels is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and their securities in mergers and
acquisitions, corporate restructurings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of its
business, Dain Rauscher Wessels and its affiliates may actively trade the debt
and equity securities of Petro and the Partnership for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
Pursuant to an engagement agreement between Petro and Dain Rauscher Wessels,
Petro paid Dain Rauscher Wessels an engagement fee of $50,000 upon the
execution of the engagement agreement and $375,000 upon the initial delivery of
the written Dain Rauscher Wessels Opinion to the Petro Board. Petro has agreed
to reimburse Dain Rauscher Wessels for its out-of-pocket expenses not to exceed
$50,000, and to indemnify Dain Rauscher Wessels and its controlling persons
against certain liabilities and expenses relating to or arising out of the
Transaction, including certain liabilities under U.S. federal securities laws.
No portion of Dain Rauscher Wessels' fee was contingent upon the closing of the
Transaction or whether Dain Rauscher Wessels rendered a favorable opinion with
respect to the proposed Merger. The terms of Dain Rauscher Wessels' engagement
agreement with Petro, which are customary for transactions of this nature, were
negotiated at arm's length between Petro and Dain Rauscher Wessels, and the
Petro Board was aware of the terms at the time of its approval of the Merger
Agreement.
It is contemplated that Dain Rauscher Wessels will serve as one of seven co-
managers of the Equity Offering.
CERTAIN PROJECTIONS OF PETRO AND THE PARTNERSHIP
Petro and the Partnership provided A.G. Edwards and Dain Rauscher Wessels
(the "Financial Advisors") with certain projected financial data for the years
1999 through 2003 (the "Projections"). The Projections were not prepared with a
view to public disclosure or compliance with published guidelines of the
Securities and Exchange Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections. The
projections are included in this proxy statement only because they were made
available to the Financial Advisors. These projections were prepared as of
September 30, 1998. Neither the Financial Advisors nor KPMG Peat Marwick,
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LLP, the Partnership's independent certified public accountants, examined,
compiled or applied any procedures with respect to the Projections or expressed
any opinion or provided any kind of assurance thereon.
While presented with numerical specificity, the Projections are based on a
variety of assumptions relating to the business of Petro and the Partnership
that, although considered appropriate by Petro and the Partnership at the time,
may not be realized. Moreover, the Projections and the assumptions upon which
they are based are subject to significant uncertainties and contingencies, many
of which are beyond the control of Petro and the Partnership. Consequently, the
Projections and the underlying assumptions are necessarily speculative in
nature and inherently imprecise, and there can be no assurance that projected
financial results will be realized. It is expected that there will be
differences between actual and projected results, and projected results and
actual results are likely to vary materially from those shown, and that
variance will likely increase over time. None of the Financial Advisors, Petro,
the Partnership, the Special Committee nor any of their respective affiliates
or advisors intends to update or otherwise revise the Projections.
The inclusion of the Projections herein should not be regarded as an
indication that the Financial Advisors, Petro, the Partnership, the Special
Committee or any of their respective affiliates or advisors considers the
Projections likely to be an accurate prediction of future results. Common
Unitholders and Common Stockholders are cautioned not to place undue reliance
on the Projections, which should be read in conjunction with the information
relating to the business, assets and financial condition of the Partnership
included herein.
The Projections contain forward-looking information and are subject to a
number of risks discussed elsewhere in this proxy statement. See "Risk
Factors." These risks are likely to cause actual results in the future to
differ significantly from results expressed or implied in the Projections.
The Projections described are the most recent versions of numerous
projections provided to the Financial Advisors. Petro and the Partnership
believe that discussion of earlier versions would not add materially to the
information provided here. Earlier versions have, however, been filed as an
exhibit to the Registration Statement.
Set forth below is a summary of the Projections prepared by Petro and the
Partnership as of September 30, 1998 and provided to the Financial Advisors.
Petro Projections on a Stand Alone Basis
In order to develop projections for the fiscal years ending December 31,
1999-2003, Petro first began with formulating a revised 1998 budget (the
"Normalized 1998 Budget"). The Normalized 1998 Budget made certain assumptions
relating to revenues and delivery expenses based on volumes which would be
associated with a "normal" winter. In addition, Petro gave full year impact in
the Normalized 1998 Budget to $11 million in cost reduction initiatives
implemented during 1998. These estimated annual cost reductions include $3.5
million for the elimination of corporate and branch overhead, $3.5 million for
the rationalization of branch operating expenses and $4 million in reduced
benefit plan, personnel and other operating expenses. For these purposes, Petro
ran two cases assuming that "normal" weather ("Weather Normalization") was
based on either (a) the historical
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average temperature of the relevant measurement statistics over the 15-year
period from 1983 through 1997 derived from information published by the U.S.
Department of Commerce-National Oceanic and Atmospheric Administration ("NOAA")
(the "15-Year Case") or (b) the historical average temperature of the relevant
measurement statistics as published by the NOAA over the 30-year period from
1961 through 1990 (the "30-Year Case").
The projections for the fiscal years ending December 31, 1999-2003 were based
on the Normalized 1998 Budget adjusted for the following: (a) base customer
attrition of 4.0% annually, (b) an increase in retail gross margins of $0.01
per gallon annually, (c) an increase in service revenues and expenses (net of
the impact of attrition) of 2.0% annually, (d) an increase in net operating
costs of 2.0% annually, and (e) no additional acquisitions due to capital
constraints.
86
<PAGE>
PETRO PROJECTIONS ON A STAND ALONE BASIS--30-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
Heating Oil EBITDA...... $ 46,900 $ 45,548 $ 43,867 $ 42,283 $ 40,766 $ 39,288
MLP Distributions(1).... 4,366 4,387 4,965 5,570 5,575 5,579
-------- -------- -------- -------- -------- --------
Total EBITDA............ 51,266 49,935 48,832 47,853 46,341 44,867
Depreciation and
Amortization........... 28,710 23,500 19,500 15,500 11,500 8,000
-------- -------- -------- -------- -------- --------
EBIT.................... 22,556 26,435 29,332 32,353 34,841 36,867
Interest Expense........ (31,444) (30,971) (30,675) (28,749) (28,083) (28,035)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... (8,888) (4,536) (1,343) 3,604 6,758 8,832
Income Taxes............ (500) (500) (500) (500) (500) (500)
Equity in Partnership
Earnings............... 997 1,291 1,255 1,283 1,375 1,467
MLP Distributions....... (4,366) (4,387) (4,965) (5,570) (5,575) (5,579)
-------- -------- -------- -------- -------- --------
Net Income(2)........... $(12,757) $ (8,132) $ (5,553) $ (1,183) $ 2,058 $ 4,220
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance
Capital Expenditures... $ 2,776 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Net Debt and Preferred
Stock (3).............. 287,935 284,816 273,995 262,227 251,305 241,809
</TABLE>
PETRO PROJECTIONS ON A STAND ALONE BASIS--15-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
Heating Oil EBITDA...... $ 44,749 $ 43,392 $ 41,769 $ 40,237 $ 38,770 $ 37,342
MLP Distributions(1).... 4,366 2,739 2,941 3,220 3,527 3,861
-------- -------- -------- -------- -------- --------
Total EBITDA............ 49,115 46,131 44,710 43,457 42,297 41,203
Depreciation and
Amortization........... 28,710 23,500 19,500 15,500 11,500 8,000
-------- -------- -------- -------- -------- --------
EBIT.................... 20,405 22,631 25,210 27,957 30,797 33,203
Interest Expense........ (31,444) (30,971) (30,675) (28,869) (29,283) (29,235)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... (11,039) (8,340) (5,465) (912) 1,514 3,968
Income Taxes............ (500) (500) (500) (500) (500) (500)
Equity in Partnership
Earnings............... 442 791 798 799 857 908
MLP Distributions....... (4,366) (2,739) (2,941) (3,220) (3,527) (3,861)
-------- -------- -------- -------- -------- --------
Net Income(2)........... $(15,463) $(10,788) $ (8,108) $ (3,833) $ (1,656) $ 515
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 2,776 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Net Debt and Preferred
Stock(3)............... 290,086 288,620 281,921 274,669 268,992 264,360
</TABLE>
- --------
(1) Publicly-traded limited partnership ("MLP") distributions in 1998 represent
actual distributions received on the Units and General Partner
interest owned by Petro; MLP distributions in 1999-2003 represent expected
distributions based on the Partnership's Available Cash, which may be less
than the full Minimum Quarterly Distribution.
(2) Net Income includes Equity in Partnership Earnings but excludes MLP
distributions.
(3) Reflects total debt less net working capital plus preferred stock.
87
<PAGE>
Partnership Projections on a Stand Alone Basis
In order to develop projections for the fiscal years ending September 30,
1999-2003, the Partnership first began with formulating a revised 1998 budget
(the "Normalized 1998 Budget"). The Normalized 1998 Budget made certain
adjustments to revenues and expenses based on the expected increase in volumes
which would be associated with a "normal" winter as well as acquisitions
completed during fiscal 1998. For these purposes, the Partnership ran two cases
assuming that "normal" weather ("Weather Normalization") was based on either
(a) the historical average temperature of the relevant measurement statistics
over the 15-year period from 1983 through 1997 derived from information
published by the NOAA (the "15-Year Case") or (b) the historical average
temperature of the relevant measurement statistics as published by the NOAA
over the 30-year period from 1961 through 1990 (the "30-Year Case").
The Projections for the fiscal year ending September 30, 1999 through 2003
include the following additional assumptions: (a) $10.0 million of acquisitions
are made annually, (b) the acquisitions are made at a purchase price of 6.5x
the first year EBITDA of the acquired assets, (c) additional debt is incurred
at an annual interest rate of 7.25%, (d) acquisitions are financed with debt
and equity such that a pro forma debt to EBITDA ratio of 4.5x is maintained,
(e) Common Units are issued at $22.00 per Unit and (f) maintenance capital
expenditures on the acquired assets are assumed to be approximately 2.2 cents
per retail gallon sold.
PARTNERSHIP PROJECTIONS ON A STAND ALONE BASIS--30-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
EBITDA.................. $ 23,722 $ 24,491 $ 26,029 $ 27,566 $ 29,104 $ 30,642
Depreciation and
Amortization........... 12,079 12,358 13,346 14,224 14,938 15,662
-------- -------- -------- -------- -------- --------
EBIT.................... 11,643 12,133 12,683 13,342 14,166 14,980
Interest Expenses....... (8,498) (8,811) (9,377) (9,878) (10,380) (10,882)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 3,145 3,322 3,306 3,464 3,786 4,098
Income Taxes............ (25) (25) (25) (25) (25) (25)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 3,120 $ 3,297 $ 3,281 $ 3,439 $ 3,761 $ 4,073
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 2,610 $ 2,632 $ 2,679 $ 2,728 $ 2,777 $ 2,827
Total Long Term Debt.... $105,000 $113,668 $120,587 $127,506 $134,425 $141,346
AVERAGE UNITS OUTSTAND-
ING
Common Units............ 3,859 3,925 4,083 4,253 4,395 4,505
Subordinated Units...... 2,396 2,396 2,396 2,396 2,396 2,396
Implied General Partner
Units.................. 128 129 132 136 139 141
-------- -------- -------- -------- -------- --------
Total Units............. 6,383 6,450 6,611 6,785 6,930 7,042
======== ======== ======== ======== ======== ========
</TABLE>
88
<PAGE>
PARTNERSHIP PROJECTIONS ON A STAND ALONE BASIS--15-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
EBITDA.................. $ 22,316 $ 23,032 $ 24,465 $ 25,898 $ 27,331 $ 28,764
Depreciation and
Amortization........... 12,079 12,358 13,346 14,224 14,938 15,662
-------- -------- -------- -------- -------- --------
EBIT.................... 10,237 10,674 11,119 11,674 12,393 13,102
Interest Expenses....... (8,498) (8,573) (8,881) (9,346) (9,811) (10,276)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 1,739 2,102 2,238 2,329 2,582 2,826
Income Taxes............ (25) (25) (25) (25) (25) (25)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 1,714 $ 2,077 $ 2,213 $ 2,304 $ 2,557 $ 2,801
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 2,610 $ 2,632 $ 2,679 $ 2,728 $ 2,777 $ 2,827
Total Long Term Debt.... $105,000 $107,078 $113,494 $119,909 $126,324 $132,737
AVERAGE UNITS OUTSTAND-
ING
Common Units............ 3,859 4,108 4,505 4,795 5,072 5,336
Subordinated Units...... 2,396 2,396 2,396 2,396 2,396 2,396
Implied General Partner
Units.................. 128 133 141 147 152 158
-------- -------- -------- -------- -------- --------
Total Units............. 6,383 6,637 7,042 7,338 7,620 7,890
======== ======== ======== ======== ======== ========
</TABLE>
Star Gas Projections Pro Forma for the Transaction
The Partnership ran two cases of projections pro forma for the Transaction.
The first case assumes that volumes reflect Weather Normalization based on the
historical average temperature of the relevant measurement statistics over the
15-year period from 1983 through 1997 derived from information published by the
NOAA (the "15-Year Case"). The second case reflects Weather Normalization based
on the historical average temperature of the relevant measurement statistics as
published by the NOAA over the 30-year period from 1961 through 1997 (the "30-
Year Case").
The pro forma Projections for the fiscal years ended September 30, 1998
through 2003 include the following additional assumptions: (a) the specific
terms of the merger as described in "The Transaction" included herein, (b) $120
million of new debt issued at 8.50%, (c) the redemption of $206.3 million in
senior and subordinated notes, the redemption of $34.2 million in Preferred
Stock, and the restructuring of $66.2 million of senior and subordinated notes,
(d) issuance of approximately $140.0 million of new Common Units at $22.00 per
Common Unit, (e) acquisitions are financed with debt and equity such that a
debt to EBITDA ratio of up to 4.5x is maintained at all times, (f) Common Units
are issued at annualized yields of 9.5% in 1999 and at 9.0% in 2000 and
thereafter, (g) base and projected EBITDA, maintenance capital expenditures,
acquisition and operating assumptions for both Petro and the Partnership are
the same as previously defined in "Petro Projections on a Stand-Alone Basis"
and "Partnership Projections on a Stand-Alone Basis", (h) annual operating
synergies associated with the Transaction of $500,000 and (i) transaction
expenses net of underwriting discounts and commissions of approximately $8.8
million.
89
<PAGE>
The pro forma Projections include the following assumptions regarding Petro's
ability to make acquisitions: (a) $30.0 million of acquisitions are made
annually under the 30-Year Case, and $25.0 million of acquisitions are made
annually under the 15-Year Case, (b) acquisitions are made at a purchase price
of 4.6x the first year EBITDA of the acquired assets, (c) customer attrition
associated with acquisitions is 16.2% in year 1, 12.6% in year 2, 6.8% in year
3, and 6.1% in year 4 and thereafter.
PARTNERSHIP PROJECTIONS
PRO FORMA FOR TRANSACTION--30-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING SEPTEMBER 30,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Propane EBITDA.......... $ 23,722 $ 24,491 $ 26,029 $ 27,566 $ 29,104 $ 30,642
Heating Oil EBITDA...... 46,900 48,881 53,535 57,814 61,900 65,791
Synergistic Savings..... 500 500 500 500 500 500
-------- -------- -------- -------- -------- --------
Pro Forma Combined
EBITDA................. 71,122 73,872 80,064 85,880 91,504 96,933
Depreciation and Amorti-
zation................. 36,097 37,922 41,537 45,047 48,398 51,764
-------- -------- -------- -------- -------- --------
EBIT.................... 35,025 35,950 38,527 40,833 43,106 45,169
Interest Expense........ (27,461) (28,699) (31,028) (33,172) (35,039) (36,842)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 7,564 7,252 7,499 7,660 8,067 8,327
Income Taxes............ (525) (525) (625) (675) (725) (775)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 7,039 $ 6,727 $ 6,874 $ 6,985 $ 7,342 $ 7,552
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 6,110 $ 6,273 $ 6,393 $ 6,516 $ 6,641 $ 6,768
Total Long Term Debt.... $309,154 $342,861 $375,290 $401,458 $426,768 $451,199
AVERAGE UNITS
OUTSTANDING
Common Units............ 10,326 10,326 10,351 10,523 10,847 11,195
Senior Subordinated
Units.................. 2,767 2,767 3,070 3,373 3,676 3,676
Junior Subordinated
Units.................. 577 577 577 577 577 577
General Partner Units... 279 279 279 279 279 279
-------- -------- -------- -------- -------- --------
Total Units............. 13,949 13,949 14,277 14,752 15,379 15,727
======== ======== ======== ======== ======== ========
</TABLE>
90
<PAGE>
PARTNERSHIP PROJECTIONS
PRO FORMA FOR TRANSACTION--15-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING SEPTEMBER 30,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Propane EBITDA.......... $ 22,316 $ 23,032 $ 24,465 $ 25,898 $ 27,331 $ 28,764
Heating Oil EBITDA...... 44,749 46,094 49,605 52,823 55,897 58,821
Synergistic Savings..... 500 500 500 500 500 500
-------- -------- -------- -------- -------- --------
Pro Forma Combined
EBITDA................. 67,565 69,626 74,570 79,221 83,728 88,085
Depreciation and Amorti-
zation................. 36,097 37,723 40,942 44,054 47,008 49,978
-------- -------- -------- -------- -------- --------
EBIT.................... 31,468 31,903 33,628 35,167 36,720 38,107
Interest Expense........ (27,595) (28,068) (29,398) (30,984) (32,478) (33,924)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 3,873 3,834 4,230 4,183 4,242 4,183
Income Taxes............ (525) (525) (525) (525) (525) (525)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 3,348 $ 3,309 $ 3,705 $ 3,658 $ 3,717 $ 3,658
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital Ex-
penditures............. $ 6,110 $ 6,273 $ 6,393 $ 6,516 $ 6,641 $ 6,768
Total Long Term Debt.... $309,154 $325,470 $347,719 $368,650 $388,931 $408,537
AVERAGE UNITS
OUTSTANDING
Common Units............ 10,326 10,673 11,223 11,632 12,059 12,502
Senior Subordinated
Units.................. 2,767 2,767 3,070 3,373 3,676 3,676
Junior Subordinated
Units.................. 577 577 577 577 577 577
General Partner Units... 279 279 279 279 279 279
-------- -------- -------- -------- -------- --------
Total Units............. 13,949 14,296 15,149 15,861 16,591 17,034
======== ======== ======== ======== ======== ========
</TABLE>
91
<PAGE>
THE TRANSACTION
The following discussion includes summaries of the principal provisions of
the Merger Agreement and the Exchange Agreement, together with certain
additional information. The descriptions of the Merger Agreement and the
Exchange Agreement contained in this proxy statement do not purport to be
complete and are qualified in their entirety by reference to the complete text
of the Merger Agreement and the Exchange Agreement, copies of which (excluding
their exhibits and schedules) are attached as Annexes A and B of this proxy
statement and incorporated by reference in this proxy statement. Common
Unitholders and Common Stockholders are urged to read the Merger Agreement, the
Exchange Agreement and other Annexes in their entirety.
DESCRIPTION OF THE TRANSACTION
The Transaction can be viewed as having four principal parts:
(a) The Partnership's acquisition of Petro, which will be accomplished
through the Exchange and the Merger. In the Exchange, certain affiliates of
Petro will exchange 11,953,432 shares of Common Stock for approximately
858,532 Senior Subordinated Units, 568,478 Junior Subordinated Units and
287,700 General Partner Units. In the Merger, Petro/Mergeco, Inc., a
wholly-owned subsidiary of the Partnership, will merge with and into Petro,
with Petro surviving the Merger. Pursuant to the Merger, the Public Common
Stockholders will exchange their 14,609,049 shares of Common Stock for
approximately 1,908,526 Senior Subordinated Units.
(b) The Equity Offering, in which the Partnership expects to sell
approximately 6.8 million Common Units, and the Debt Offering, in which
Petro Holdings expects to sell $120 million of notes. The net proceeds of
the Equity Offering and the Debt Offering, which are expected to be
approximately $243.7 million (assuming an offering price in the Equity
Offering of $20.00 per Common Unit), will be used to redeem certain debt
and preferred stock of Petro.
(c) The withdrawal of Star Gas as the general partner of the Partnership
and the Operating Partnership and the election of Star Gas LLC as the
successor general partner.
(d) The adoption of certain amendments to the Partnership Agreement and
the Operating Partnership Agreement. See "Amendments to the Partnership
Agreements."
DESCRIPTION OF THE MERGER AND THE EXCHANGE
The Merger
Upon the terms and subject to the conditions of the Merger Agreement, at the
Effective Time, (a) Petro/Mergeco, Inc. will merge with and into Petro, and the
separate corporate existence of Petro/Mergeco, Inc. will cease; (b) Petro will
survive and continue to exist as a Minnesota corporation and as a wholly-owned
indirect subsidiary of the Operating Partnership; (c) each share of the common
stock of Petro/Mergeco, Inc. outstanding immediately prior to the Effective
Time will be converted into one newly issued, fully paid and non-assessable
share of common stock of Petro as the "Surviving Corporation"; (d) each share
of Common Stock held by Petro as Treasury Stock or owned by Petro/Mergeco, Inc.
will be canceled and retired and no consideration will be issued in exchange
therefor; (e) each share of Common Stock held by a dissenting Common
Stockholder who
92
<PAGE>
has perfected his dissenters' rights under the MBCA will represent only the
right to receive "fair value" for those shares, as determined pursuant to the
MBCA, unless such dissenting Common Stockholder withdraws his Fair Value Demand
(as defined in the MBCA) or loses his dissenters' rights, in which case, those
shares will be converted into Senior Subordinated Units as described below in
subparagraph (g)(1) below; (f) each outstanding option to purchase shares of
Common Stock granted to employees and directors of Petro and its subsidiaries
that is vested at the Effective Time or becomes vested by reason of the Merger
will cease to represent the right to acquire shares of Common Stock and will be
converted into an option to purchase .13064 of a Senior Subordinated Unit at an
exercise price equal to the quotient of dividing the original exercise price by
.13064, and those options shall thereupon be assumed by the Partnership; and
(g) each share of Common Stock outstanding immediately prior to the Effective
Time (excluding shares as to which dissenters' rights have been perfected and
shares held by Petro or Petro/Mergeco, Inc.) will cease to be outstanding and
will be converted as follows:
(1) each outstanding share of Common Stock will be converted into .13064
of a Senior Subordinated Unit, with cash being paid in lieu of any
fractional Senior Subordinated Unit;
(2) each outstanding share of Junior Convertible Preferred Stock will be
converted into .13064 of a Common Unit, with cash being paid in lieu of any
fractional Common Unit;
(3) each outstanding share of Public Preferred Stock will be converted
into the right to receive cash in the amount of $23.00 plus accrued and
unpaid dividends; and
(4) each outstanding share of Class B Common Stock will remain unchanged.
Up to an aggregate of 909,000 additional Senior Subordinated Units may be
issued to the holders of Senior Subordinated Units, Junior Subordinated Units
and General Partner Units, on a pro rata basis, but only if Petro achieves
certain financial goals during the five-year period following the closing of
the Transaction.
Subject to the satisfaction or waiver of the conditions in the Merger
Agreement and described in "Description of the Merger Agreement--Conditions to
the Merger," the Merger will become effective upon the later to occur of (a)
the filing of a certificate of merger in the office of the Secretary of State
of Delaware and (b) the filing of articles of merger with the Minnesota
Department of State, or a later date and time as may be described in such
certificate of merger and articles of merger (the "Effective Time"). The Merger
will have the effects prescribed in the Delaware General Corporation Law (the
"DGCL") and the MBCA. Directors of Petro who are also employees of Petro
immediately prior to the Effective Time and officers of Petro immediately prior
to the Effective Time will be those of Petro following the Effective Time.
If the Partnership changes the number of Common Units outstanding prior to
the Effective Time by reason of a subdivision, dividend in the form of equity
interests, split, reclassification, recapitalization or combination, the
foregoing exchange ratios and the average closing prices of Common Units
applicable to the payment of cash in lieu of fractional Common Units will be
proportionately adjusted.
Completion of the Merger is subject to various conditions. See "Description
of the Merger Agreement--Conditions to the Merger."
93
<PAGE>
The Exchange
The Exchange will occur immediately prior to the Merger and is comprised of
the following elements:
(a) Irik P. Sevin, Audrey L. Sevin, Hanseatic Corp. and Hanseatic
Americas LDC (the "LLC Owners") will form Star Gas LLC, to which they will
contribute an aggregate of 1,808,400 shares of Common Stock in exchange for
all of the limited liability company interests in Star Gas LLC. Star Gas
LLC will contribute the shares of Common Stock received in the preceding
step to Petro in exchange for 287,700 General Partner Units (representing
all of the General Partner Units) in the Partnership. In addition, the LLC
Owners will contribute 3,573,290 shares of Common Stock to the Partnership
in exchange for 568,478 Junior Subordinated Units.
(b) In addition, certain other Common Stockholders of Petro that are
parties to a shareholders' agreement with the LLC Owners with respect to
the Class C Common Stock will contribute 6,571,740 shares of Common Stock
to the Partnership in exchange for 858,532 Senior Subordinated Units.
RELATED FINANCING AND REFINANCING TRANSACTIONS
An integral element of the Transaction is the refinancing of Petro's
outstanding debt and preferred stock in order to substantially reduce Petro's
ongoing borrowing costs, which is expected to increase the cash flow of the
combined entity. This refinancing will be accomplished through several related
transactions that are described below and will close substantially
simultaneously with the closing of the Transaction.
Public Offerings
Key elements in the related financing are the Equity Offering and the Debt
Offering by the Partnership. The Partnership will offer for sale to the public
approximately 6.8 million Common Units (assuming an offering price of $20.00
per Common Unit) the net proceeds of which are estimated to be $128.3 million.
Petro will sell to the public approximately $120.0 million of notes, the net
proceeds of which are estimated to be $115.4 million. It is expected that the
Partnership and Petro Holdings will guarantee the notes issued in the Debt
Offering.
The net proceeds of the Equity Offering and the Debt Offering will be used to
redeem the Petro public debt and preferred stock and to pay for the expenses of
the Transaction.
Description of Exchange of Petro Private Debt and Redemption of Preferred
Stock
Petro has entered into agreements (the "Private Debt Agreements") with the
holders (the "Private Noteholders") of
(1) its outstanding 10.90% Senior Notes due 2002 (the "Senior Notes") in
the aggregate principal amount of $60 million; and
(2) its 14.1% Senior and Subordinated Notes due 2001 (the "14.1% Notes"
and together with the Senior Notes, the "Petro Private Debt") in the
aggregate principal amount of $4.1 million (after payment of the January
1999 installment).
94
<PAGE>
Pursuant to the Private Debt Agreements at the Effective Time:
(a) the holders of the Senior Notes will exchange those Notes for
$63.1 million aggregate principal amount of 9.0% Senior Notes due 2002
of Petro (the "New 9% Notes"); and
(b) the holders of the 14.1% Notes will exchange those notes for $2.2
million aggregate principal amount of 10.25% Senior Notes due 2001 of
Petro and $2.2 million principal amount of 10.25% Subordinated Notes
due 2001 of Petro (collectively, the "New 10.25% Notes"). The New 9%
Notes and the New 10.25% Notes will be guaranteed by the Partnership
and Petro Holdings. (The New 9% Notes and the New 10.25% Notes are
collectively referred to as the "New Private Notes").
Petro has also entered into an agreement with the holder of $4.1 million in
face value of its 1989 Preferred Stock to redeem the 1989 Preferred Stock at
100% of face value plus accrued but unpaid dividends immediately prior to the
Effective Time.
Description of Petro Public Debt and Public Preferred Stock Exchange Offers
In September 1998, Petro completed an exchange offer (the "Debt Exchange
Offer") with the holders of Petro's Old Public Debt and entered into
individually negotiated agreements (the "Preferred Stock Agreements") with the
holders of its Old Public Preferred Stock.
Pursuant to the Debt Exchange Offer and the Preferred Stock Agreements the
holders (the "Tendering Holders") of approximately 98.5% in aggregate principal
amount and liquidation preference of the Old Securities exchanged the Old
Securities for a like principal amount and liquidation preference of New Public
Debt and New Public Preferred Stock, the terms of which are in all material
respects the same as the terms of the Old Public Debt and the Old Public
Preferred Stock, except that
(1) the New Public Debt is senior to the Old Public Debt, and
(2) the terms of the New Public Debt and the New Public Preferred Stock
(collectively, the "New Public Securities")
(a) give Petro the right to redeem (the "Redemption Right") the New
Securities of the Transaction at the following redemption prices:
(1) 103.5% of face value for the new 12 1/4% Debentures;
(2) 100% of face value for the new 10 1/8% Notes and the 9 3/8%
Debentures; and
(3) $23.00 per share for the new Public Preferred Stock; and
(b) eliminate substantially all covenants from the indentures under
which the Old Public Debt was issued. The Tendering Holders of the Old
Public Preferred Stock have also granted Petro an irrevocable proxy to
vote their shares of New Public Preferred Stock in favor of the
Acquisition Proposal at the Special Meeting.
95
<PAGE>
In the Debt Exchange Offer, Petro issued an aggregate of 786,690 shares of
Junior Convertible Preferred Stock (the "Exchange Shares") to the Tendering
Holders. At the Effective Time, pursuant to the Merger, the Exchange Shares
will be converted into an aggregate of 102,773 Common Units. Holders of
Exchange Shares have also granted Petro an irrevocable proxy or have agreed to
vote the Exchange Shares in favor of the Acquisition Proposal.
DESCRIPTION OF THE MERGER AGREEMENT
The description of the Merger Agreement set forth below is qualified by
reference to the Merger Agreement itself, which is attached for your review as
Annex A. Under the terms of the Merger Agreement, Petro/Mergeco, Inc. will be
merged with and into Petro, with Petro surviving as an indirect wholly-owned
subsidiary of the Partnership.
The Effective Time; Closing
The Closing of the Merger shall occur after the day on which the last of the
conditions to the Merger have been satisfied or waived (see "--Conditions to
the Merger" and "--Amendment, Waiver and Termination of the Merger Agreement
and Provisions for Payment of Expenses") but in no event prior to February 15,
1999. The Effective Time will follow the filing of (i) the Certificate of
Merger with the Delaware Secretary of State and (ii) the Articles of Merger
with the Minnesota Department of State.
Merger Consideration
In the Merger:
(1) Each share of outstanding Common Stock held by a Public Common Holder
immediately prior to the Effective Time shall be converted into the right
to receive .13064 of a Senior Subordinated Unit.
(2) Each share of outstanding Junior Preferred Stock shall be converted
into the right to receive .13064 of a Common Unit.
(3) Each share of outstanding Public Preferred Stock shall be converted
into the right to receive $23 in cash plus accrued and unpaid dividends.
(4) Shares of Class B Common Stock shall remain unchanged.
(5) Treasury shares and shares held by Petro/Mergeco, Inc. shall be
cancelled for no consideration.
No Fractional Units will be Issued in the Merger
No fractional Senior Subordinated Units or Common Units are to be issued in
the Merger. In lieu thereof, (a) each former holder of Common Stock who would
otherwise be entitled to receive a fractional Senior Subordinated Unit will
receive an amount in cash, without interest, equal to the product (calculated
to the nearest cent) obtained by multiplying the fraction by the closing price
of the Senior Subordinated Units on the first day of trading thereof on the New
York Stock Exchange, as reported in an authoritative source, and (b) each
former holder of Junior Preferred Stock will
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receive an amount in cash, without interest, equal to the product (calculated
to the nearest cent) obtained by multiplying the fraction by the average of the
daily last sales prices of Common Units on the New York Stock Exchange, as
reported in an authoritative source, for the five consecutive trading days
ending on the second trading day preceding the Closing Date. No former holder
is entitled to distributions or interest on, or other rights in respect of, any
such fraction. Although it is not possible to quantify the aggregate amount to
be paid with respect to fractional Units, the total amount is estimated to be
less than $ .
Procedure for, and Description of, the Exchange of Petro Stock Certificates
for Partnership Units or Cash
At or prior to the Effective Time, the Partnership will deposit, or cause to
be deposited, with American Stock Transfer & Trust Company (the "Exchange
Agent"), for the benefit of the holders of certificates formerly representing
shares of Common Stock, Junior Preferred Stock and Public Preferred Stock ("Old
Certificates"), (a) in respect of holders of Common Stock and Junior Preferred
Stock, certificates representing Senior Subordinated Units and Common Units
("New Certificates") and an estimated amount of cash payable with respect to
fractional Senior Subordinated Units and Common Units and (b) the amount of
cash necessary to be distributed to the holders of certificates formerly
representing Public Preferred Stock.
For holders of Common Stock and Junior Preferred Stock: Promptly after the
Effective Time, the Exchange Agent will mail transmittal materials to each
holder of record of Common Stock and Junior Preferred Stock outstanding
immediately prior to the Effective Time (other than Petro, Petro/Mergeco, Inc.
or dissenting Common Stockholders) for use by that Common Stockholder in
exchanging Old Certificates for New Certificates. Upon submission to the
Exchange Agent of Old Certificates from a former holder of Common Stock or
Junior Preferred Stock, together with executed transmittal materials and any
other items specified by the letter of transmittal, the Exchange Agent will
deliver to the former holder New Certificates representing Senior Subordinated
Units or Common Units, as appropriate, together with a check for payment of
cash in lieu of any fractional Senior Subordinated Units or Common Units.
NOTE: COMMON STOCKHOLDERS SHOULD NOT SEND IN THEIR OLD CERTIFICATES UNTIL
THEY RECEIVE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
For holders of Public Preferred Stock: Promptly after the Effective Time, the
Exchange Agent will mail transmittal materials to each holder of Public
Preferred Stock. Upon submission to the Exchange Agent of Old Certificates from
a former holder of Public Preferred Stock, together with executed transmittal
materials and any other items specified by the letter of transmittal, the
Exchange Agent will deliver a check for the aggregate amount payable to the
former holder of Public Preferred Stock.
The Exchange Agent may impose reasonable and customary terms and conditions
upon the acceptance of Old Certificates in order to effect an orderly exchange.
Notwithstanding the foregoing, neither the Exchange Agent nor the
Partnership, Petro/Mergeco, Inc. or Petro shall be liable to any former Common
Stockholder for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
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Holders of record of Common Stock and Junior Preferred Stock immediately
prior to the Effective Time will thereafter be entitled, subject to compliance
with the certificate exchange procedures, including submission of an executed
Transfer Application, to receive distributions from the Partnership in respect
of the number of Senior Subordinated Units or Common Units, as the case may be,
into which their shares of Common Stock or Junior Preferred Stock have been
converted.
Covenants of the Partnership and Petro in the Merger Agreement
Article IV of the Merger Agreement sets forth covenants of Petro and the
Partnership, in effect until the Effective Time or until the Merger Agreement
is terminated.
Petro and the Partnership are required to conduct their business in the
ordinary course consistent with past practice, to use reasonable best efforts
to preserve their business organizations intact and to maintain their rights,
franchises, goodwill and assets, keep available the services of their
employees, and preserve their relationships with customers, suppliers and
others.
Certain Negative Covenants of Petro and the Partnership. Petro and the
Partnership have agreed that, unless the prior written consent of the other
party is obtained (which consent will not be unreasonably withheld or delayed)
and except as expressly contemplated by the Merger Agreement, Petro and the
Partnership will not, and will not permit their subsidiaries to:
(1) Capital Stock. In the case of Petro, issue, sell or otherwise permit
to become outstanding, or authorize the creation of, any additional shares
of stock, or securities convertible into or exchangeable for shares of
stock, or any rights to subscribe for or acquire any shares of stock, or
enter into any agreement with respect to the foregoing, or permit any
additional shares of stock to become subject to new grants of employee
stock options, stock appreciation rights or similar stock-based employee
rights, except pursuant to the exercise of stock options disclosed in the
Merger Agreement or pursuant to the Petro dividend reinvestment program;
(2) Dividends, distributions. Make, declare or pay any dividends on any
of its equity securities (except for regular quarterly dividends on Public
Preferred Stock and Private Preferred Stock and regular quarterly
distributions of Available Cash on Common Units, Subordinated Units and the
general partner interest of the Partnership), split, combine or reclassify
any capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of, or in substitution for shares
of capital stock, or repurchase, redeem or otherwise acquire any shares of
capital stock, except as required by the terms of its securities
outstanding on the date of the Merger Agreement or as contemplated by an
existing employee benefit plan;
(3) Compensation, Employment Agreements. Enter into or amend any written
employment, severance or similar agreements or arrangements with any of its
directors, officers or employees, or grant any salary or wage increase or
increase any employee benefit (including incentive or bonus payments),
except for (a) normal increases in compensation to employees (other than
officers and directors) or (b) other changes as are provided for in the
Merger Agreement, as may be required by law or to satisfy contractual
obligations existing as of the date of the Merger Agreement or (c)
additional grants or awards to newly hired employees consistent with past
practice;
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(4) Benefit Plans. In the case of Petro, enter into or amend any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related to any of the above, in respect of any directors, officers or other
employees, including, without limitation, taking any action that
accelerates the vesting or exercise of any benefits payable under any of
the above;
(5) Acquisitions and Dispositions. In the case of Petro, sell, lease,
dispose of, or discontinue, any portion of its assets, business or
properties material to it and its subsidiaries, or acquire or lease (other
than by way of foreclosure or acquisition of control in a bona fide
fiduciary capacity or in satisfaction of debts previously contracted in
good faith, in each case in the ordinary course of business consistent with
past practice) any assets or all or any portion of the business or property
of any other entity that, in either case, would be likely to have a
material adverse effect on the ability of the parties to the Merger
Agreement to consummate the Merger or that would materially delay the
Effective Time;
(6) Amendments. In the case of Petro, amend its Articles of Incorporation
or By-laws;
(7) Accounting Methods. Implement or adopt any changes in accounting
principles, practices or methods, other than as may be required by law or
by generally accepted accounting principles;
(8) Insurance. Fail to use reasonable best efforts to maintain, with
financially responsible insurance companies, insurance in the amounts and
against the risks and losses as has been customarily maintained by it in
the past;
(9) Notification. Fail to promptly notify the other party of any material
change in its condition (financial or otherwise) or business, any material
litigation, governmental proceedings or the breach in a material respect of
any of its representations or warranties contained in the Merger Agreement;
(10) Taxes. Make or rescind any material express or deemed election
relating to taxes, unless it is not reasonable to expect that the action
will not materially adversely affect it; settle or compromise any material
tax claim, litigation, proceeding investigation or audit, except where that
settlement or compromise will not materially adversely affect it; or change
in any material respect any of its methods of reporting income or
deductions for federal income tax purposes from those employed in the
preparation of its federal income tax return for the most recent taxable
year for which a return has been filed, except as may be required by
applicable law or except for changes that it is not reasonable to expect
will materially adversely affect it;
(11) Debt, Capital Expenditures. In the case of Petro, except for its
obligation to use reasonable best efforts to accomplish the Refinancing
Conditions (as defined), (a) incur any indebtedness for borrowed money
(except for working capital under existing credit facilities) or guarantee
the indebtedness of others, (b) enter into any material lease (whether
operating or capital), (c) create any material mortgages, liens, security
interests or other encumbrances on its property in any pre-existing
indebtedness, new indebtedness or lease, or (d) make or commit to make
aggregate capital expenditures in excess of $2.0 million over Petro's
fiscal 1998 capital expenditure budget;
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(12) No Dissolution. Authorize, recommend, propose or announce its
intention to adopt a plan of complete or partial liquidation or
dissolution;
(13) Adverse Actions. Knowingly take any action that is intended or is
reasonably likely to result in (a) any representations and warranties
described in the Merger Agreement being or becoming untrue in any material
respect at any time prior to the Closing, (b) any of the conditions to the
Merger described in the Merger Agreement not being satisfied, or (c) a
material violation of any provision of the Merger Agreement, except, in
each case, as may be required by applicable law;
(14) Agreements. Agree or commit to do anything prohibited by the
covenants in the Merger Agreement.
Representations and Warranties Set Forth in the Merger Agreement
Article V of the Merger Agreement sets forth representations and warranties
of the parties, which will terminate immediately after the Effective Time.
Pursuant to Section 5.2, with certain exceptions, no representation or warranty
of Petro or the Partnership shall be deemed untrue or incorrect, and no party
shall be deemed to have committed a breach of representation or warranty, as a
consequence of the existence of any fact, circumstance or event, unless the
fact, circumstance or event, individually or taken together with all other
facts, circumstances or events has had or is reasonably expected to have a
Material Adverse Effect (as defined).
Petro and the Partnership have made certain representations and warranties as
to themselves and their subsidiaries with respect to, among other things: (1)
corporate organization or partnership formation, existence, qualifications to
do business, permits and authorizations; (2) capitalization; (3) subsidiaries
and other equity interests; (4) corporate or partnership power and authority
to own its assets, conduct its business and to execute, deliver and perform its
obligations under the Merger Agreement; (5) authority of the equityholders to
agree to the Merger Agreement, binding nature of the Merger Agreement, and
authorization of the Merger Agreement by all necessary corporate action (other
than by action of Common Stockholders and Common Unitholders, not yet voted
upon); (6) that execution of the Merger Agreement will not constitute a default
under any agreement or judgment; (7) financial statements and related filings
with the Securities Exchange Commission; (8) absence of undisclosed litigation,
claims, proceedings, judgments, orders and decrees;(9) compliance
with applicable laws; (10) absence of undisclosed contracts and defaults under
contracts; (11) absence of undisclosed brokerage or finders' fee claims in the
Merger Agreement; (12) employee compensation and benefit plans and related
matters; (13) labor matters; (14) absence of violations or liabilities under
environmental laws; (15) filing of material tax returns and the payment or
provision for payment of all taxes shown to be due on those returns; (16)
absence of any necessary regulatory approvals as to the Merger, other than
pursuant to the HSRA; (17) the conduct of business, and the absence of certain
materially adverse changes, since December 31, 1997 in the case of Petro, and
since September 30, 1997 in the case of the Partnership; (18) certain insurance
matters; and (19) the condition and sufficiency of certain tangible assets; and
(20) the ownership and adequacy of certain intellectual property rights.
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Indemnification of Officers and Directors Provided for in the Merger Agreement
The Merger Agreement provides that if an actual or threatened claim, suit,
proceeding or investigation in which any person who is, has been at any time
prior to the date of the Merger Agreement, or who becomes prior to the Closing
under the Merger Agreement, a director, officer or employee of Petro or any of
its subsidiaries, including directors of Star Gas (each an "Indemnified
Party"), is, or is threatened to be, made a party, based wholly or partially on
(1) the fact that he/she is or was a director, officer or employee of Petro or
any of its subsidiaries or was prior to the Closing serving at the request of
any of those parties as a director, officer, employee, fiduciary or agent of
another entity or enterprise, or (2) the Merger Agreement or any of the
transactions contemplated by it and all actions taken by an Indemnified Party
in any of those transactions, whether, in any case, asserted or arising before
or after the Closing (each, a "Claim"), the Indemnified Party will cooperate
and use his or her best efforts to defend against and respond to that Claim. In
addition, the Partnership has agreed that following the Closing, it will
indemnify and hold harmless each Indemnified Party against losses, damages,
liabilities, judgments, fines and amounts paid in settlement of any Claim and
expenses (including reasonable attorneys' fees and expenses to be paid to each
Indemnified Party in advance of the final disposition of a Claim) upon receipt
of an undertaking from the Indemnified Party to repay advanced expenses if it
is finally determined that the Indemnified Party was not entitled to
indemnification. The Partnership's indemnification obligation continues in
effect for a period of six years from the Closing provided that all rights to
indemnification in respect of a Claim asserted or made within the six year
period continue until the final disposition of the Claim.
The Partnership has also agreed that all rights to indemnification and all
limitations of liability existing in favor of an Indemnified Party under the
articles of incorporation or by-laws of Petro and its subsidiaries, as in
effect on the date of the Merger Agreement, as to matters occurring on or prior
to the Closing, will survive the Merger and will continue in effect for a
period of six years from the Closing provided that all rights to
indemnification in respect of any Claim asserted or made within that period
continue until the final disposition of the Claim.
The Partnership has agreed to use its best efforts to cause persons serving
as officers and directors of Petro and the General Partner immediately prior to
the Closing to be covered for a period of six years from the Closing by the
directors' and officers' liability insurance policy maintained by Petro with
respect to acts or omissions of those officers and directors in their capacity
as officers and directors, occurring prior to the Closing provided that the
Partnership will not be required to pay premiums in excess of last annual
premium paid by Petro prior to the date of the Merger Agreement, but, in such
case, will buy as much coverage as is reasonably practicable for that amount.
Conditions to Consummation of the Merger
Conditions to Each Party's Obligations. Article VII of the Merger Agreement
provides that the obligation of each of Petro and the Partnership to consummate
the Merger is conditioned upon the accuracy of the other party's
representations and warranties and the compliance of the other party with its
covenants and the satisfaction at or prior to the Closing of, among other
things, the following conditions:
(1) Unitholder and Stockholder Vote. Approvals of the Acquisition
Proposal by the requisite vote of the Common Stockholders and the Star
Proposals by the requisite vote of the Common Unitholders;
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(2) Governmental Approvals. Any waiting period under the HSRA shall have
expired or terminated and all other filings required to be made prior to
the Effective Time with, and all other approvals required to be obtained
prior to the Effective Time from, any governmental authority in the
execution and delivery of the Merger Agreement shall have been made or
obtained, except where the failure to obtain those approvals would not be
reasonably likely to result in a Material Adverse Effect (as defined) on
the Partnership or Petro or on the ability of the Partnership or Petro to
consummate the transactions contemplated by the Merger Agreement;
(3) No Injunction. No order, decree or injunction of any court or agency
of competent jurisdiction shall be in effect, no law or regulation shall
have been enacted or adopted which prohibits, enjoins or makes illegal the
completion of any of the transactions contemplated by the Merger Agreement,
and no action, proceeding or investigation by any governmental authority
with respect to the Merger shall be pending that seeks to enjoin or delay
completion of the Merger or to impose any material restrictions or
requirements on it or on the Partnership or Petro in this matter; provided,
however, that prior to invoking this condition, each party shall have
complied fully with its obligations under the Merger Agreement relating to
defending any litigation seeking to enjoin the Merger;
(4) Effective Merger Registration Statement. The registration statement
pertaining to the Merger shall have become effective and no stop order and
no proceedings for that purpose shall have been initiated or threatened by
the Securities Exchange Commission or any other governmental authority;
(5) Legal Opinions. The Partnership and Petro will have received (a) an
opinion, as to certain limited partnership and tax matters, from Andrews &
Kurth L.L.P., special counsel to the Partnership, and (b) an opinion, as to
certain corporate matters, from Phillips Nizer Benjamin Krim & Ballon LLP,
counsel to Petro;
(6) NYSE Listing. The Senior Subordinated Units and the Common Units
issuable in the Merger shall have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance;
(7) Fairness Opinion. In the case of the Partnership, the A.G. Edwards
Opinion shall not have been withdrawn, and in the case of Petro, the Dain
Rauscher Wessels Opinion shall not have been withdrawn;
(8) Public Offerings. The Equity Offering and the Debt Offering shall
have been completed, with a Cost of Capital (as defined in the Merger
Agreement) not to exceed $27.5 million on an annual basis, the Special
Committee shall not have reasonably objected to the restrictive covenants
pertaining to the notes issued in the Debt Offering, and the net proceeds
shall be applied to reduce indebtedness;
(9) Refinancing Conditions. Certain conditions with respect to
refinancing of debt, cash balances and working capital shall have been met;
(10) Dissenters' Rights. The number of shares of Common Stock held by
dissenting Common Stockholders shall not exceed 10% of the number of shares
of Common Stock outstanding immediately prior to the Effective Time;
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(11) Working Capital Loan. Petro shall have entered into a working
capital credit facility of not less than $30 million on terms reasonably
satisfactory to the Special Committee;
(12) Custody Agreement. All of the members of the Tax Free Group shall
have executed a custody agreement (with respect to their shares of Common
Stock) on or prior to December 31, 1998.
Amendment, Waiver and Termination of the Merger Agreement and Provision for
Payment of Expenses
Amendment and Waiver. The Merger Agreement provides that prior to the
Closing, any provision of the Merger Agreement may be (1) waived by the party
benefitted by that provision or (2) modified or amended at any time by a
written agreement of Petro and the Partnership if approved by the Petro Board
and the Special Committee. The Merger Agreement also provides that prior to
submission of the Merger Agreement for approval at the Special Meeting, the
Partnership may change the method of effecting the combination of Petro with
the Partnership, and Petro has agreed that the Petro Board will approve any
amendments to the Merger Agreement resulting from that action by the
Partnership provided that the change does not (x) alter or change the amount or
kind of consideration to be issued to Common Stockholders as provided for in
the Merger Agreement (the "Merger Consideration"), or (y) alter the tax
treatment of Common Stockholders as a result of receiving the Merger
Consideration beyond that which was originally contemplated by the Merger
Agreement, or (z) materially impede or delays the Merger.
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, whether prior to or after
approval of the Merger by the Common Unitholders or the Common Stockholders:
(a) by the mutual consent of Petro and the Partnership, if the Petro
Board and the Special Committee so determine;
(b) by the Partnership, if the Special Committee so determines, or by
Petro, if the Petro Board so determines, if a material breach by the other
party of any representation, warranty or covenant contained in the Merger
Agreement that is not cured or curable in the prescribed time should occur;
(c) by the Partnership, if the Special Committee so determines, or the
Petro Board, if the Petro Board so determines, if (i) the approval under
the HSRA required for completion of the Merger shall have been denied by
final action of any governmental authority or a court or other governmental
authority shall have issued a final order enjoining or otherwise
prohibiting the completion of the Merger provided that the terminating
party shall have observed and performed its covenants contained in the
Merger Agreement; or (ii) Common Stockholders fail to approve the
Acquisition Proposal at the Special Meeting or the Common Unitholders fail
to approve the Star Proposals at the Unitholders Meeting; or
(d) by the Partnership, if the Petro Board has, or by Petro, if the Star
Gas Board has, withdrawn, modified or changed in a manner adverse to the
terminating party its approval or recommendation of the Merger Agreement
and the transactions contemplated thereby.
Furthermore, the Merger Agreement shall be terminated if the Merger shall not
have been completed on or prior to April 1, 1999 unless the Special Committee
and Petro elect to extend the termination date.
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In the event of termination of the Merger Agreement and the abandonment of
the Merger pursuant to the foregoing provisions, neither Petro nor the
Partnership will have any liability or further obligation to any other party
under the Merger Agreement, except that termination will not relieve a
breaching party from liability for any wilful breach of the Merger Agreement
giving rise to that termination.
Expenses. Petro will bear all expenses incurred for the Merger Agreement and
its contemplated transactions.
RESTRICTIONS ON RESALES OF SENIOR SUBORDINATED UNITS BY NON-AFFILIATES AND
AFFILIATES
The Common Units and Senior Subordinated Units issuable to Petro stockholders
upon completion of the Transaction have been registered under the Securities
Act and may be traded freely without restriction on those Common Stockholders
who are not deemed to be "affiliates" (as defined in the rules promulgated
under the Securities Act) of the Partnership or Petro.
Common Units and Senior Subordinated Units received by those Petro
stockholders who are deemed to be affiliates of the Partnership or Petro at the
time of the Meetings may be resold without registration under the Securities
Act only as permitted by Rule 145 or as otherwise permitted under the
Securities Act. Senior Subordinated Units received by persons who are deemed to
be "affiliates" of the Partnership may be sold by them only in transactions
permitted under the provisions of Rule 144 under the Securities Act, or as
otherwise permitted under the Securities Act.
SELLING UNITHOLDERS
The Registration Statement of which this proxy statement forms a part also
covers the reoffering and resale from time to time (collectively, the
"Offering") by the following persons (the "Selling Unitholders") who may be
deemed to be "affiliates" of Petro within the meaning of Rule 145 of the
following Senior Subordinated Units (the "Resale Units") to be received by the
Selling Unitholders in the Transaction. The Partnership will not receive any
proceeds from the sale of the Resale Units by the Selling Unitholders.
<TABLE>
<CAPTION>
NUMBER OF SENIOR
SELLING UNITHOLDER SUBORDINATED UNITS (A)
------------------ ----------------------
<S> <C>
Phillip Cohen............................................ 103,556
Thomas Edelman........................................... 102,203(b)
Richard O'Connell........................................ 186,972
Wolfgang Traber.......................................... 1,181
Brentwood Corp. ......................................... 104,885
Gabes S.A. .............................................. 94,313
Minneford Corp. ......................................... 11,188
Fernando Montero......................................... 4,610
M.M. Warburg & Co. ...................................... 4,155
Barcel Corp. ............................................ 98,814
Hubertus Langen.......................................... 96,740
Tortosa GmbH............................................. 39,024
Paul Biddelman........................................... 311
United Capital Corp. .................................... 11,758
</TABLE>
- --------
(a) Represents the total number of Senior Subordinated Units owned by each
Selling Unitholder prior to the Offering and the maximum number of Senior
Subordinated Units which could be sold by each Selling Unitholder in the
Offering.
(b) Includes 9,929 Senior Subordinated Units owned by Mr. Edelman's wife and
trusts for the benefit of his minor children.
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PLAN OF DISTRIBUTION FOR THE RESALE UNITS
The Selling Unitholders may from time to time sell all or a portion of their
Resale Units in transactions on the NYSE, in the over-the-counter market, in
negotiated transactions, pursuant to Rule 144 or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The Resale Units may be sold directly or through brokers or dealers or in a
distribution by one or more underwriters on a firm commitment or best efforts
basis. The methods by which the Resale Units may be sold include (1) a block
trade (which may involve crosses) in which the broker dealer or dealer engaged
will attempt to sell the Resale Units as agent but may position and resell a
portion of the block as principal to facilitate the transaction, (2) purchases
by a broker or dealer as principal and resales by that broker dealer for its
account pursuant to this proxy statement, (3) ordinary brokerage transactions
and transactions in which the broker solicits purchasers or to or through
marketmakers, (4) transactions in put or call options or other rights (whether
exchange-listed or otherwise) established after the effectiveness of the
Registration Statement of which this proxy statement is a part and (5)
privately negotiated transactions. In addition, any of the Resale Units that
qualify for sale pursuant to Rule 145 under the Securities Act may be sold in
transactions complying with the Rule, rather than pursuant to this proxy
statement.
In the case of the sale of the Resale Units effected to or through broker-
dealers, the broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Unitholders or the purchasers of
the Resale Units sold by or through the broker-dealers, or both. The
Partnership is not aware as of the date of this proxy statement of any
agreements between any of the Selling Unitholders and any broker-dealers with
respect to the sale of the Resale Units. The Selling Unitholders and any
broker-dealers or agents participating in the distribution of the Resale Units
may be deemed to be "underwriters" within the meaning of the Securities Act and
any commissions received by the broker-dealers or agents and profits on any
resale of the Resale Units may be deemed to be underwriting commissions under
the Securities Act. The commissions received by a broker-dealer or agent may be
in excess of customary compensation. The Partnership will receive no part of
the proceeds from the sale of any of the shares of the Resale Units by the
Selling Unitholders.
The Partnership will pay all costs and expenses incurred for the registration
under the Securities Act of the Resale Units offered by the Selling
Unitholders, including without limitation all registration and filing fees,
listing fees, printing expenses, fees and disbursements of counsel and
accountants for the Partnership. Each Selling Unitholder will pay all brokerage
fees and commissions, if any, incurred in the sale of the Resale Units owned by
him. In addition, the Partnership has agreed to indemnify the Selling
Unitholders against certain liabilities, including liabilities under the
Securities Act.
ACCOUNTING TREATMENT OF THE TRANSACTION
The parties anticipate that the Transaction will be accounted for as a
purchase for accounting purposes. See "Unaudited Pro Forma Condensed
Consolidated Financial Information."
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REGULATORY MATTERS ASSOCIATED WITH THE TRANSACTION
Other than (a) the filing of notice of the proposed Transaction with the
United States Department of Justice and the Federal Trade Commission under the
HSRA, and the lapse of the relevant waiting period prescribed under them; (b)
registration under the Securities Act of the Senior Subordinated Units and the
Common Units to be issued in the Transaction and the Common Units to be offered
in the Equity Offering; (c) certain notifications required to be given by Petro
to state and county authorities pursuant to provisions of certain licenses and
permits, and (d) certain tax filings, no filing with, or approval of any
federal or state governmental entity is required for the Transaction.
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MANAGEMENT OF THE PARTNERSHIP AFTER THE TRANSACTION
GENERAL PARTNER
Since Star Gas is a wholly-owned subsidiary of Petro and will become an
indirect subsidiary of the Partnership in the Transaction, it will no longer be
able to serve as the general partner. At the Effective Time, the general
partner of the Partnership and the Operating Partnership will be Star Gas LLC.
The membership interests in Star Gas LLC are owned by the LLC Owners. The
officers of Star Gas LLC will be Irik P. Sevin, Chairman of the Board and Chief
Executive; Joseph Cavanaugh, Executive Vice President--Propane and Member of
the Office of President; William G. Powers, Jr., Executive Vice President--
Heating Oil and Member of the Office of President; George Leibowitz, Treasurer;
Richard F. Ambury, Vice President; James Bottiglieri, Vice President; and
Audrey L. Sevin, Secretary.
The General Partner manages and operates the activities of the Partnership.
Unitholders do not directly or indirectly participate in the management or
operation of the Partnership. The General Partner owes a fiduciary duty to the
Unitholders. See "Parties and Conflicts--Conflicts of Interest."
Notwithstanding any limitation on obligations or duties, the General Partner is
liable, as the general partner of the Partnership, for all debts of the
Partnership (to the extent not paid by the Partnership), except to the extent
that indebtedness or other obligations incurred by the Partnership are made
specifically non-recourse to the general partner. In addition, if the Operating
Partnership defaults under the First Mortgage Notes or the Bank Credit
Facilities, the General Partner will be liable for any deficiency remaining
after foreclosure on the Operating Partnership's assets.
BOARD OF DIRECTORS OF STAR GAS LLC
At the Effective Time, it is expected that the Star Gas LLC Board will
consist of the following persons, all of whom currently serve as directors of
Star Gas: Irik P. Sevin (Chairman of the Board), Audrey L. Sevin, William G.
Powers, Jr., Thomas J. Edelman, Paul Biddelman, Wolfgang Traber, and William P.
Nicoletti. At her request, one of the current directors of Star Gas will
withdraw as a director upon completion of the Transaction as a result of
additional duties associated with a new job. That director will be replaced by
a director selected by the Star Gas LLC Board, and the new director will not be
an officer or employee of Star Gas LLC or any of its affiliates.
William P. Nicoletti and an independent director to be selected by the Star
Gas LLC Board, who are neither officers nor employees of any affiliates of the
General Partner, will serve on the Audit Committee of the Star Gas LLC Board
with the authority to review, at the request of the General Partner, specific
matters as to which the General Partner believes there may be a conflict of
interest in order to determine if the resolution of the conflict proposed by
the General Partner is fair and reasonable to the Partnership. Any matters
approved by the Audit Committee will be conclusively deemed to be fair and
reasonable to the Partnership, approved by all partners of the Partnership and
not a breach by the General Partner of any duties it may owe the Partnership or
the Unitholders. In addition, the Audit Committee reviews external financial
reporting of the Partnership, recommends engagement of the Partnership's
independent accountants and reviews the Partnership's procedure for internal
auditing and the adequacy of the Partnership's internal accounting controls. In
these additional matters, the Audit Committee may act on its own initiative to
question the General Partner and, absent the delegation of specific authority
by the entire Board of Directors, its recommendations will be advisory.
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OFFICERS AND EMPLOYEES OF THE OPERATING PARTNERSHIP AND PETRO
Operating Partnership. At the Effective Time, the officers and employees of
Star Gas who currently manage the operations and business of the Partnership
will become officers and employees of the Operating Partnership.
It is expected that the following persons who currently comprise Star Gas'
executive officers will continue to serve as executive officers of the
Operating Partnership: Irik P. Sevin, Chairman of the Board; Joseph P.
Cavanaugh, President and Chief Executive Officer; David R. Eastin, Vice
President-Operations; Richard F. Ambury, Vice President-Finance; and Audrey L.
Sevin, Secretary.
Certain information relating to executive compensation, various benefit plans
(including unit option plans), voting securities and their principal holders,
certain relationships and related transactions and other related matters as to
the Partnership and Star Gas is incorporated by reference or described in the
Partnership's Annual Report on Form 10-K for the fiscal year ended September
30, 1998, and is incorporated by reference in this proxy statement.
Securityholders of the Partnership or Petro desiring copies of these documents
may contact the Partnership at its address or telephone number indicated under
"Where You Can Find More Information."
Petro. At the Effective Time, the officers and employees of Petro will
continue to be employed by Petro.
It is expected that the following persons who currently comprise Petro's
executive officers will continue to serve as executive officers of Petro: Irik
P. Sevin, Chairman of the Board and Chief Executive Officer; William G. Powers,
Jr., President; C. Justin McCarthy, Senior Vice President-Operations; George
Leibowitz, Treasurer; Vincent De Palma, Vice President and General Manager-New
York Region; James J. Bottiglieri, Controller; Matthew J. Ryan, Vice President-
Supply; Angelo Catania, Vice President and General Manager-Mid Atlantic Region;
John Ryan, Vice-President-Sales and Marketing; and Peter B. Terenzio, Jr., Vice
President-Human Resources; and Audrey L. Sevin, Secretary.
Certain information relating to executive compensation, various benefit plans
(including stock option plans), voting securities and their principal holders,
certain relationships and related transactions and other related matters as to
Petro is described in Petro's Annual Report on Form 10-K for the year ended
December 31, 1997, and is incorporated by reference in this proxy statement.
Securityholders of the Partnership or Petro desiring copies of these documents
may contact Petro at its address or telephone number indicated under "Where You
Can Find More Information."
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER
The General Partner does not receive any management fee or other compensation
for its management of the Partnership. The General Partner is reimbursed at
cost for all expenses incurred on behalf of the Partnership, including the
costs of compensation described herein properly allocable to the Partnership.
The Partnership Agreement provides that the General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion.
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The General Partner will be entitled to distributions on its General Partner
Units and will be entitled to Incentive Distributions in respect of those
Units, as described under "Cash Distribution Policy."
PARTNERSHIP STRUCTURE
The first chart below illustrates the organization and ownership of the
Partnership, the Operating Partnership and its subsidiary and Star Gas prior to
the Transaction. The second chart illustrates the organization and ownership of
the Partnership, the Operating Partnership and its subsidiaries and Star Gas
LLC immediately following the Transaction (without giving any effect to the
issuance of the any additional Senior Subordinated Units). The percentages
reflected in the following chart represent the approximate ownership interests
in each of the Partnership and the Operating Partnership, individually, and not
on an aggregate basis.
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[GRAPHIC]
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[GRAPHIC]
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BENEFICIAL OWNERSHIP OF PRINCIPAL UNITHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership (as of the Record
Date) of Common Units, Senior Subordinated Units, Junior Subordinated Units and
General Partner Units after giving effect to the Transaction by (i) Star Gas
LLC and certain beneficial owners and all of the directors of Star Gas LLC,
(ii) each of the named executive officers of Star Gas and Petro, and (iii) all
directors and executive officers of Star Gas and Petro as a group.
<TABLE>
<CAPTION>
SENIOR JUNIOR GENERAL PARTNER
COMMON UNITS SUBORDINATED UNITS SUBORDINATED UNITS UNITS
-------------------- --------------------- --------------------- ---------------------
NAME(A) NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
------- ------ ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Star Gas LLC............ -- --% -- --% -- --% 287,700(b) 100%
Irik P. Sevin........... -- -- -- -- 99,514 17.5 287,700(e) 100
Audrey L. Sevin......... -- -- -- -- 248,718 43.8 287,700(e) 100
Wolfgang Traber......... 10,400(c) * 1,181 * 220,246(d) 38.6 287,700(e) 100
Paul Biddelman.......... -- -- 311 * 220,246(d) 38.6 287,700(e) 100
Thomas Edelman.......... -- -- 102,203(f) 3.7 -- -- -- --
Richard F. Ambury....... 625 * 46 * -- -- -- --
George Leibowitz........ -- -- -- * -- -- -- --
C. Justin McCarthy...... -- -- -- -- -- -- -- --
Vincent De Palma........ -- -- 1,306 * -- -- -- --
Angelo Catania.......... -- -- 327 * -- -- -- --
David Eastin............ -- -- -- -- -- -- -- --
Joseph G. Cavanaugh..... -- -- 65 * -- -- -- --
William G. Powers....... -- -- -- -- -- -- -- --
All officers and
directors and Star Gas
LLC as a group
(14 persons)........... 11,025 * 207,815 7.5% 568,475 99.9% 287,700 100%
</TABLE>
- --------
* Less than 1%.
(a) The address of each of these persons is c/o the Partnership at 2187
Atlantic Street, Stamford, CT 06912-0011.
(b) Includes, as deemed General Partner Units, Star Gas LLC's .1% general
partner interest in the Operating Partnership.
(c) Includes 10,000 Common Units owned by Mr. Traber's wife and 400 Common
Units owned by Mr. Traber's daughter as to which he may be deemed to share
beneficial ownership.
(d) Includes 220,246 Junior Subordinated Units held by Hanseatic Americas LDC,
a Bahamian limited duration company in which the sole managing member is
Hansabel Partners, LLC, a Delaware limited liability company in which the
sole managing member is Hanseatic Corporation, a New York corporation.
Messrs. Traber and Biddelman are executive officers of Hanseatic
Corporation and Mr. Traber holds in excess of a majority of the shares of
capital stock of Hanseatic Corporation.
(e) Assumes each member of Star Gas LLC (and Messrs. Traber and Biddelman
through their positions with Hanseatic, a member of Star Gas LLC) may be
deemed to beneficially own all of Star Gas LLC's General Partner Units, as
to which they disclaim beneficial ownership.
(f) Includes 9,929 Senior Subordinated Units owned by Mr. Edelman's wife and
trusts for the benefit of his minor children.
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AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
Set forth below is a summary of the proposed amendments to the Partnership
Agreement and Operating Partnership Agreement to be voted upon by the
Partnership's Common Unitholders. The following discussion of the amendments
and the resulting Amended and Restated Partnership Agreement is not complete.
For a more complete understanding of the amendments, see Annex C, which sets
forth the full text of the proposed Amended and Restated Partnership Agreement,
and also shows the portions of the existing Partnership Agreement that will be
deleted or changed if the Amendment Proposal is approved at the Unitholders
Meeting.
INTRODUCTION; VOTE REQUIRED BY UNITHOLDERS IN ORDER TO AMEND THE PARTNERSHIP
AGREEMENT
Pursuant to the Partnership Agreement, the General Partner proposes the
adoption of the amendments to the Partnership Agreement and Operating
Partnership Agreement described herein. In order to become effective, the
Amendment Proposal must receive the approval of the holders of a Unit Majority.
Under the Partnership Agreement, as currently in effect, a Unit Majority means,
during the Subordination Period, at least a majority of the Common Units
outstanding on the record date (other than Common Units owned by the General
Partner or any affiliate). The enclosed proxy affords Unitholders an
opportunity to separately vote for or against the Amendment Proposal by marking
the appropriate box on their proxy card. HOWEVER, THE TRANSACTION WILL NOT BE
EFFECTED UNLESS THE AMENDMENT PROPOSAL IS ADOPTED.
SUMMARY OF AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Increase of Minimum Quarterly Distribution. The Amendment Proposal will
increase the minimum quarterly distribution from $0.55 to $0.575 per quarter
(the "Minimum Quarterly Distribution") ($2.20 to $2.30 on an annualized basis).
No changes will be made to the Target Distribution Levels.
Extension of the Subordination Period. The Amendment Proposal will extend the
earliest date on which the Subordination Period can expire from January 1, 2001
to October 1, 2002. Under the Partnership Agreement, as currently in effect,
the Subordination Period will end upon the removal of the General Partner as
the general partner of the Partnership upon the requisite vote by limited
partners under circumstances where Cause does not exist. The Amendment Proposal
provides that the Subordination Period will end upon the removal of the General
Partner upon the requisite vote by limited partners under circumstances where
Cause does not exist; provided, however, that if the General Partner is removed
during the Subordination Period within 12 months after a six-quarter period in
which the Minimum Quarterly Distribution was not made on the Common Units with
respect to more than one of those quarters (excluding for this purpose the
payment of any Common Unit Arrearages) and the first quarter in that six-
quarter period that the Minimum Quarterly Distribution on the Common Units is
not made occurs after March 31, 2001, then the Subordination Period will not
end. If the General Partner is removed and the Subordination Period does not
end, the Junior Subordinated Units shall convert into Senior Subordinated Units
on a one-for-one basis and the distribution rights on the General Partner Units
with respect to the Minimum Quarterly Distribution and to an extent with
respect to liquidating distributions will rank pari passu with the Senior
Subordinated Units.
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Issuance of Senior Subordinated Units. The Amendment Proposal will authorize
the issuance of Senior Subordinated Units. The Senior Subordinated Units will
have distribution rights that are subordinated to all present and future Common
Units with respect to the Minimum Quarterly Distribution and arrearages
thereon, and to an extent with respect to liquidating distributions. The Senior
Subordinated Units will be senior to all present and future Junior Subordinated
Units and General Partner Units with respect to the Minimum Quarterly
Distribution and to an extent with respect to liquidating distributions. Upon
expiration of the Subordination Period, all outstanding Senior Subordinated
Units will convert into Class B Common Units on a one-for-one basis and each
outstanding Common Unit will be redesignated as a Class A Common Unit (all
references herein to Common Units after the expiration of the Subordination
Period are deemed to be references to Class A Common Units and Class B Common
Units unless otherwise indicated). The only differences between the Class A
Common Units and the Class B Common Units is that the Class B Common Units will
have the right to receive Incentive Distributions and the right to receive
additional Senior Subordinated Units if Petro achieves certain financial goals.
See "Cash Distribution Policy--Distributions of Available Cash from Operating
Surplus During the Subordination Period."
Issuance of Junior Subordinated Units. The Amendment Proposal will authorize
the issuance of Junior Subordinated Units. The Junior Subordinated Units will
have distribution rights that are subordinate to all present and future Common
Units and Senior Subordinated Units, and that rank pari passu with all present
and future General Partner Units, with respect to the Minimum Quarterly
Distribution and to an extent with respect to liquidating distributions. Upon
expiration of the Subordination Period, all outstanding Junior Subordinated
Units will convert into Class B Common Units on a one-for-one basis. The
existing Subordinated Units held by Star Gas will be cancelled in the
Transaction. See "Cash Distribution Policy--Distributions of Available Cash
from Operating Surplus During the Subordination Period."
Subordination of General Partner Interests. The Amendment Proposal will
redesignate the general partner interests of the General Partner in the
Partnership as General Partner Units and subordinate the distribution rights of
the General Partner Units so that they rank pari passu with the Junior
Subordinated Units with respect to the Minimum Quarterly Distribution and
Liquidation. Currently, the General Partner is entitled to 2% of all payments
of the Minimum Quarterly Distribution made on the Common Units and the existing
Subordinated Units. The General Partner Units shall not convert into any class
of Common Units upon expiration of the Subordination Period; however, at that
time they shall no longer be subordinated and shall rank pari passu with the
Class A Common Units and the Class B Common Units. See "Cash Distribution
Policy--Distributions of Available Cash from Operating Surplus During the
Subordination Period" and "--Distributions of Available Cash from Operating
Surplus After the Subordination Period."
Limitations on Distributions on Subordinated Interests. The Amendment
Proposal will limit distributions during the Subordination Period on the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units in the
following manner:
No distributions will be paid on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units with respect to the time period
beginning on the Effective Time and ending on March 31, 1999 until the
distribution date for the quarter ending on June 30, 1999, which will be on
approximately August 15, 1999.
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With respect to the time period beginning on the Effective Time and ending on
June 30, 1999, the Partnership may make a distribution of Available Cash on the
Senior Subordinated Units, Junior Subordinated Units and General Partner Units
in an amount up to the Minimum Quarterly Distribution for that period to the
extent the sum of EBITDA less interest, less taxes and less maintenance capital
expenditures on a consolidated basis (the Partnership and Petro combined from
October 1, 1998 until the Effective Time) ("Adjusted Distributable Cash") for
the period beginning October 1, 1998 and ending on June 30, 1999 exceeds the
sum of:
(1) $57,172,000, plus or minus
(2) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(3) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(4) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000.
With respect to the quarter ending September 30, 1999, the Partnership may
make a distribution of Available Cash on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units in an amount up to the Minimum
Quarterly Distribution for that period to the extent the Adjusted Distributable
Cash for the time period beginning October 1, 1998 and ending on September 30,
1999 exceeds the sum of:
(1) $25,307,000 plus or minus
(2) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(3) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999, exceeds
or is less than 10,544,000, plus or minus
(4) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000, plus or minus
(5) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending September 30, 1999,
exceeds or is less than 10,544,000.
Beginning with the distribution for the quarter ending on December 31, 1999,
no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units or General Partner Units, except for distributions from
Capital Surplus, unless the aggregate amount of distributions on all
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Units with respect to all quarters, beginning with the quarter ended December
31, 1999, shall be equal to or less than the total Operating Surplus generated
by the Partnership since October 1, 1999 (which does not include the portion of
Operating Surplus included in clause (a) (i) of the definition of Operating
Surplus).
The Amendment Proposal does not prohibit the holders of Senior Subordinated
Units, Junior Subordinated Units or General Partner Units from receiving
distributions from Capital Surplus in a partial liquidation during the
Subordination Period.
Issuance of Additional Senior Subordinated Units. The Amendment Proposal
authorizes the issuance and distribution to holders of the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units of up to an
aggregate of 909,000 additional Senior Subordinated Units or Class B Common
Units. For each full non-overlapping four-quarter period ending on or after the
first anniversary of the Effective Time, but prior to the fifth anniversary of
the Effective Time, in which the dollar amount of Petro Adjusted Operating
Surplus (as defined hereinafter) per Petro Unit (as defined hereinafter) equals
or exceeds $2.90, the Partnership will issue 303,000 Senior Subordinated Units
(or 303,000 Class B Common Units if the issuance occurs after the end of the
Subordination Period) to the holders of the Senior Subordinated Units, Junior
Subordinated Units and the General Partner Units on the record date in respect
of the distribution for the final quarter of that four-quarter period, pro
rata; provided, however, that the Partnership may not issue more than 909,000
Senior Subordinated Units or Class B Common Units in the aggregate pursuant to
this provision; provided, further, that the Partnership may not issue more than
303,000 Senior Subordinated Units or Class B Common Units pursuant to this
provision in any 365-day period. See "Cash Distribution Policy--Issuance of
Additional Senior Subordinated Units."
Reallocation of Incentive Distribution Rights. The Amendment Proposal will
reallocate the right to receive Incentive Distributions currently held by the
General Partner among the Senior Subordinated Units, Junior Subordinated Units
and General Partner Units. As a result, there may be quarters with respect to
which the holders of Senior Subordinated Units, Junior Subordinated Units and
General Partner Units receive greater distributions than the holders of Common
Units. See "Cash Distribution Policy--Incentive Distributions During the
Subordination Period" and "--Incentive Distributions After the Subordination
Period."
Deletion of the Provision Regarding the Net Worth of the General Partner. The
Amendment Proposal will delete the prohibition against the General Partner from
taking any action that would cause its net worth, independent of its interest
in the Partnership and Operating Partnership, to be less than $6.0 million. The
primary purpose of the net worth requirement was to ensure that the Partnership
would be treated as a partnership and not as an association taxable as a
corporation for federal income tax purposes. Counsel has advised the
Partnership that the failure of the General Partner to maintain a specific net
worth will not result in the Partnership being treated as an association
taxable as a corporation for federal income tax purposes under current
regulations under the Code.
Issuance of Additional Common Units. The Partnership Agreement, as currently
in effect, authorizes the Partnership to issue 1,300,000 Common Units or Units
ranking on a parity with
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Common Units (which number does not include Common Units issued for (1) certain
capital improvements, (2) certain acquisitions that are accretive on a per Unit
basis, (3) the repayment of certain indebtedness or (4) the conversion of the
existing Subordinated Units) without the approval of the Unitholders. The
Amendment Proposal will increase the number of Common Units or Units ranking on
a parity with Common Units without further Unitholder approval to 2,500,000
(which number does not include (a) Common Units issued in (1), (2) and (3)
above, (b) Class B Common Units issued in the conversion of Senior Subordinated
Units and Junior Subordinated Units and (c) the Common Units issued in the
Transaction, including the Equity Offering. Approval of this amendment
satisfies the requirement under the Partnership Agreement, as currently in
effect, that the holders of a Unit Majority approve the issuance of Common
Units in the Equity Offering.
Definition of Unit Majority. Under the Partnership Agreement as currently in
effect, certain transactions require the approval of a Unit Majority, which is
defined to mean the approval of a majority of the Common Units (other than
Common Units held by the General Partner or any of its affiliates). The
Amendment Proposal will provide that the Senior Subordinated Units and Junior
Subordinated Units have a vote with respect to certain matters by restating the
definition of "Unit Majority" as follows:
"Unit Majority" means, during the Subordination Period, at least (1) a
majority of the outstanding Common Units voting as a class and (ii) a
majority of the outstanding Senior Subordinated Units and Junior
Subordinated Units voting as a single class, in each case excluding Units
owned by the General Partner or any affiliate, and, after the Subordination
Period, at least a majority of the outstanding Common Units.
Proportionate Increase in Operating Surplus Basket. The Amendment Proposal
will increase the basket of $6 million described in the definition of
"Operating Surplus" in proportion to the additional number of Common Units to
be issued in the Equity Offering. In lieu of $6 million, the amount shall be a
number equal to the product of (1) $6 million and (2) a fraction, (x) the
numerator of which is the number of outstanding Common Units at the Effective
Time (assuming the simultaneous closing of the Equity Offering) and (y) the
denominator of which is the number of outstanding Common Units immediately
prior to the Effective Time. Assuming the issuance of approximately 6.8 million
Common Units in the Equity Offering, the basket will be increased to
approximately $16.7 million. This amendment will keep the dollar amount of the
basket per Common Unit the same as it was immediately before the Transaction.
Deletion of Provisions Relating to Early Conversion of Subordinated
Units. The Amendment Proposal will delete those provisions of the Partnership
Agreement that provide that a portion of the Subordinated Units will convert
into Common Units prior to the expiration of the Subordination Period if
certain levels of Minimum Quarterly Distribution are both earned and
distributed. Based upon the Partnership's inability to satisfy certain tests
based on distributions and earnings, the early conversion of certain
Subordinated Units is no longer feasible.
General Partner Capital Contribution Requirement. The Amendment Proposal will
relieve the General Partner of its obligation to make contributions of capital
to the Partnership upon the issuance of additional Units in order to maintain a
fixed percentage general partner interest in the Partnership. The General
Partner will retain its preemptive right to maintain its existing ownership
interest. If the
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General Partner does not make a contribution of capital upon the issuance of
additional Units, its claim on distributions of Available Cash will be
proportionately reduced.
Additional Capital Contribution Obligation of the General Partner. The
Amendment Proposal will delete the Additional Capital Contribution Obligation
of the General Partner in order for the Partnership to pay the Minimum
Quarterly Distribution on the Common Units. Based upon the satisfaction of
certain tests determined by distributions, this obligation of the General
Partner has expired.
Partnership's Right to Acquire Units. The Amendment Proposal will provide
that if at any time after the expiration of the Subordination Period and the
earlier to occur of (A) the fifth anniversary of the Effective Time or (B) the
issuance of 909,000 Senior Subordinated Units and Class B Common Units in the
aggregate, the Partnership acquires, in a twelve-month period through purchase
or exchange, 66 2/3% or more of the total Class B Common Units, the Partnership
may purchase all, but not less than all, of the remaining Class B Common Units
then outstanding during the following twelve-month period.
Registration Rights of Certain Affiliates of Petro. The Amendment Proposal
will provide that the Partnership must register for resale under the Securities
Act the Common Units and Senior Subordinated Units issued to affiliates of
Petro in the Transaction.
SUMMARY OF AMENDMENTS TO THE OPERATING PARTNERSHIP AGREEMENT
Under the Partnership Agreement, as currently in effect, the General Partner
cannot consent to any amendment of the Operating Partnership Agreement that
would have a material adverse effect on the Partnership as a partner of the
Operating Partnership or cause the Partnership to elect a successor general
partner to the Operating Partnership without the approval of the holders of at
least a Unit Majority.
The General Partner consents to and proposes that the Limited Partners
approve (1) the election of Star Gas LLC as successor general partner to the
Operating Partnership, (2) delete allocation of depreciation to the General
Partner, (3) delete the prohibition against the General Partner from taking any
action that would cause its net worth to be less than $6 million and (4) any
other amendments to the Operating Partnership Agreement that the General
Partner deems necessary for the Transaction.
CONFORMING CHANGES
Certain additional changes will be required to conform the Partnership
Agreement and the Operating Partnership Agreement to the foregoing amendments
and to facilitate the Transaction. It is the good faith opinion of the General
Partner that the conforming changes do not adversely affect the Unitholders in
any material respect, and thus pursuant to the Partnership Agreement, as
currently in effect, the General Partner may make any or all conforming changes
without the consent of the Unitholders.
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THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT
IF THE TRANSACTION IS COMPLETED (WHICH WILL NOT OCCUR UNLESS THE ACQUISITION
PROPOSAL, THE AMENDMENT PROPOSAL AND THE GENERAL PARTNER PROPOSAL ARE EACH
APPROVED), ALL HOLDERS OF THE PARTNERSHIP'S UNITS WILL BE BOUND BY THE
PROVISIONS OF THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT, AS IT MAY BE
FURTHER AMENDED FROM TIME TO TIME. THE FOLLOWING PARAGRAPHS DISCUSS CERTAIN
PROVISIONS OF THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT. THIS DISCUSSION
DOES NOT PURPORT TO BE COMPLETE. FOR A MORE COMPLETE UNDERSTANDING, SEE THE
PROPOSED AMENDED AND RESTATED PARTNERSHIP AGREEMENT IN ANNEX C IN THIS PROXY
STATEMENT.
Certain provisions of the Amended and Restated Partnership Agreement are
summarized elsewhere in this Prospectus under various headings. With regard to
various transactions and relationships of the Partnership with the General
Partner and its affiliates, see "Parties and Conflicts--Conflicts of Interest."
With regard to the management of the Partnership, see "Management of the
Partnership After the Transaction." With regard to the transfer of Units, see
"Description of the Units." With regard to distributions of Available Cash, see
"Cash Distribution Policy." With regard to allocations of taxable income and
taxable loss, see "Certain Federal Income Tax Considerations." Prospective
investors are urged to review these sections of this Prospectus and the Amended
and Restated Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in 1995 as
Delaware limited partnerships. The Partnership will dissolve on December 31,
2085, unless sooner dissolved pursuant to the terms of the Amended and Restated
Partnership Agreement.
PURPOSE
The purpose of the Partnership is limited to serving as the limited partner
of the Operating Partnership and engaging in other activities as may be
approved by the General Partner. The General Partner is authorized in general
to perform all acts deemed necessary to carry out those purposes and to conduct
the business of the Partnership. The General Partner will have the ability
under the Amended and Restated Partnership Agreement to cause the Partnership
and the Operating Partnership to engage in activities that may pose a greater
risk to investors than the propane marketing business and home heating oil
marketing business. The General Partner has the power to cause the Partnership
to commence a bankruptcy proceeding under the federal bankruptcy laws. However,
the General Partner does not intend to cause the Partnership to commence such a
proceeding unless the Partnership is insolvent.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application for that Unit, grants to the
General Partner and, if a liquidator of the Partnership has been appointed,
that liquidator, a power of attorney to, among other things, execute and file
certain documents required for the qualification, continuance or dissolution of
the Partnership, or the amendment of the Amended and Restated Partnership
Agreement in accordance with the terms thereof and to make consents and waivers
contained in the Amended and Restated Partnership Agreement.
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RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER WITH RESPECT TO EXTRAORDINARY
TRANSACTIONS; LACK OF DISSENTERS' RIGHTS
The authority of the General Partner is limited in certain respects under the
Amended and Restated Partnership Agreement. The General Partner is prohibited,
without the prior approval of holders of record of a Unit Majority, from, among
other things, selling, exchanging or otherwise disposing of all or
substantially all of the Partnership's assets in a single transaction or a
series of related transactions (including by way of merger, consolidation or
other combination) or approving on behalf of the Partnership the sale, exchange
or other disposition of all or substantially all of the assets of the Operating
Partnership. However, the Partnership may mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the Partnership's
assets without that approval. The Partnership may also sell all or
substantially all of its assets pursuant to a foreclosure or other realization
upon the foregoing encumbrances without that approval. The Unitholders are not
entitled to dissenters' rights of appraisal under the current Partnership
Agreement, the Amended and Restated Partnership Agreement or applicable
Delaware law if a merger or consolidation of the Partnership or the sale,
exchange or other disposition of substantially all of the Partnership's assets
or any other event should occur.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER; APPROVAL OF SUCCESSOR GENERAL
PARTNER
The General Partner has agreed not to voluntarily withdraw as general partner
of the Partnership and the Operating Partnership prior to December 31, 2005
(with limited exceptions described below), without obtaining the approval of a
Unit Majority and furnishing an opinion of counsel that the withdrawal
(following the selection of a successor general partner) will not result in the
loss of the limited liability of the limited partners of the Partnership or
cause the Partnership to be treated as an association taxable as a corporation
or otherwise taxed as an entity for federal income tax purposes (an "Opinion of
Counsel"). On or after December 31, 2005, the General Partner may withdraw as
general partner by giving 90 days written notice (without first obtaining
approval from the Unitholders), and the withdrawal will not constitute a
violation of the Amended and Restated Partnership Agreement. Notwithstanding
the foregoing, the General Partner may withdraw without Unitholder approval
upon 90 days notice to the limited partners if more than 50% of the outstanding
Units are held or controlled by one person and its affiliates (other than the
General Partner and its affiliates). In addition, the Amended and Restated
Partnership Agreement permits the General Partner (in certain limited
instances) to sell all of its general partner interest (which is evidenced by
the General Partner Units) in the Partnership. See "--Restriction on Transfer
of General Partner Interest."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
General Partner Units, the holders of a Unit Majority may select a successor to
the withdrawing General Partner. If the successor is not elected, or is elected
but an Opinion of Counsel cannot be obtained, the Partnership will be
dissolved, wound up and liquidated, unless within 180 days after that
withdrawal, a Unit Majority agrees in writing to continue the business of the
Partnership and to the appointment of a successor general partner. See "--
Description of Termination and Dissolution of the Partnership."
Pursuant to the terms of the Amended and Restated Partnership Agreement, the
General Partner may not be removed unless removal is approved by the vote of
the holders of not less than
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66 2/3% of the outstanding Units owned by limited partners voting together as a
single class (other than those of the General Partner and its affiliates) and
the Partnership receives an Opinion of Counsel. Removal is also subject to the
approval of a successor general partner by the vote of the holders of a Unit
Majority. If the General Partner is removed as General Partner other than for
Cause, the Subordination Period will end, any then-existing arrearages on the
Common Units will be terminated, any Senior Subordinated Units and Junior
Subordinated Units held by the General Partner will immediately convert into
Class B Common Units and the General Partner Units will no longer be
subordinated; provided, however, that if the General Partner is removed during
the Subordination Period within 12 months after a six-quarter period in which
the Minimum Quarterly Distribution has not been made on the Common Units for
more than one of those quarters (excluding for this purpose the payment of any
Common Unit Arrearages) and the first quarter in that six-quarter period that
the Minimum Quarterly Distribution on the Common Units is not made occurs after
March 31, 2001, then the Subordination Period will not end. If the General
Partner is removed and the Subordination Period does not end, the Junior
Subordinated Units shall convert into Senior Subordinated Units on a one-for-
one basis and the distribution rights on the General Partner Units with respect
to the Minimum Quarterly Distribution and Liquidation will rank equally with
the Senior Subordinated Units.
Removal or withdrawal of the General Partner of the Partnership also
constitutes removal or withdrawal, as the case may be, of the General Partner
as general partner of the Operating Partnership.
In the event of withdrawal of the General Partner where the withdrawal
violates the Amended and Restated Partnership Agreement or removal of the
General Partner by the limited partners under circumstances where Cause exists,
a successor general partner will have the option to purchase the General
Partner Units of the departing General Partner (the "Departing Partner") in
both the Partnership and the Operating Partnership for a cash payment equal to
the fair market value of that interest. Under all other circumstances where the
General Partner withdraws or is removed by the limited partners, the Departing
Partner will have the right to require the successor general partner to
purchase the General Partner Units of the Departing Partner for that amount. In
each case, the fair market value will be determined by agreement between the
Departing Partner and the successor general partner, or if no agreement is
reached, by an independent investment banking firm or other independent experts
selected by the Departing Partner and the successor general partner (or if no
expert can be agreed upon, by the expert chosen by agreement of the experts
selected by each of them). In addition, the Partnership will be required to
reimburse the Departing Partner for all amounts due the Departing Partner,
including, without limitation, all employee-related liabilities such as
severance liabilities, incurred in the termination of the employees employed
for the benefit of the Partnership by the Departing Partner.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's General Partner Units will be converted into Common Units (or Class A
Common Units if any Class B Common Units are then outstanding) equal to the
fair market value of the interest as determined by an investment banking firm
or other independent expert selected in the manner described in the preceding
paragraph.
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RESTRICTION ON TRANSFER OF GENERAL PARTNER INTEREST
Except for a transfer by the General Partner of all, but not less than all,
of its General Partner Units to an affiliate or for with the merger or
consolidation of the General Partner with or into another entity, the General
Partner may not transfer any or all of the General Partner Units to
another person or entity prior to December 31, 2005, without the approval of
holders of at least a Unit Majority; provided that, in each case the transferee
assumes the rights and duties of the General Partner, agrees to be bound by the
provisions of the Amended and Restated Partnership Agreement, furnishes an
Opinion of Counsel and agrees to purchase all (or the appropriate portion
thereof as applicable) of the General Partner's partnership interest in the
Operating Partnership. At any time, the members of Star Gas LLC may sell or
otherwise transfer their membership interests in Star Gas LLC to a third party
without the approval of the Unitholders.
REIMBURSEMENT FOR SERVICES OF THE GENERAL PARTNER
The Amended and Restated Partnership Agreement provides that the General
Partner is not entitled to receive any compensation for its services as general
partner of the Partnership; the General Partner is, however, entitled to be
reimbursed on a monthly basis (or such other basis as the General Partner may
reasonably determine) for all direct and indirect expenses it incurs or
payments it makes on behalf of the Partnership, and all other necessary or
appropriate expenses allocable to the Partnership or otherwise reasonably
incurred by the General Partner for the operation of the Partnership's business
(including expenses allocated to the General Partner by its affiliates). The
Amended and Restated Partnership Agreement provides that the General Partner
shall determine the expenses that are allocable to the Partnership in any
reasonable manner determined by the General Partner in its sole discretion.
RIGHTS AND STATUS AS LIMITED PARTNER OR ASSIGNEE UPON TRANSFER OF INTEREST
Except as described below under "--Limited Liability," the Units will be
fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
A person receiving a Common Unit or Senior Subordinated Unit subsequent to
executing and delivering a Transfer Application, but pending its admission as a
substituted limited partner or additional limited partner, as the case may be,
is entitled to an interest in the Partnership equivalent to that of a limited
partner with respect to the right to share in allocations and distributions,
including liquidating distributions. The General Partner will vote and exercise
other powers attributable to Common Units or Senior Subordinated Unit owned by
that person who has not become a substitute limited partner or additional
limited partner, as the case may be, at the written direction of that person.
See "--Meetings of Limited Partners and Voting Rights." Persons who do not
execute and deliver a Transfer Application will be treated neither as assignees
nor as record holders of Common Units or Senior Subordinated Unit and will not
receive cash distributions, federal income tax allocations or reports furnished
to record holders of Common Units, Senior Subordinated Units and Junior
Subordinated Units. See "Description of the Units--Obligations and Procedures
for the Transfer of Units."
LIMITATIONS ON THE RIGHTS OF NON-CITIZEN ASSIGNEES AND REDEMPTION RIGHTS OF THE
PARTNERSHIP
If, because of the nationality, citizenship or other related status of any
limited partner or assignee, the Partnership is or becomes subject to federal,
state or local laws or regulations that, in
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the reasonable determination of the General Partner, create a substantial risk
of cancellation or forfeiture of any property in which the Partnership has an
interest, the Partnership may redeem the Units held by that limited partner or
assignee at their Current Market Price. In order to avoid any cancellation or
forfeiture, the General Partner may require each limited partner or assignee to
furnish information about his nationality, citizenship, residency or related
status. If a limited partner or assignee fails to furnish information about his
nationality, citizenship, residency or other related status within 30 days
after a request for the information, that limited partner or assignee may be
treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to
other limitations on the rights of an assignee who is not a substituted limited
partner, a Non-citizen Assignee does not have the right to direct the voting of
his Units and may not receive distributions in kind upon liquidation of the
Partnership.
ISSUANCE OF ADDITIONAL SECURITIES BY THE PARTNERSHIP
The General Partner is authorized to cause the Partnership to issue an
unlimited number of additional limited partner interests and other equity
securities of the Partnership for the consideration and on the terms and
conditions established by the General Partner in its sole discretion, without
the approval of any limited partners. However, during the Subordination Period,
the Partnership may not issue an aggregate of more than 2,500,000 additional
limited partner interests (the "Parity Units") without the prior approval of at
least a majority of the outstanding Common Units (other than those held by the
General Partner and its affiliates).
Even during the Subordination Period, the restrictions on issuance of
additional limited partner interests are subject to the following exceptions
(that is, additional limited partner interests can be made in the following
circumstances):
(1) the Partnership may issue Common Units pursuant to the Transaction,
including those issued in the Equity Offering;
(2) the Partnership may issue an unlimited number of additional Common
Units or Parity Units without the approval of the Unitholders if the
issuance occurs
(a) an Acquisition or a Capital Improvement or
(b) within 365 days of, and the net proceeds from the issuance
are used to repay debt incurred for, an Acquisition or a Capital
Improvement, in each case, where that Acquisition or Capital
Improvement involves assets that would have, if acquired by the
Partnership as of the date that is one year prior to the first day
of the quarter in which the transaction is to be effected,
resulted in an increase in the amount of Adjusted Operating
Surplus calculated on a per-Unit basis for all outstanding Units
as to each of the four most recently completed quarters (on a pro
forma basis);
(3) the Partnership may also issue an unlimited number of additional
Common Units or Parity Units prior to the end of the Subordination Period
and without the approval of the Unitholders if the proceeds from the
issuance are used exclusively to repay up to $20 million of indebtedness of
the Partnership, the Operating Partnership or any subsidiary thereof; and
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(4) the Partnership may issue Class B Common Units upon the conversion of
the Senior Subordinated Units and Junior Subordinated Units at the end of
the Subordination Period. In accordance with Delaware law and the
provisions of the Amended and Restated Partnership Agreement, the General
Partner in its sole discretion, may cause the Partnership to issue
additional partnership interests that may have special voting rights.
The General Partner has the right, which it may assign in whole or in part to
any of its affiliates, to purchase any class of Units or other equity
securities from the Partnership on the same terms that the Partnership issues
the Units or securities to persons other than the General Partner and its
affiliates, whenever that purchase is necessary so that the General Partner and
its affiliates will maintain the percentage of ownership interest that existed
immediately prior to each issuance. The holders of Common Units do not have
preemptive rights to acquire additional Common Units or other partnership
interests that may be issued by the Partnership.
Additional issues of Units, including Senior Subordinated Units and Junior
Subordinated Units or other equity securities of the Partnership ranking junior
to the Common Units, may reduce the likelihood and/or amount of, any
distributions above the Minimum Quarterly Distribution.
LIMITED CALL RIGHT ON OUTSTANDING LIMITED PARTNER INTERESTS
If at any time (a) not more than 20% of the then-issued and outstanding
limited partner interests of any class are held by persons other than the
General Partner and its affiliates, the General Partner will have the right,
which it may assign and transfer in whole or in part to any of its affiliates
or to the Partnership, to acquire all, but not less than all, of the remaining
limited partner interests of that class held by those unaffiliated persons as
of a record date to be selected by the General Partner, on at least 10 but not
more than 60 days' notice or (b) after the expiration of the Subordination
Period and the earlier to occur of (A) the fifth anniversary of the Effective
Time or (B) the issuance of 909,000 Senior Subordinated Units and Class B
Common Units in the aggregate, the Partnership acquires, through purchase or
exchange, in a twelve-month period, 66 2/3% or more of the total Class B Common
Units, the Partnership shall then have the right, which it may not assign or
transfer, exercisable in its sole discretion, to purchase all, but not less
than all, of the remaining Units of such class then outstanding during the
following twelve-month period. The purchase price if (a) or (b) above should
occur shall be the greater of (x) the highest cash price paid by the
Partnership, the General Partner or any of its affiliates for any limited
partner interests of that class purchased within the 90 days preceding the date
on which the Partnership or the General Partner first mails notice of its
election to purchase those limited partner interests and (y) the Current Market
Price as of the date three days prior to the date the notice is mailed. As a
consequence of the Partnership's or the General Partner's right to purchase
outstanding limited partner interests (including Senior Subordinated Units and
Junior Subordinated Units), a holder of limited partner interests may have his
limited partner interests purchased from him even though that holder may not
desire to sell them, or the price paid may be less than the amount the holder
would desire to receive upon the sale of his limited partner interests. The tax
consequences to a Unitholder of the exercise of this call right are the same as
a sale by that Unitholder of his Units in the market. See "Certain Federal
Income Tax Considerations--Disposition of Units."
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AMENDMENT OF THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT
Amendments to the Amended and Restated Partnership Agreement may be proposed
only by or with the consent of the General Partner. In order to adopt a
proposed amendment, the General Partner is required to seek written approval of
the holders of the number of Units required to approve the amendment or call a
meeting of the limited partners to consider and vote upon the proposed
amendment, except as described below.
Prohibited Amendments. Proposed amendments (unless otherwise specified) must
be approved by holders of at least a Unit Majority except that no amendment may
be made that would:
(1) enlarge the obligations of any limited partner, without its consent,
(2) enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable, reimbursable or
otherwise payable to, the General Partner, without its consent, which may
be given or withheld in its sole discretion,
(3) change the term of the Partnership,
(4) provide that the Partnership is not dissolved upon expiration of its
term or
(5) give any person the right to dissolve the Partnership (other than the
General Partner's right to dissolve the Partnership with the approval of
holders of at least a Unit Majority).
No Unitholder Approval. The General Partner may make amendments to the
Amended and Restated Partnership Agreement without the approval of any limited
partner or assignee to reflect:
(1) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent or the
registered office of the Partnership,
(2) admission, substitution, withdrawal or removal of partners in
accordance with the Amended and Restated Partnership Agreement,
(3) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a partnership in which the limited partners have limited
liability or that is necessary or advisable to ensure that the Partnership
and the Operating Partnership will not be treated as an association taxable
as a corporation or otherwise taxed as an entity for federal income tax
purposes,
(4) an amendment that is necessary, in the opinion of counsel to the
Partnership, to prevent the Partnership or the General Partner or its
respective directors or officers from being subjected in any manner to the
provisions of the Investment Company Act of 1940, as amended, the
Investment Advisors Act of 1940, as amended, or the "plan asset"
regulations adopted under the Employee Retirement Income Security Act of
1974, as amended, whether or not substantially similar to plan asset
regulations currently applied or proposed,
(5) subject to the limitations on the issuance of additional Class A
Common Units, Class B Common Units or other limited or general partner
interests described above, an amendment that in the sole discretion of the
General Partner is necessary or advisable for the authorization of
additional limited or general partner interests,
(6) any amendment expressly permitted in the Amended and Restated
Partnership Agreement to be made by the General Partner acting alone,
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(7) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved pursuant to the terms of the Amended and
Restated Partnership Agreement,
(8) any amendment that, in the sole discretion of the General Partner, is
necessary or advisable for the formation by the Partnership of, or its
investment in, any corporation, partnership or other entity (other than the
Operating Partnership) as otherwise permitted by the Amended and Restated
Partnership Agreement,
(9) a change in the fiscal year and taxable year of the Partnership and
changes related to that change and
(10) any other amendments substantially similar to the foregoing.
In addition, the General Partner may make amendments to the Amended and
Restated Partnership Agreement without the approval of any limited partner or
assignee if the amendments:
(1) do not adversely affect the limited partners in any material respect,
(2) are necessary or advisable, in the sole discretion of the General
Partner to satisfy any requirements, conditions or guidelines contained in
any opinion, directive, ruling or regulation of any federal or state agency
or judicial authority or contained in any federal or state statute,
(3) are necessary or advisable to facilitate the trading of the Units or
to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the Units are or will be listed for trading,
compliance with any of which the General Partner deems to be in the best
interests of the Partnership and the Unitholders or
(4) are required or contemplated by the Amended and Restated Partnership
Agreement.
Opinion of Counsel and Unitholder Approval. The General Partner will not be
required to obtain an Opinion of Counsel if the amendments described in the two
immediately preceding paragraphs should occur. No other amendments to the
Amended and Restated Partnership Agreement will become effective without the
approval of at least 90% of the Units unless the Partnership obtains an Opinion
of Counsel to the effect that the amendment will not affect the limited
liability of any limited partner in the Partnership or the limited partner of
the Operating Partnership.
Any amendment that materially and adversely affects the rights or preferences
of any type or class of outstanding Units in relation to other classes of Units
will require the approval of holders of at least a majority of the outstanding
Units so affected (excluding, during the Subordination Period, any Units held
by the General Partner and its affiliates).
MEETINGS OF LIMITED PARTNERS AND VOTING RIGHTS
Unitholders or assignees who are record holders of Units on the record date
set pursuant to the Amended and Restated Partnership Agreement will be entitled
to notice of, and to vote at, meetings of limited partners of the Partnership
and to act on matters as to which approvals may be solicited. When Units are
owned by an assignee who is a record holder but who has not yet been admitted
as a limited partner, the General Partner shall be deemed to be the limited
partner of those Units and shall, in exercising the voting rights of those
Units on any matter, vote the Units at the written direction of that record
holder. Absent this direction, those Units will not be voted (except that, in
the case of Units held by the General Partner on behalf of Non-citizen
Assignees, the General Partner
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shall distribute the votes of these Units in the same ratios as the votes of
limited partners on other Units are cast).
The General Partner does not anticipate that any meeting of limited partners
will be called in the foreseeable future, other than the Unitholders Meeting.
Any action that is required or permitted to be taken by the limited partners
may be taken either at a meeting of the limited partners or without a meeting
if consents in writing setting forth the action so taken are signed by holders
of that number of limited partner interests as would be necessary to authorize
or take that action at a meeting of all of the limited partners. Meetings of
the limited partners of the Partnership may be called by the General Partner or
by limited partners owning at least 20% of the outstanding Units of the class
for which a meeting is proposed. Limited partners may vote either in person or
by proxy at meetings. The holders of a majority of the outstanding Units of the
class or classes for which a meeting has been called, who are represented in
person or by proxy, shall constitute a quorum at a meeting of limited partners
of that class or classes, unless the action by the limited partners requires
approval by holders of a greater percentage of those Units, in which case the
quorum shall be the greater percentage (excluding, in either case, if they are
to be excluded from the vote, outstanding Units owned by the General Partner
and its affiliates).
Each record holder of a Unit has a vote according to his percentage interest
in the Amended and Restated Partnership, although additional limited partner
interests having special voting rights could be issued by the General Partner.
See "--Issuance of Additional Securities by the Partnership." The Partnership
Agreement provides that Units held in a nominee or street name account will be
voted by the broker (or other nominee) pursuant to the instruction of the
beneficial owner unless the arrangement between the beneficial owner and his
nominee provides otherwise.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Units (regardless of whether the
record holder has been admitted as a limited partner) under the terms of the
Amended and Restated Partnership Agreement will be delivered to the record
holder by the Partnership or by the Transfer Agent at the request of the
Partnership.
INDEMNIFICATION OBLIGATIONS OF THE PARTNERSHIP
The Amended and Restated Partnership Agreement provides that the Partnership
will indemnify (1) the General Partner, (2) any Departing Partner, (3) any
Person who is or was an affiliate of the General Partner or any Departing
Partner, (4) any Person who is or was an officer, director, employee, partner,
agent or trustee of the General Partner or any Departing Partner or any
affiliate of the General Partner or any Departing Partner or (5) any Person who
is or was serving at the request of the General Partner or any Departing
Partner or any affiliate of the General Partner or any Departing Partner as an
officer, director, employee, partner, agent or trustee of another Person
("Indemnitees").
The Partnership will indemnify these persons to the fullest extent permitted
by law, from and against any and all losses, claims, damages, liabilities
(joint or several), expenses (including, without limitation, legal fees and
expenses), judgments, fines, penalties, interest, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as any of the foregoing; provided
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that in each case the Indemnitee acted in good faith and in a manner that the
Indemnitee reasonably believed to be in, or not opposed to, the best interests
of the Partnership and, with respect to any criminal proceeding, had no
reasonable cause to believe its conduct was unlawful.
Any indemnification under these provisions will only be out of the assets of
the Partnership, and the General Partner shall not be personally liable for, or
have any obligation to contribute or loan funds or assets to, the Partnership
to enable it to effectuate, that indemnification. The Partnership is authorized
to purchase (or to reimburse the General Partner or its affiliates for the cost
of) insurance against liabilities asserted against and expenses incurred by
those persons for the Partnership's activities, regardless of whether the
Partnership would have the power to indemnify that person against those
liabilities under the provisions described above.
POTENTIAL LOSS OF LIMITED LIABILITY BY UNITHOLDERS
Assuming that a limited partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Amended and Restated
Partnership Agreement, his liability under the Delaware Act will be limited,
subject to certain possible exceptions, to the amount of capital he is
obligated to contribute to the Partnership in respect of his Units plus his
share of any undistributed profits and assets of the Partnership. If it were
determined, however, that the right or exercise of the right by the limited
partners as a group to remove or replace the General Partner, to approve
certain amendments to the Amended and Restated Partnership Agreement or to take
other action pursuant to the Amended and Restated Partnership Agreement
constituted "participation in the control" of the Partnership's business for
the purposes of the Delaware Act, then the limited partners could be held
personally liable for the Partnership's obligations under the laws of the State
of Delaware to the same extent as the General Partner with respect to persons
who transact business with the Partnership reasonably believing, based on the
limited partner's conduct, that the limited partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to nonrecourse liability shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds
that nonrecourse liability. The Delaware Act provides that a limited partner
who receives a distribution and knew at the time of the distribution that the
distribution was in violation of the Delaware Act shall be liable to the
limited partnership for the amount of the distribution for three years from the
date of the distribution. Under the Delaware Act, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except
the assignee is not obligated for liabilities unknown to him at the time he
became a limited partner and that could not be ascertained from the partnership
agreement.
The Operating Partnership conducts business in at least 13 states.
Maintenance of limited liability may require compliance with legal requirements
in those jurisdictions in which the Operating Partnership conducts business,
including qualifying the Operating Partnership to do business therein.
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Limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established in many jurisdictions. If
it were determined that the Partnership was, by virtue of its limited partner
interest in the Operating Partnership or otherwise, conducting business in any
state without compliance with the applicable limited partnership statute, or
that the right or exercise of the right by the limited partners as a group to
remove or replace the General Partner, to approve certain amendments to the
Amended and Restated Partnership Agreement, or to take other action pursuant to
the Amended and Restated Partnership Agreement constituted "participation in
the control" of the Partnership's business for the purposes of the statutes of
any relevant jurisdiction, then the limited partners could be held personally
liable for the Partnership's obligations under the law of that jurisdiction to
the same extent as the General Partner under certain circumstances. The
Partnership will operate in the manner as the General Partner deems reasonable
and necessary or appropriate to preserve the limited liability of Unitholders.
OBLIGATIONS OF THE GENERAL PARTNER TO PROVIDE BOOKS AND REPORTS TO LIMITED
PARTNERS
The General Partner is required to keep appropriate books of the business of
the Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership (for accounting but not for tax purposes) is
October 1 to September 30.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish each record holder of
Units (as of a record date selected by the General Partner) with an annual
report containing audited financial statements of the Partnership for the past
fiscal year, prepared in accordance with generally accepted accounting
principles. As soon as practicable, but in no event later than 90 days after
the close of each quarter (except the last quarter of each fiscal year), the
General Partner will furnish each record holder of Units (as of a record date
selected by the General Partner) a report containing unaudited financial
statements of the Partnership with respect to that quarter and any other
information as may be required by law.
The General Partner will use all reasonable efforts to furnish each record
holder of a Unit with information reasonably required for tax reporting
purposes within 90 days after the close of each calendar year in which the
Partnership's taxable year ends. This information is expected to be furnished
in summary form so that certain complex calculations normally required of
partners can be avoided. The General Partner's ability to furnish summary
information to Unitholders will depend on the cooperation of such Unitholders
in supplying certain information to the General Partner. Every Unitholder
(without regard to whether he supplies this information to the General Partner)
will receive information to assist him in determining his federal and state tax
liability and filing his federal and state income tax returns.
LIMITED PARTNERS' RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Amended and Restated Partnership Agreement provides that a limited
partner can, for a purpose reasonably related to the limited partner's interest
as a limited partner, upon reasonable demand and at his/her own expense, be
furnished with (1) a current list of the name and last known address of each
partner, (2) a copy of the Partnership's tax returns, (3) information as to the
amount of cash, and a description and statement of the net agreed value of any
other property or services,
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contributed or to be contributed by each partner and the date on which each
became a partner, (4) copies of the Amended and Restated Partnership Agreement,
the certificate of limited partnership of the Partnership, amendments thereto
and powers of attorney pursuant to which the same have been executed, (5)
information regarding the status of the Partnership's business and financial
condition and (6) such other information regarding the affairs of the
Partnership as is just and reasonable. The General Partner may, and intends to,
keep the following confidential from the limited partners: trade secrets or
other information the disclosure of which the General Partner believes in good
faith is not in the best interests of the Partnership or that is required by
law or by agreements with third parties to be kept confidential.
DESCRIPTION OF TERMINATION AND DISSOLUTION OF THE PARTNERSHIP
The Partnership will continue until December 31, 2085, unless sooner
terminated pursuant to the Amended and Restated Partnership Agreement. The
Partnership will be dissolved upon (1) the election of the General Partner to
dissolve the Partnership, if approved by holders of a Unit Majority, (2) the
sale, exchange or other disposition of all or substantially all of the assets
and properties of the Partnership and the Operating Partnership, (3) the entry
of a decree of judicial dissolution of the Partnership or (4) withdrawal or
removal of the General Partner or any other event that results in its ceasing
to be the General Partner (other than by reason of a transfer of its General
Partner Units in accordance with the Amended and Restated Partnership Agreement
or withdrawal or removal following approval and admission of a successor). Upon
a dissolution pursuant to clause (4), the holders of at least a majority of the
outstanding Units (excluding Units held by the Departing General Partner and
its affiliates) may also elect, within certain time limitations, to
reconstitute the Partnership and continue its business on the same terms and
conditions in the Amended and Restated Partnership Agreement by forming a new
limited partnership on terms identical to those in the Partnership Agreement
and having as a general partner a person or entity approved by at least the
holders of a majority of the outstanding Units (excluding Units held by the
Departing General Partner and its affiliates), subject to receipt by the
Partnership of an Opinion of Counsel.
LIQUIDATION OF THE PARTNERSHIP AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up
the affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the General Partner that the Liquidator deems necessary or desirable
in its good faith judgment, liquidate the Partnership's assets and apply the
proceeds of the liquidation as provided in "Cash Distribution Policy--
Distributions of Cash upon Liquidation During the Subordination Period" and "--
Distributions of Cash upon Liquidation After the Subordination Period." Under
certain circumstances and subject to certain limitations, the Liquidator may
defer liquidation or distribution of the Partnership's assets for a reasonable
period of time or distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to the partners.
REGISTRATION RIGHTS OF THE GENERAL PARTNER OR ITS AFFILIATES
Pursuant to the terms of the Amended and Restated Partnership Agreement and
subject to certain limitations described therein, the Partnership has agreed
(1) to register for resale under the
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Securities Act and applicable state securities laws any Units proposed to be
sold by the General Partner or its affiliates (upon their request) if an
exemption from the registration requirements is not otherwise available for
that proposed transaction and (2) to register for resale under the Securities
Act and applicable state securities laws the Common Units and Senior
Subordinated Units issued to affiliates of Petro in the Transaction (upon their
request if an exemption from the registration requirements is not otherwise
available for such proposed transaction), and to use its best efforts to keep
that registration statement effective for one year, subject to certain
exceptions and to the requesting party providing necessary information. The
Partnership is obligated to pay all expenses incidental to that registration,
excluding underwriting discounts and commissions.
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CASH DISTRIBUTION POLICY
The following discussion gives effect to the adoption of the Amendment
Proposal and is furnished by the Partnership. Thus, references to "we," "us"
and "our" are to the Partnership.
GENERAL DESCRIPTION OF THE PARTNERSHIP'S CASH DISTRIBUTION
In general, we distribute to our partners on a quarterly basis, all of our
Available Cash in the manner described herein. "Available Cash" is defined in
the Glossary and generally means, with respect to any of our fiscal quarters,
all cash on hand at the end of that quarter less the amount of cash reserves
that are necessary or appropriate in the reasonable discretion of the General
Partner to (i) provide for the proper conduct of the Partnership's business,
(ii) comply with applicable law or any of our debt instruments or other
agreements or (iii) provide funds for distributions to the Common Unitholders
and the Senior Subordinated Unitholders during the next four quarters (in
certain circumstances). The General Partner may not establish cash reserves for
distributions to the Senior Subordinated Units unless the General Partner has
determined that in its judgment the establishment of reserves will not prevent
us from distributing the Minimum Quarterly Distribution on all Common Units and
any Common Unit Arrearages thereon with respect to the next four quarters. As
discussed below, the restrictions on distributions to Senior Subordinated
Units, Junior Subordinated Units and General Partner Units could result in cash
that would otherwise be Available Cash being reserved for other purposes.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed among different classes of Units. See "--Quarterly Distributions of
Available Cash."
Operating Surplus as currently defined generally refers to (i) the cash
balance of the Partnership on the date we commenced operations, plus
approximately $16 million, plus all of our cash receipts of the Partnership
(excluding cash receipts from Capital Surplus), less (ii) all of our operating
expenses (including expenses of the General Partner incurred on our behalf),
debt service payments, maintenance capital expenditures and reserves
established for future Partnership operations; provided, however, that
Operating Surplus is calculated without any reduction for costs or expenses
incurred in the Transaction.
Capital Surplus will generally be generated only by borrowings (other than
for working capital purposes), sales of debt and equity securities and sales or
other dispositions of assets for cash (other than inventory, accounts
receivable and other assets, all as disposed of in the ordinary course of
business).
To avoid the difficulty of trying to determine whether Available Cash is
distributed from Operating Surplus or Capital Surplus, all Available Cash
distributed from any source will be treated as distributed from Operating
Surplus until the sum of all Available Cash distributed since our commencement
equals the Operating Surplus as of the end of the quarter prior to that
distribution. Any excess Available Cash (irrespective of its source) will be
deemed to be Capital Surplus and distributed accordingly.
If Capital Surplus is distributed in respect of each Initial Common Unit in
an aggregate amount per Unit equal to $22.00 per Common Unit (the "Initial Unit
Price"), the distinction between
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Operating Surplus and Capital Surplus will cease, and all distributions will be
treated as from Operating Surplus. The General Partner does not expect that
there will be significant distributions from Capital Surplus.
The Senior Subordinated Units and the Junior Subordinated Units are each a
separate class of interests in the Partnership, and the rights of holders of
those interests to participate in distributions differ from the rights of the
holders of Common Units. When issued, the Class B Common Units will also be a
separate class of interests in the Partnership.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
We will make distributions to our partners with respect to each of our fiscal
quarters prior to liquidation in an amount equal to all of our Available Cash
for that quarter. Distributions will be made approximately 45 days after each
March 31, June 30, September 30 and December 31, to holders of record on the
applicable record date. If the Partnership meets certain tests described in the
Amended and Restated Partnership Agreement, the first distribution permitted to
be paid to the holders of the Senior Subordinated Units issued in the
Transaction will be paid with respect to the quarter ending June 30, 1999 and
will be paid on approximately August 14, 1999 to holders of record on
approximately August 3, 1999. The distribution, if paid, will include a pro
rata distribution for the period between the Effective Time and March 31, 1999.
The first distribution on the Common Units (including those issued in the
Equity Offering) subsequent to the Effective Time will be paid with respect to
the quarter ending March 31, 1999 on approximately May 15, 1999 to holders of
record on approximately May 4, 1999 regardless of how many days the Common
Units have been outstanding. For a discussion of certain restrictions on
distributions to the holders of subordinated interests, see "--Limitation on
Distributions on Subordinated Interests."
Upon expiration of the Subordination Period, all Senior Subordinated Units
and Junior Subordinated Units will be converted (on a one-for-one basis) into
Class B Common Units (all references herein to Common Units after the
expiration of the Subordination Period are deemed to be references to Class A
Common Units and Class B Common Units, collectively, unless otherwise
indicated) and distributions on the General Partner Units will no longer be
subordinated to distributions on the Common Units. Neither Class A Common Units
nor Class B Common Units will accrue arrearages for any quarter after the
Subordination Period, and Senior Subordinated Units, Junior Subordinated Units
and General Partner Units will not accrue any arrearages with respect to
distributions for any quarter.
The Minimum Quarterly Distribution and the Target Distribution Levels are
subject to adjustment as described below under "--Distributions from Capital
Surplus" and "--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
The Subordination Period will generally extend until the first day of any
quarter beginning on or after July 1, 2002 in respect of which (1)
distributions of Available Cash from Operating Surplus on the Common Units,
Senior Subordinated Units, Junior Subordinated Units and General Partner Units
equaled or exceeded the sum of the Minimum Quarterly Distributions on all of
the outstanding
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Common Units, Senior Subordinated Units, Junior Subordinated Units and General
Partner Units with respect to each of the three non-overlapping four-quarter
periods immediately preceding that date, (2) the Adjusted Operating Surplus
generated during each of the three immediately preceding non-overlapping four-
quarter periods equaled or exceeded the sum of the Minimum Quarterly
Distributions on all of the outstanding Common Units, Senior Subordinated
Units, Junior Subordinated Units and General Partner Units during those periods
on a fully diluted basis with respect to employee options or other employee
incentive compensation (including all outstanding Units and all Common Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of the
quarter immediately following the quarter with respect to which determination
is made, and all Units that have as of the date of determination been earned by
but not yet issued to management of the Partnership in respect of incentive
compensation) and (3) there are no arrearages in payment of the Minimum
Quarterly Distribution on the Common Units.
In certain circumstances, if the General Partner is removed without Cause,
the Subordination Period will end, any existing arrearages on the Common Units
will be extinguished, the Senior Subordinated Units and Junior Subordinated
Units will immediately convert into Class B Common Units and distributions on
the General Partner Units will no longer be subordinated. See "The Amended and
Restated Partnership Agreement--Withdrawal or Removal of the General Partner;
Approval of Successor General Partner."
Distributions of Available Cash from Operating Surplus with respect to any
quarter during the Subordination Period will be made in the following manner:
first, 100% to the Common Units, pro rata, until there has been
distributed in respect of each Common Unit an amount equal to the Minimum
Quarterly Distribution for that quarter;
second, 100% to the Common Units, pro rata, until there has been
distributed in respect of each Common Unit an amount equal to any
Cumulative Common Unit Arrearages on each Common Unit with respect to any
prior quarter;
third, 100% to the Senior Subordinated Units, pro rata, until there has
been distributed in respect of each Senior Subordinated Unit an amount
equal to the Minimum Quarterly Distribution for that quarter;
fourth, 100% to the Junior Subordinated Units and General Partner Units,
pro rata, until there has been distributed in respect of each Junior
Subordinated Unit and General Partner Unit an amount equal to the Minimum
Quarterly Distribution for that quarter; and
thereafter, in the manner described in "--Incentive Distributions During
the Subordination Period" below.
Upon completion of the Transaction, the General Partner will have a 1.99%
general partner interest in the Partnership in the form of General Partner
Units and a 0.01% general partner interest in the Operating Partnership.
References in this proxy statement to distributions on the General Partner
Units disregard the General Partner's 0.01% general partner interest in the
Operating Partnership.
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DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
Distributions of Available Cash from Operating Surplus with respect to any
quarter after the Subordination Period will be made in the following manner:
first, 100% to all Units, pro rata, until there has been distributed in
respect of each Unit an amount equal to the Minimum Quarterly Distribution
for that quarter; and
thereafter, in the manner described in "--Incentive Distributions After
the Subordination Period" below.
INCENTIVE DISTRIBUTIONS DURING THE SUBORDINATION PERIOD
For any quarter for which Available Cash from Operating Surplus is
distributed in respect of each of the Common Units, Senior Subordinated Units,
Junior Subordinated Units and General Partner Units in an amount equal to the
Minimum Quarterly Distribution and Available Cash has been distributed on
outstanding Common Units in the amount as may be necessary to eliminate any
Cumulative Common Unit Arrearages, then any additional Available Cash from
Operating Surplus in respect of that quarter will be distributed among the
Units in the following manner:
first, 100% to all Units, until each Unit has received (in addition to
any distributions to the Common Units to eliminate any Cumulative Common
Unit Arrearages) a total of $0.604 per Unit for that quarter in respect of
each Unit (the "First Target Distribution");
second, 86.7% to all Units, pro rata, and 13.3% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata, until the Common Units have received (in addition to any
distributions to Common Unitholders to eliminate any Cumulative Common Unit
Arrearages) a total of $0.711 per Unit for that quarter in respect of each
Common Unit (the "Second Target Distribution");
third, 76.5% to all Units, pro rata, and 23.5% to all Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, pro rata, until
the Common Units have received (in addition to any distributions to Common
Unitholders to eliminate any Cumulative Common Unit Arrearages) a total of
$0.926 per Unit for that quarter in respect of each Common Unit (the "Third
Target Distribution"); and
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata.
The Amended and Restated Partnership Agreement may not be amended (including
the issuance of additional partnership securities) in any manner which would
increase the aggregate amount of Incentive Distributions without the approval
of a majority of the outstanding Units of the classes that would be adversely
affected (each class voting separately).
The following table illustrates the percentage of Available Cash from
Operating Surplus distributed pro rata to all Unitholders ("Base
Distributions") pro rata and the percentage of Available Cash distributed to
the holders of Senior Subordinated Units, Junior Subordinated Units and General
Partner Units only ("Incentive Distributions")
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at the Target Distribution Levels. The percentages in the table below are the
percentage interests of the Unitholders in Available Cash from Operating
Surplus distributed as Base Distributions and Incentive Distributions based on
the number of Units outstanding immediately after completion of the
Transaction.
<TABLE>
<CAPTION>
PERCENTAGE OF AVAILABLE CASH
DISTRIBUTED AS INCENTIVE
DISTRIBUTIONS TO THE SPECIFIED
UNIT CLASS
---------------------------------
-
PERCENTAGE OF PERCENTAGE OF
QUARTERLY AVAILABLE CASH AVAILABLE CASH
DISTRIBUTION DISTRIBUTED AS DISTRIBUTED AS SENIOR JUNIOR GENERAL
AMOUNT PER BASE INCENTIVE SUBORDINATED SUBORDINATED PARTNER
COMMON UNIT DISTRIBUTIONS DISTRIBUTIONS UNITS UNITS UNITS
------------ -------------- -------------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.575 100.0% -- -- -- --
First Target
Distribution........... 0.604 100.0 -- -- -- --
Second Target
Distribution........... 0.711 86.7 13.3% 10.2% 2.1% 1.0%
Third Target
Distribution........... 0.926 76.5 23.5 17.9 3.7 1.9
Thereafter.............. -- 51.0 49.0 37.4 7.7 3.9
</TABLE>
The percentage allocation of Incentive Distributions among Senior
Subordinated Units, Junior Subordinated Units and General Partner Units, will
change in the future if there are additional non proportional issuances of
Units.
The following table illustrates the distribution of Available Cash per Unit
among the Common Units, Senior Subordinated Units, Junior Subordinated Units
and General Partner Units at the Target Distribution Levels. The calculations
are based on the assumption that the quarterly distribution amounts shown do
not include any Cumulative Common Unit Arrearages. The amounts set forth below
are based on the Units outstanding immediately after completion of the
Transaction.
<TABLE>
<CAPTION>
QUARTERLY DISTRIBUTION AMOUNT
----------------------------------------
SENIOR JUNIOR GENERAL
COMMON SUBORDINATED SUBORDINATED PARTNER
UNIT UNIT UNIT UNIT
------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution........ $0.575 $0.575 $0.575 $0.575
First Target Distribution............. 0.604 0.604 0.604 0.604
Second Target Distribution............ 0.711 0.777 0.777 0.777
Third Target Distribution............. 0.926 1.257 1.257 1.257
</TABLE>
INCENTIVE DISTRIBUTIONS AFTER THE SUBORDINATION PERIOD
For any quarter for which Available Cash from Operating Surplus is
distributed in respect of each of the Class A Common Units, the Class B Common
Units and General Partner Units in an amount equal to the Minimum Quarterly
Distribution, then any additional Available Cash from Operating Surplus in
respect of that quarter will be distributed among the Unitholders in the
following manner:
first, 100% to all Units, pro rata, until the Units have received the
First Target Distribution;
second, 86.7% to all Units, pro rata, and 13.3% to all Class B Common
Units and General Partner Units, pro rata, until the Class A Common Units
have received the Second Target Distribution;
third, 76.5% to all Units, pro rata, and 23.5% to all Class B Common
Units and General Partner Units, pro rata, until the Class A Common Units
have received the Third Target Distribution; and
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thereafter, 51% to all Units, pro rata, and 49% to all Class B Common
Units and General Partner Units, pro rata.
The following table illustrates the distribution of Available Cash per Unit
among the Class A Common Units, Class B Common Units and General Partner Units
at the Target Distribution Levels. The calculations are based on the assumption
that the quarterly distribution amounts shown do not include any Cumulative
Common Unit Arrearages. The amounts set forth below are based on the number of
Units outstanding immediately after completion of the Transaction.
<TABLE>
<CAPTION>
QUARTERLY
DISTRIBUTION
---------------------
CLASS CLASS
A B GENERAL
COMMON COMMON PARTNER
UNIT UNIT UNIT
------ ------ -------
<S> <C> <C> <C>
Minimum Quarterly Distribution............................ $0.575 $0.575 $0.575
First Target Distribution................................. 0.604 0.604 0.604
Second Target Distribution................................ 0.711 0.777 0.777
Third Target Distribution................................. 0.926 1.257 1.257
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made 100% on all Units, pro rata, until we shall have distributed, in
respect of each Initial Common Unit, Available Cash from Capital Surplus in an
aggregate amount per Initial Common Unit equal to the Initial Unit Price.
Thereafter, all distributions from Capital Surplus will be distributed as if
they were from Operating Surplus.
When a distribution is made from Capital Surplus, it is treated as if it were
a repayment of the Initial Unit Price. To reflect repayment, the Minimum
Quarterly Distribution and the Target Distribution Levels will be adjusted
downward by multiplying each amount by a fraction, the numerator of which is
the Unrecovered Initial Unit Price immediately after giving effect to the
repayment and the denominator of which is the Unrecovered Initial Unit Price
immediately prior to the repayment. For example, based on the Unrecovered
Initial Unit Price of $22.00 per Unit and assuming Available Cash from Capital
Surplus of $11.00 per Unit is distributed on all Initial Common Units (assuming
no prior adjustments), then the amount of the Minimum Quarterly Distribution
and the Target Distribution Levels would each be reduced to 50% of its initial
level.
When "payback" of the Initial Unit Price has occurred (when the Unrecovered
Initial Unit Price is zero), then in effect the Minimum Quarterly Distribution
and the Target Distribution Levels each will have been reduced to zero.
Thereafter, all distributions of Available Cash from all sources will be
treated as if they were from Operating Surplus and, because the Minimum
Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the holders of the rights to Incentive Distributions will be
entitled to receive 49% of all distributions of Available Cash after
distributions in respect of Cumulative Common Unit Arrearages.
Distributions from Capital Surplus will not reduce the Minimum Quarterly
Distribution or any of the Target Distribution Levels for the quarter with
respect to which they are distributed.
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LIMITATION ON DISTRIBUTIONS ON SUBORDINATED INTERESTS
With respect to the time period beginning on the completion of the
Transaction and ending on June 30, 1999, the Partnership may make a
distribution of Available Cash on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units in an amount up to the Minimum
Quarterly Distribution for that period to the extent the sum of EBITDA, less
interest, less taxes and less maintenance capital expenditures consolidated
(combined from October 1, 1998 until completion of the Transaction) for the
Partnership and Petro ("Adjusted Distributable Cash") for the time period
beginning October 1, 1998 and ending on June 30, 1999 exceeds the sum of
(1) $57,172,000, plus or minus
(2) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(3) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(4) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000.
With respect to the quarter ending September 30, 1999, the Partnership may
make a distribution of Available Cash on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units to the extent the Adjusted
Distributable Cash for the time period beginning October 1, 1998 and ending on
September 30, 1999 exceeds the sum of
(1) $25,307,000 plus or minus
(2) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(3) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999, exceeds
or is less than 10,544,000, plus or minus
(4) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000, plus or minus
(5) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending September 30, 1999,
exceeds or is less than 10,544,000.
Beginning with the distribution for the quarter ending on December 31, 1999,
no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units or General Partner Units, except for distributions from
Capital Surplus, unless the aggregate amount of distributions on all Units with
respect to all quarters, beginning with the quarter ended December 31, 1999,
shall be
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equal to or less than the total Operating Surplus generated by us since October
1, 1999 (which does not include the approximately $16.7 million and our cash
balance on the date we commenced operations).
The holders of the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units are not prohibited from receiving distributions from
Capital Surplus in a partial liquidation during the Subordination Period.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjustments made upon a distribution of Available Cash from
Capital Surplus, (1) the Minimum Quarterly Distribution, (2) the Target
Distribution Levels, (3) the Unrecovered Initial Unit Price, (4) the number of
additional Common Units issuable during the Subordination Period without a
Unitholder vote, (5) the number of Class B Common Units issuable upon
conversion of the Senior Subordinated Units and (6) Junior Subordinated Units
and other amounts calculated on a per Unit basis will be proportionately
adjusted upward or downward, as appropriate, if any combination or subdivision
of Units should occur (whether effected by a distribution payable in Units or
otherwise), but not by reason of the issuance of additional Units for cash or
property. For example, if a two-for-one split of the Common Units should occur
(assuming no prior adjustments), the Minimum Quarterly Distribution, the Target
Distribution Levels and the Unrecovered Initial Unit Price would each be
reduced to 50% of its initial level.
The Minimum Quarterly Distribution and Target Distribution Levels may also be
adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects us to
taxation as an entity for federal, state or local income tax purposes. In this
event, the Minimum Quarterly Distribution and Target Distribution Levels for
each quarter thereafter would be reduced to amounts equal to the product of (1)
the respective Minimum Quarterly Distribution or Target Distribution Level
multiplied by (2) one minus the sum of (x) the highest marginal federal
corporate (or other entity as applicable) income tax rate to which we are then
subject as an entity plus (y) any increase in the effective overall state and
local income tax rate to which we are subject as a result of the new imposition
of the entity level tax (after taking into account the benefit of any deduction
allowable for federal income tax purposes with respect to the payment of state
and local income taxes), but only to the extent of the increase in rates
resulting from that legislation or interpretation. For example, assuming we are
not previously subject to state and local income tax, if we were to become
taxable as an entity for federal income tax purposes and we became subject to a
maximum marginal federal, and effective state and local, income tax rate of
38%, then the Minimum Quarterly Distribution and the Target Distribution Levels
would each be reduced to 62% of the amount thereof immediately prior to the
adjustment.
ISSUANCE OF ADDITIONAL SENIOR SUBORDINATED UNITS
The Amended and Restated Partnership Agreement provides that for each full
non-overlapping four-quarter period ending on or after the first anniversary of
completion of the Transaction, but prior to the fifth anniversary of the
completion of the Transaction, in which the dollar amount of Petro Adjusted
Operating Surplus (as defined hereinafter) per Petro Unit (as defined
hereinafter) equals or
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exceeds $2.90, we will issue 303,000 Senior Subordinated Units (or 303,000
Class B Common Units if the issuance occurs after the end of the Subordination
Period) to the holders of the Senior Subordinated Units, Junior Subordinated
Units and the General Partner Units on the record date in respect of the
distribution for the final quarter of the four-quarter period, pro rata;
provided that the Partnership may not issue more than 909,000 Senior
Subordinated Units or Class B Common Units in the aggregate pursuant to this
provision; provided, further, that the Partnership may not issue more than
303,000 Senior Subordinated Units or Class B Common Units pursuant to this
provision in any 365-day period. We will not issue any fractional Senior
Subordinated Units or Class B Common Units in the issuance of the additional
Units. We will pay to each holder who would otherwise be entitled to a
fractional Senior Subordinated Unit an amount in cash to be paid in lieu of
those fractional Units determined by multiplying the fraction by the Current
Market Price of a Senior Subordinated Unit or a Class B Common Unit, as the
case may be, as of the date three days prior to issuance of the additional
Units. On the first day after the record date for distributions with respect to
the first quarter ending on or after the fifth anniversary of completion of the
Transaction, the right to receive the additional Units shall lapse and all
conversion rights shall cease to exist.
"Petro Adjusted Operating Surplus" means, with respect to any four-quarter
period, the Adjusted Operating Surplus generated by Petro (which for purposes
of this definition includes all subsidiaries of the Partnership primarily
engaged in the home heating oil business) during that four quarter period, as
determined in good faith by a majority of the members of the Board of Directors
of the General Partner (with the concurrence of the audit committee of the
Board of Directors of the General Partner consisting of two members of the
Board who are not officers of the General Partner (the "Audit Committee")). In
calculating Petro Adjusted Operating Surplus, (1) debt service (including the
payment of principal, interest and premium) on all debt incurred or assumed by
Petro or any of its affiliates, the proceeds of which are used by or for the
benefit of Petro (including the proceeds from the Debt Offering), shall be
included to the extent that debt service is included in the calculation of
Operating Surplus, and (2) debt service (including the payment of principal,
interest and premium) on all debt incurred or assumed by Petro or any of its
affiliates, the proceeds of which are not used by or for the benefit of Petro,
shall be excluded.
"Petro Units", with respect to any date, means the sum of (1) the excess of
the number of Units outstanding at completion of the Transaction over the
number of Units outstanding immediately prior to the completion of the
Transaction (assuming the simultaneous closing of the Equity Offering), (2) the
number of Units issued by the Partnership thereafter to the extent the net
proceeds of which are contributed to Petro (which for these purposes includes
all subsidiaries of the Partnership primarily engaged in the home heating oil
business), (3) the number of Senior Subordinated Units or Class B Common Units
issued pursuant to the Amended and Restated Partnership Agreement based on the
performance of Petro and (4) the deemed number of Units outstanding based upon
a contribution of capital to Petro by the Partnership or any of its affiliates
after completion of the Transaction (which contribution is not covered by (2)
above or traceable to debt proceeds), which number of deemed Units is obtained
by dividing (A) the amount of that contribution by (B) the Current Market Price
of a Common Unit (or of a Class A Common Unit after the termination of the
Subordination Period). If Petro pays down debt of Petro or debt allocated to
Petro from internally generated funds of Petro and if those internally
generated funds exist at Petro only because Petro has not paid dividends up to
the
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Partnership in an amount equal to the distributions that would have been paid
on the Petro Units had they been actual outstanding Units of the Partnership,
then the amount used to pay down that debt will be treated as if it were
contributed to Petro by the Partnership. The distribution per Senior
Subordinated Unit of the Partnership shall be the amount that the Partnership
would have been deemed to have distributed per Petro Unit had they been actual
outstanding Units of the Partnership. For purposes of the number of deemed
outstanding Units in (4) above, those Units shall be deemed to be issued on the
date of such Capital Contribution. For this purpose, Common Unit means Class A
Common Units upon expiration of the Subordination Period.
The terms upon which any of the said additional Units may be issued may not
be amended in a manner that would materially adversely affect the rights of the
holders thereof without the affirmative vote of the holders of a majority of
the outstanding Senior Subordinated Units, Junior Subordinated Units and
General Partner Units, voting together as a single class.
DISTRIBUTIONS OF CASH UPON LIQUIDATION DURING THE SUBORDINATION PERIOD
Following the commencement of the dissolution and liquidation, assets will be
sold or otherwise disposed of and the partners' capital account balances will
be adjusted to reflect any resulting gain or loss. The proceeds of liquidation
will, first, be applied to the payment of our creditors in the order of
priority provided in the Amended and Restated Partnership Agreement and by law
and, thereafter, be distributed on the Units in accordance with respective
capital account balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with capital
account balances. Although operating losses are allocated on all Units pro
rata, the allocations of gains and losses attributable to liquidation are
intended to entitle the holders of outstanding Common Units to a preference
over the holders of outstanding Senior Subordinated Units, Junior Subordinated
Units and General Partner Units, to the extent of the Unrecovered Initial Unit
Price plus any Cumulative Common Unit Arrearages. However, no assurance can be
given that there will be sufficient gain upon liquidation of the Partnership to
enable the holders of Common Units to fully recover all of such amounts, even
though there may be cash available for distribution to the holders of Senior
Subordinated Units and Junior Subordinated Units. The manner of such adjustment
is provided in the Amended and Restated Partnership Agreement. If our
liquidation occurs before the end of the Subordination Period, any gain (or
unrealized gain attributable to assets distributed in kind) will be allocated
to the partners as follows:
first, to the Partners that have negative balances in their capital
accounts, to the extent of and in proportion to, such negative balances;
second, 100% to the Common Units, pro rata, until the capital account for
each Common Unit is equal to the Unrecovered Initial Unit Price in respect
of such Common Unit plus the amount of the Minimum Quarterly Distribution
for the fiscal quarter during which the dissolution occurs, plus any
Cumulative Common Unit Arrearages in respect of such Common Units;
third, 100% to the Senior Subordinated Units, pro rata, until the capital
account for each Senior Subordinated Unit is equal to the Unrecovered
Initial Unit Price plus the amount of the Minimum Quarterly Distribution
for the fiscal quarter during which the dissolution occurs.
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fourth, 100% to the Junior Subordinated Units and General Partner Units,
pro rata, until the Capital Account for each Junior Subordinated Unit is
equal to the Unrecovered Initial Unit Price plus the amount of the Minimum
Quarterly Distribution for the fiscal quarter during which the dissolution
occurs;
fifth, 100% to all Units, pro rata, until there has been allocated under
this clause fifth an amount per Common Unit equal to (a) the excess of the
First Target Distribution per Unit over the then effective Minimum
Quarterly Distribution per Unit for each quarter of the Partnership's
existence, less (b) the amount per Common Unit of any distributions of
Available Cash from Operating Surplus in excess of the then effective
Minimum Quarterly Distribution per Unit that was distributed 100% to all
Units, pro rata, for each quarter of the Partnership's existence;
sixth, 86.7% to all Units, pro rata, 13.3% to Senior Subordinated Units,
Junior Subordinated Units and General Partner Units, pro rata, until there
has been allocated under this clause sixth an amount per Common Unit equal
to (a) the excess of the Second Target Distribution per Common Unit over
the First Target Distribution per Common Unit for each quarter of the
Partnership's existence, less (b) the amount per Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per Common Unit but not in excess of the Second
Target Distribution for each quarter of the Partnership's existence;
seventh, 76.5% to all Units, pro rata, and 23.5% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata, until there has been allocated under this clause seventh an
amount per Common Unit equal to (a) the excess of the Third Target
Distribution per Common Unit over the Second Target Distribution but not in
excess of the Third Target Distribution for each quarter of the
Partnership's existence; and
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata.
Any loss or unrealized loss will be allocated to the Unitholders as follows:
first, 100% to the Junior Subordinated Units and General Partner Units, pro
rata, in proportion to the positive balances in their respective capital
accounts until the positive balances in their respective capital accounts have
been reduced to zero; second, 100% to the Senior Subordinated Units in
proportion to the positive balances in their respective capital accounts until
the positive balances in their respective capital accounts have been reduced to
zero; third, 100% to the Common Units in proportion to the positive balances in
their respective capital accounts until the positive balances in the respective
capital accounts have been reduced to zero; and thereafter, to the General
Partner Units.
DISTRIBUTIONS OF CASH UPON LIQUIDATION AFTER THE SUBORDINATION PERIOD
If the liquidation of the Partnership occurs after the end of the
Subordination Period, any gain (or unrealized gain attributable to assets
distributed in kind) will be allocated to the partners as follows:
first, to the partners that have negative balances in their capital
accounts to the extent of and in proportion to such negative balances;
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second, 100% to all Class A Common Units and Class B Common Units, until
the capital account for each Class A Common Unit and Class B Common Unit is
equal to the Unrecovered Initial Unit Price (plus the amount of the Minimum
Quarterly Distribution for the fiscal quarter during which the dissolution
occurs);
third, 100% to all Units, pro rata, until there has been allocated under
this clause third an amount per Class A Common Unit equal to (a) the excess
of the First Target Distribution per Class A Common Unit over the then
effective Minimum Quarterly Distribution for each quarter of the
Partnership's existence, less (b) the amount per Class A Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
then effective Minimum Quarterly Distribution per Class A Common Unit that
was distributed 100% to Units, pro rata, for each quarter of the
Partnership's existence;
fourth, 86.7% to all Units, pro rata, and 13.3% to Class B Common Units
and General Partner Units, pro rata, until there has been allocated under
this clause fourth an amount per Class A Common Unit equal to (a) the
excess of the Second Target Distribution per Class A Common Unit over the
First Target Distribution per Class A Common Unit for each quarter of the
Partnership's existence, less (b) the amount per Class A Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution but not in excess of the Second Target
Distribution for each quarter of the Partnership's existence;
fifth, 76.5% to all Units, pro rata, and 23.5% to Class B Common Units
and General Partner Units, pro rata, until there has been allocated under
this clause five an amount per Class A Common Unit equal to (a) the excess
of the Third Target Distribution per Class A Common Unit over the Second
Target Distribution per Class A Common Unit for each quarter of the
Partnership's existence, less (b) the amount per Class A Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution but not in excess the Third Target Distribution
for each quarter of the Partnership's existence; and
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Class B Common
Units and General Partner Units, pro rata.
Any loss or unrealized loss will be allocated to the General Partner Units,
the Class A Common Units, Class B Common Units, pro rata, in proportion to the
positive balances in their respective capital accounts, until the positive
balances in the respective capital accounts have been reduced to zero.
Interim adjustments to Capital Accounts will be made at the time the
Partnership issues additional interests in the Partnership or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests issued or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders in the same manner as
gain or loss is allocated upon liquidation.
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CASH AVAILABLE FOR DISTRIBUTION
The Partnership believes that it will generate sufficient Available Cash from
Operating Surplus for the first four-quarter period following the Effective
Time to cover the full Minimum Quarterly Distribution for such four-quarter
period on all then outstanding Units.
Even if such amount is generated, the Partnership may, however, not
distribute such cash. In particular, the Partnership may distribute less than
the Minimum Quarterly Distribution on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units because of the subordination
provisions and other limitations on distributions in the Amended and Restated
Partnership Agreement.
The Partnership's belief about the amount of cash it may generate is based on
a number of assumptions, including the assumptions that normal weather
conditions will prevail in the Partnership's and Petro's operating areas, that
the Partnership's and Petro's operating margins will remain constant and that
market and overall economic conditions will not change substantially. Although
the Partnership believes its assumptions are within a range of reasonableness,
most of the assumptions are not within the control of the Partnership and
cannot be predicted with any degree of certainty. For example, in any
particular year or even series of years, weather may deviate substantially from
normal. Therefore, certain of the Partnership's assumptions may prove to be
inaccurate. As a result, the Operating Surplus of the Partnership could deviate
from that currently expected. See "Risk Factors."
The amount of Available Cash constituting Operating Surplus needed to pay the
Minimum Quarterly Distribution for four quarters on the Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units to be
outstanding immediately after the Effective Time (assuming no exercise of the
underwriters' overallotment option in the Equity Offering) is approximately
$33.1 million ($24.7 million for the Common Units, $6.4 million for the Senior
Subordinated Units, $1.3 million for the Junior Subordinated Units and $0.7
million for the General Partner Units). After giving pro forma effect to the
Transaction, the amount of pro forma Available Cash constituting Operating
Surplus generated during the twelve months ended September 30, 1998, would have
been approximately $18.7 million; if certain infrequent restructuring,
corporate identity and Transaction expenses were not taken into effect, pro
forma Available Cash constituting Operating Surplus would have been $22.9
million. In fiscal 1998, temperatures were significantly warmer than normal for
the areas in which the Partnership conducts its propane operations and Petro
conducts its home heating oil operations. The Partnership believes that overall
levels of both pro forma Available Cash from operating Surplus and EBITDA were
adversely affected during fiscal 1998 due to this abnormally warm weather. See
"Unaudited Pro Forma Condensed Consolidated Financial Information."
The Partnership is required to establish reserves for the future payment of
principal and interest on the First Mortgage Notes and the indebtedness under
the Bank Credit Facilities. There are other provisions in such agreements that
will, under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Note 9 to Consolidated Financial
Statements--Long-Term Debt and Working Capital Borrowings" in the Partnership's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998 that is
incorporated herein by reference. The notes issued in the Debt Offering are
expected to have provisions that will, under certain circumstances, similarly
restrict the Partnership's ability to make distributions to its Unitholders.
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DESCRIPTION OF THE UNITS
This discussion gives effect to the adoption of the Amendment Proposal.
The Common Units and Senior Subordinated Units to be issued in the
Transaction have been registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and its promulgated rules and regulations, and
the Partnership is subject to the reporting and certain other requirements of
the Exchange Act. The Partnership is required to file periodic reports
containing financial and other information with the Securities and Exchange
Commission ("SEC" or the "Commission").
Common Stockholders who receive Common Units or Senior Subordinated Units in
the Transaction and subsequent transferees of Common Units and Senior
Subordinated Units (or their brokers, agents or nominees on their behalf) will
be required to execute Transfer Applications, the form of which is included as
Appendix A to this proxy statement and which is also set forth on the reverse
side of the certificate representing Common Units and Senior Subordinated
Units. Unitholders may hold Common Units and Senior Subordinated Units in
nominee accounts, provided that the broker (or other nominee) executes and
delivers a Transfer Application and becomes a limited partner. The Partnership
will be entitled to treat the nominee holder of a Common Unit or a Senior
Subordinated Unit as the absolute owner thereof, and the beneficial owner's
rights will be limited solely to those that it has against the nominee holder
as a result of or by reason of any understanding or agreement between such
beneficial owner and nominee holder.
THE RIGHTS OF UNITHOLDERS
Generally, the Common Units, Senior Subordinated Units and Junior
Subordinated Units represent limited partner interests in the Partnership,
which entitle the holders thereof to participate in Partnership distributions
and exercise the rights or privileges available to limited partners under the
Amended and Restated Partnership Agreement. For a description of the relative
rights and preferences of holders of Common Units, Senior Subordinated Units
and Junior Subordinated Units in and to Partnership distributions, together
with a description of the circumstances under which Senior Subordinated Units
and Junior Subordinated Units may convert into Class B Common Units, see "Cash
Distribution Policy." For a description of the rights and privileges of limited
partners under the Amended and Restated Partnership Agreement, see "The Amended
and Restated Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
The Partnership has retained BankBoston N.A. as registrar and transfer agent
(the "Transfer Agent") for the Common Units and the Senior Subordinated Units.
The Transfer Agent receives a fee from the Partnership for serving in such
capacities. All fees charged by the Transfer Agent for transfers of Common
Units and Senior Subordinated Units will be borne by the Partnership and not by
the holders of Common Units or Senior Subordinated Units, except that fees
similar to those customarily paid by stockholders for surety bond premiums to
replace lost or stolen certificates, taxes and other governmental charges,
special charges for services requested by a holder of a Common Unit or a Senior
Subordinated Unit and other similar fees or charges will be borne by the
affected
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holder. There will be no charge to holders for disbursements of the
Partnership's cash distributions. The Partnership will indemnify the Transfer
Agent, its agents and each of their respective common stockholders, directors,
officers and employees against all claims and losses that may arise out of
acts performed or omitted in respect of its activities as such, except for any
liability due to any negligence, gross negligence, bad faith or intentional
misconduct of the indemnified person or entity.
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the General Partner of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the General Partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
OBLIGATIONS AND PROCEDURES FOR THE TRANSFER OF UNITS
Until a Common Unit, a Senior Subordinated Unit or a Junior Subordinated Unit
has been transferred on the books of the Partnership, the Partnership and the
Transfer Agent, notwithstanding any notice to the contrary, may treat the
record holder thereof as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations. Any transfers of a
Common Unit or a Senior Subordinated Unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless the transferee executes and
delivers a Transfer Application. By executing and delivering a Transfer
Application, the transferee of Common Units, Senior Subordinated Units or
Junior Subordinated Units (i) becomes the record holder of such Units and shall
be constituted as an assignee until admitted into the Partnership as a
substituted limited partner, (ii) automatically requests admission as a
substituted limited partner in the Partnership, (iii) agrees to be bound by the
terms and conditions of, and executes, the Amended and Restated Partnership
Agreement, (iv) represents that such transferee has the capacity, power and
authority to enter into the Amended and Restated Partnership Agreement,
(v) grants powers of attorney to the General Partner and any liquidator of
the Partnership as specified in the Amended and Restated Partnership Agreement
and (vi) makes the consents and waivers contained in the Amended and Restated
Partnership Agreement. An assignee will become a substituted limited partner of
the Partnership in respect of the transferred Common Units or Senior
Subordinated Units upon satisfaction of the following two conditions: the
consent of the General Partner, which may be withheld for any reason in its
sole discretion, and the recordation of the name of the assignee on the books
and records of the Partnership.
Common Units and Senior Subordinated Units are securities and are
transferable according to the laws governing transfer of securities. In
addition to other rights acquired upon transfer, the transferor gives the
transferee the right to request admission as a substituted limited partner in
the Partnership in respect of the transferred Common Units or Senior
Subordinated Units. A purchaser or transferee of Common Units or Senior
Subordinated Units who does not execute and deliver a Transfer Application
obtains only (a) the right to assign the Common Unit or Senior Subordinated
Units to a purchaser or other transferee and (b) the right to transfer the
right to seek admission as a substituted limited partner in the Partnership
with respect to the transferred Common Units or Senior Subordinated Units.
Thus, a purchaser or transferee of Common Units who does not execute and
deliver a Transfer Application will not receive cash distributions unless the
Common Units or Senior
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Subordinated Units are held in a nominee or "street name" account and the
nominee or broker has executed and delivered a Transfer Application with
respect to such Common Units or Senior Subordinated Units, and may not receive
certain federal income tax information or reports furnished to record holders
of Common Units or Senior Subordinated Units. The transferor of Common Units or
Senior Subordinated Units will have a duty to provide such transferee with all
information that may be necessary to obtain registration of the transfer of the
Common Units or Senior Subordinated Units, but a transferee agrees, by
acceptance of the certificate representing Common Units or Senior Subordinated
Units, that the transferor will not have a duty to insure the execution of the
Transfer Application by the transferee and will have no liability or
responsibility if such transferee neglects or chooses not to execute and
forward the Transfer Application to the Transfer Agent. See "The Amended and
Restated Partnership Agreement--Rights and Status as Limited Partner or
Assignee Upon Transfer of Interest."
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COMPARISON OF SECURITIES
The following comparison explains the material differences between the
attributes of Class A Common Stock that will be replaced with Senior
Subordinated Units. The summary is necessarily incomplete, and reference is
hereby made to the Amended and Restated Partnership Agreement, a copy of which
is attached hereto as Annex C and to "Certain Federal Income Tax
Considerations."
TAXATION
Class A Common Stock Senior Subordinated Units
Taxable income is realized by the The holders of the Senior
holders of Class A Common Stock when Subordinated Units will be required
Petro makes actual distributions out to report their share of the
of current or accumulated earnings Partnership's income, gains, losses
or, in other cases, if distributions and deductions in their federal
exceed the holder's basis in such income tax return whether or not
stock. distributions are made to them. In
general, cash distributions on the
Senior Subordinated Units will
themselves be taxable only if, and
to the extent that, they exceed the
holder's tax basis in the Senior
Subordinated Units.
DISTRIBUTIONS AND DIVIDENDS
Class A Common Stock Senior Subordinated Units
The Senior Subordinated Units
Shares of Class A Common Stock are generally are entitled to receive
entitled to a pro rata share of any quarterly distributions from
dividends declared by the Petro Available Cash during the
Board to be made from funds legally Subordination Period after the
available therefor; provided, that Common Units receive the Minimum
no dividends may be paid on the Quarterly Distribution plus any
shares of Class A Common Stock arrearages thereon. The Senior
until, with respect to the 1989 Subordinated Units have the right to
Preferred Stock and the New receive the Minimum Quarterly
Preferred Stock, all dividends have Distribution before any distribution
been paid (or declared and set is made on the Junior Subordinated
apart) and all mandatory redemption Units and the General Partner Units.
requirements have been satisfied. No distribution can be paid on
Senior Subordinated Units unless the
Partnership meets certain cash
generation requirements. In
addition, the Senior Subordinated
United have the right to receive
distributions in addition to the
Minimum Quarterly Distribution if
quarterly distributions of Available
Cash exceed the Target Distribution
Levels.
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VOTING RIGHTS
Class A Common Stock
Senior Subordinated Units
All Units have limited voting rights
The holders of Class A Common Stock on matters affecting the
are entitled to one vote per share partnership. The matters that
and the holders of Class C Common do require Unitholder approval
Stock are entitled to ten votes per generally require the approval of
share upon all matters submitted for the holders of a Unit Majority,
a vote to the Common Stockholders. which prior to the expiration of the
Except when required by Minnesota Subordination Period, includes the
law and in certain special approval of a majority of the Senior
circumstances described in the Subordinated Units and Junior
Restated Articles of Incorporation, Subordinated Units voting together
the holders of Class B Shares are as a single class as well as the
not entitled to vote. Generally, the approval of a majority of the Common
action of the majority of the votes Units. Unitholders in the
evidenced by the shares of all Partnership do not elect the
classes voting as a single class directors of the General Partner.
represented at a meeting of the
Common Stockholders and entitled to
vote is sufficient for actions that
require a vote of the Common
Stockholders.
RIGHTS TO CALL MEETINGS
Class A Common Stock
Senior Subordinated Units
Petro is required to hold an annual The Partnership does not have annual
stockholders meeting each year. meetings. A meeting of Unitholders
Special meetings of the stockholders may be called only by the General
may be called (and business proposed Partner or by the holders of 20% or
at such meetings) by the Chairman more of the outstanding Units of the
of the Petro Board or by the class for which the meeting is
Secretary upon the written request proposed.
of a majority of the total number of
Directors that Petro would have if
there were no vacancies.
REMOVAL OF DIRECTORS OR THE GENERAL PARTNER
Class A Common Stock
Senior Subordinated Units
The business and affairs of Petro The business and affairs of the
are managed by or under the Partnership are managed by or under
direction of the Petro Board, whose the direction of the General
members are elected by a plurality Partner. Subject to certain
of the votes cast by stockholders. conditions, the General Partner may
Stockholders may remove a director be removed upon the approval of the
or the entire Petro Board with or holders of at least 66 2/3% of
without cause, and such removal the outstanding Units (excluding
requires the affirmative vote of a Units owned by the General Partner
majority of the outstanding voting and its affiliates).
stock.
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LIQUIDATION RIGHTS
Senior Subordinated Units
Class A Common Stock
In the event of any liquidation of
In the event of any complete the Partnership during the
liquidation, dissolution or winding Subordination Period, the Senior
up of the business of Petro, each Subordinated Units will be entitled
Class B Share would be entitled to a to receive a distribution out of the
distribution equal to $5.70 per net assets of the Partnership after
share, as adjusted, before any liquidating distributions are made
distribution is made with respect to on the Common Units. The Senior
any other class of Petro Stock. Subordinated Units will be entitled
Thereafter, each share of 1989 to receive a distribution out of the
Preferred Stock and each share of net assets of the Partnership in
Public Preferred Stock would be preference to liquidating
entitled to distributions equal to distributions on the Junior
$100 per share and $23 per share, Subordinated Units and General
respectively, plus accrued and Partner Units.
unpaid dividends. Thereafter, each
share of Junior Convertible
Preferred Stock would be entitled to
a distribution of $0.10 per share.
Thereafter, each share of Class A
Common Stock, Class B Share, Class C
Common Stock and Junior Convertible
Preferred Stock would participate
equally in all liquidating
distributions.
CONVERSION RIGHTS
Class A Common Stock Senior Subordinated Units
The Class A Common Stock is not The Senior Subordinated Units will
convertible into any other security. convert into Class B Common Units
upon the expiration of the
Subordination Period. The
Subordination Period will extend
until the first day of any quarter
beginning July 1, 2002 in respect of
which certain amounts of Available
Cash were distributed and earned in
previous quarters.
LIABILITY OF HOLDERS
Class A Common Stock Senior Subordinated Units
The liability of a holder of Class A So long as a holder of a Senior
Common Stock for the debts and Subordinated Unit does not
obligations of Class A Common Stock participate in the control of the
is limited to such holders' business of the Partnership and acts
investment in the stock. All Class A in accordance with the Amended and
Common Stock is fully paid and non- Restated Partnership Agreement,
assessable. liability is limited to the holder's
investment in the Senior
Subordinated Units. Except under
limited exceptions, all Senior
Subordinated Units are fully paid
and non-assessable.
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TRANSFERABILITY AND LISTING
Class A Common Stock
Senior Subordinated Units
Shares of Class A Common Stock are The Senior Subordinated Units are
freely transferrable and are quoted freely transferable and listed on
on the Nasdaq National Market. the New York Stock Exchange.
REDEMPTION
Class A Common Stock
Senior Subordinated Units
There are no redemption rights with If at any time not more than 20% of
respect to shares of Class A Common the then issued and outstanding
Stock. limited partner interests of any
class are held by persons other than
the General Partner and its
affiliates, the General Partner will
have the right, which it may assign
to an affiliate or the Partnership,
to acquire all, but not less than
all, of the remaining limited
partner interests of such class.
If at any time after the expiration
of the Subordination Period the
Partnership acquires, through
purchase or exchange, in a twelve-
month period, 66 2/3% or more of the
total Class B Common Units, the
Partnership shall have the right,
which it may not assign, to purchase
all, but not less than all, of the
remaining Class B Common Units of
such class during the following
twelve-month period.
APPRAISAL RIGHTS
Class A Common Stock
Senior Subordinated Units
Under Sections 302A.471 and 302A.473 The holders of the Senior
of the MBCA, described in full as Subordinated Units (as well as the
Annex F to this proxy statement, holders of all other Units) are not
Common Stockholders (other than who entitled to dissenters' rights under
have agreed to vote for the the Amended and Restated Partnership
Acquisition Proposal or who have Agreement or applicable Delaware law
granted irrevocable powers to Petro if a merger or consolidation of the
to vote for the Transaction at the Partnership, or a sale, exchange or
Special Meeting) have the right to other disposition of substantially
dissent, and obtain payment for the all of the Partnership's assets
"fair value" of their shares, if should occur.
certain corporate actions such as
the Transaction should occur.
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PREEMPTIVE RIGHTS
Class A Common Stock
Senior Subordinated Units
Holders of Class A Common Stock have The holders of the Senior
no preemptive rights, rights to Subordinated Units do not have
maintain their respective percentage preemptive rights with respect to
ownership interests or other rights the issuance of any securities of
to subscribe for additional Petro the Partnership.
Stock.
INSPECTION OF BOOKS, RECORDS AND LIST OF HOLDERS
Class A Common Stock
Senior Subordinated Units
Under Section 302A.461 of the MBCA, So long as there exists a purpose
any stockholder, in person or by reasonably related to a limited
attorney or other agent, has the partner's interest, the holders of
right, upon written demand under Senior Subordinated Units may, upon
oath stating the purpose thereof, reasonable demand and at their own
during the usual hours of business expense, have furnished to them (i)
to inspect for any proper purpose a current list of the name and last
the corporation's stock ledger, a known address of each partner, (ii)
list of its stockholders, and its a copy of the Partnership's tax
other books and records, and to make returns, (iii) certain information
copies or extracts therefrom. A with respect to the value of
proper purpose means a purpose contributions to the Partnership,
reasonably related to such person's (iv) copies of the Amended and
interest as a stockholder. Restated Partnership Agreement,
certificate of limited partnership
and powers of attorney,
(v) information regarding the status
of the Partnership's business and
financial condition and (vi) such
other information regarding the
affairs of the Partnership as is
just and reasonable.
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COMPARATIVE SECURITY PRICE AND DISTRIBUTION INFORMATION
PARTNERSHIP SECURITIES
Common Units. Since May 29, 1998, the Common Units have been listed and
traded on the New York Stock Exchange under the symbol "SGU." From December 20,
1995 through May 28, 1998, the Common Units were listed on the Nasdaq National
Market. The following table sets forth the closing high and low sales prices
per Common Unit on the Nasdaq National Market through May 28, 1998 and
thereafter on the New York Stock Exchange and the cash distributions declared
per Common Unit for the periods indicated.
<TABLE>
<CAPTION>
FISCAL
FISCAL 1999 FISCAL 1998 1997
-------------------------------- -------------------------- --------------------------
FISCAL CASH CASH CASH
QUARTER ENDED HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION
------------- --------- --------- ------------ ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,............ $21.81(a) $15.31(a) $0.55(b) $23.38 $20.50 $0.55 $23.88 $21.75 $0.55
March 31,............... -- -- -- 24.75 21.38 0.55 24.63 20.75 0.55
June 30,................ -- -- -- 23.00 20.50 0.55 21.88 19.00 0.55
September 30,........... -- -- -- 22.38 20.13 0.55 23.50 21.00 0.55
</TABLE>
- --------
(a) From October 1, 1998 through December 21, 1998.
(b) During this period the partnership did not pay a distribution to its
subordinated unitholders.
On August 13, 1998, the last full trading day prior to the public
announcement of the proposed Transaction, the closing sales price of the Common
Units was $21.06 on the NYSE. On December 21, 1998, the closing sales price of
the Common Units was $16.13.
Subordinated Units. There is no trading market for the Partnership's
2,396,078 Subordinated Units, all of which are held by Star Gas.
Senior Subordinated Units. There are no Senior Subordinated Units outstanding
as of the date of this proxy statement.
Junior Subordinated Units. There are no Junior Subordinated Units outstanding
as of the date of this proxy statement.
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PETRO CAPITAL STOCK
Class A Common Stock. Shares of Class A Common Stock are listed and traded on
the Nasdaq National Market under the symbol "HEAT". The following table sets
forth the last reported high and low sale prices per share of Class A Common
Stock and dividends declared on shares of Class A Common Stock for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- ----------------------- -----------------------
FISCAL QUARTER ENDED HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- -------------------- -------- ------- --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31,............. $ 3 $1 7/16 $0.075(b) $6 3/4 $3 3/8 $0.075 $8 1/4 $6 1/2 $0.15
June 30,.............. 2 1/16 1 1/2 -- 3 7/8 2 1/2 0.075 7 3/4 6 1/2 0.15
September 30,......... 2 1/16 1 5/16 -- 3 1/2 2 5/8 0.075 7 3/4 6 1/4 0.15
December 31,.......... 1 29/32 (a) 14/16 (a) -- 3 1/2 2 1/8 0.075 7 3/4 5 5/8 0.15
</TABLE>
- --------
(a) From October 1, 1998 through December 18, 1998.
(b) Petro declared a dividend of $.075 per share of Class A Common Stock which
was paid on January 2, 1998 to holders of record on December 15, 1997. On
February 24, 1998, Petro announced that it will suspend its regularly
scheduled quarterly common stock dividend and that it did not expect to pay
common stock dividends for the remainder of the year. In arriving at this
decision, the Petro Board considered the impact of unusually warm winter
weather on its earnings and cash flow, as well as a variety of other facts.
On August 13, 1998, the last full trading day prior to the public
announcement of the proposed Transaction, the closing sales price of the Class
A Common Stock was $1.875 on the Nasdaq National Market. The last sale price of
the Class A Common Stock on , 1998 was $ per share. As of ,
1998, Petro had holders of record of Class A Common Stock.
Class C Common Stock. There is no established trading market for Class C
Common Stock. As of , 1998, Petro had holders of record of
Class C Common Stock.
Public Preferred Stock. There is no established trading market for the Public
Preferred Stock. As of , 1998, Petro had holders of record of
Public Preferred Stock.
Private Preferred Stock. There is no established trading market for the
Private Preferred Stock. As of , 1998, Petro had holders of
record of the Private Preferred Stock.
Junior Convertible Preferred Stock. There is no established trading market
for the Junior Convertible Preferred Stock. As of , 1998, Petro had
holders of record of Junior Convertible Preferred Stock.
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<PAGE>
COMPARATIVE PER SHARE/PER UNIT INFORMATION (UNAUDITED)
The following table sets forth, for Units and shares of Class A Common Stock,
certain historical, pro forma and pro forma equivalent per Unit financial
information for the latest fiscal years of the Partnership and Petro. The pro
forma data do not purport to be indicative of the results of future operations
or the results that would have occurred had the Transaction been completed on
October 1, 1997. This information should be read in conjunction with and is
qualified in its entirety by the financial statements and accompanying notes of
the Partnership and Petro included in the documents described under
"Incorporation of Certain Documents By Reference" and the pro forma combined
financial statements and accompanying discussion and notes set forth under
"Unaudited Pro Forma Condensed Consolidated Financial Statements."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
PARTNERSHIP(A)(E) PARTNERSHIP(A)(E) PETRO(B)(F) EQUIVALENT(A)(E)
----------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
Net Income.............. $(0.16) $(1.04) $(1.06) $(0.14)
Cash Distributions...... $ 2.20 $ 2.30 $ 0.30 $ 0.32
Book Value.............. $ 9.50 (c) $14.82 (c) $(6.76)(d) $ 2.03 (d)
</TABLE>
- --------
(a) For the fiscal year ended September 30, 1998.
(b) For the fiscal year ended December 31, 1997.
(c) As of September 30, 1998.
(d) As of December 31, 1997.
(e) Per Unit limited partner interest.
(f) Per share of Petro Common Stock.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be relevant
to prospective Unitholders and, to the extent set forth below under "Legal
Opinions and Advice," expresses the opinion of Andrews & Kurth L.L.P., special
counsel to the General Partner and the Partnership ("Counsel"), insofar as it
relates to matters of law and legal conclusions. This section is based upon
current provisions of the Code, existing and its proposed regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change with and without retroactive effect. Subsequent changes
in such authorities may cause the tax consequences to vary substantially from
the consequences described below. Unless the context otherwise requires,
references in this section to the Partnership are references to both the
Partnership and the Operating Partnership. In addition, unless otherwise noted,
the following discussion is from the Partnership's perspective and all
references to "we," "us" and "our" are to the Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to
corporations, estates, trusts, non-resident aliens or other Unitholders subject
to specialized tax treatment (such as tax-exempt institutions, foreign persons,
individual retirement accounts, REITs or mutual funds). Accordingly, each
prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences
peculiar to him of the ownership or disposition of Units.
TAX CONSEQUENCES OF THE MERGER
The Merger will be a taxable transaction to the Petro Common Stockholders
generally resulting in gain or loss to each such holder in an amount equal to
the difference between the value of the Senior Subordinated Units received by
him and the federal income tax basis he has in the shares exchanged for Senior
Subordinated Units. The gain or loss will be capital gain or loss if the stock
is held by the Common Stockholder as a capital asset and will be long-term gain
or loss if such stock has been held for more than one year. Long-term capital
gain will generally be taxed at a maximum rate of 20%. Capital losses can be
deducted against capital gains and thereafter against ordinary income to the
extent of $3,000 per year for individuals with any unused capital loss being
carried forward indefinitely. Net capital gain of foreign holders of Common
Stock should generally not be subject to United States federal income tax.
Common Stockholders participating in the Merger will have a basis in their
Senior Subordinated Units equal to the fair market value of such Units at the
time of the Merger and their holding period will begin on the day after the
Merger. Counsel has not rendered any opinion with respect to these matters.
The Merger will also result in gain to Petro equal to the excess of the value
of the Senior Subordinated Units distributed to the Common Stockholders in the
Merger and any debt relief over the federal income tax basis of such Units to
Petro. Although it is expected by Petro that such gain will generally be offset
by Petro's NOLs, the NOLs are subject to challenge by the IRS. Petro and its
affiliates (the "Corporate Group") do not anticipate that it will pay
significant federal income tax at the outset; however, over time more federal
income tax will be paid by the Corporate Group. The Corporate Group's ability
to reduce income for federal income tax purposes is dependent on depreciation
deductions and interest deductions with respect to certain debt, all of which
is subject to scrutiny by the IRS. Counsel has not rendered any opinion with
respect to these matters.
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<PAGE>
TAX CONSEQUENCES OF UNIT OWNERSHIP
Legal Opinions and Advice. Counsel is of the opinion that, based on the
representations and subject to the qualifications in the detailed discussion
that follows, for federal income tax purposes (1) the Partnership and the
Operating Partnership have been and will each be treated as a partnership and
(2) owners of Units (with certain exceptions, as described in "Limited Partner
Status" below) will be treated as partners of the Partnership (but not the
Operating Partnership). In addition, all statements as to matters of law and
legal conclusions contained in this section, unless otherwise noted, reflect
the opinion of Counsel.
No ruling has been or will be requested from the IRS with respect to
classification of the Partnership as a Partnership for federal income tax
purposes, whether the Partnership's operations generate "qualifying income"
under Section 7704 of the Code or any other matter affecting the Partnership or
prospective Unitholders. An opinion of counsel represents only that counsel's
best legal judgment and does not bind the IRS or the courts. Thus, no assurance
can be provided that the opinions and statements set forth herein would be
sustained by a court if contested by the IRS. Any such contest with the IRS may
materially and adversely impact the market for the Units and the prices at
which Units trade. In addition, the costs of any contest with the IRS will be
borne directly or indirectly by the Unitholders and the General Partner.
Furthermore, no assurance can be given that the treatment of the Partnership or
an investment therein will not be significantly modified by future legislative
or administrative changes or court decisions. Any such modifications may or may
not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (1) the
treatment of a Unitholder whose Units are loaned to a short seller to cover a
short sale of Units (see "--Tax Treatment of Operations--Treatment of Short
Sales"), (2) whether a Unitholder acquiring Units in separate transactions must
maintain a single aggregate adjusted tax basis in his Units (see "--Disposition
of Units--Recognition of Gain or Loss"), (3) whether the Partnership's monthly
convention for allocating taxable income and losses is permitted by existing
Treasury Regulations (see "--Disposition of Units--Allocations Between
Transferors and Transferees"), (4) whether the Partnership's method for
depreciating Section 743 adjustments is sustainable (see "--Tax Treatment of
Operations--Section 754 Election") and (5) whether the allocations of recapture
income contained in the Partnership Agreement will be respected (see "--
Allocation of Our Income, Gain, Loss and Deduction").
Tax Rate. The top marginal income tax rate for individuals for 1998 is 39.6%.
Net capital gains of an individual are generally subject to a maximum 20% tax
rate if the asset was held for more than 12 months at the time of disposition.
Partnership Status. A partnership is not a taxable entity and incurs no
federal income tax liability. Instead, each partner is required to take into
account his allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of cash distributed is in
excess of the partner's adjusted basis in his partnership interest.
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<PAGE>
No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating Partnership as a partnership for federal income
tax purposes. Instead, the Partnership has relied on the opinion of Counsel
that, based upon the Code, its regulations, published revenue rulings and court
decisions and certain representations set forth below, the Partnership and the
Operating Partnership have been and will each be classified as a partnership
for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the Partnership and the General Partner. Such factual
matters for taxable years beginning before December 31, 1996 are as follows:
(a) With respect to the Partnership and the Operating Partnership, the
General Partner, at all times while acting as general partner of the
relevant partnership, had a net worth, computed on a fair market value
basis, excluding its interest in the Partnership and the Operating
Partnership and any notes or receivables due from such partnerships, equal
to at least $6.0 million;
(b) The Partnership has been operated in accordance with (1) all
applicable partnership statutes, (2) the Partnership Agreement and (3) the
description thereof in this proxy statement;
(c) The Operating Partnership has been operated in accordance with (1)
all applicable partnership statutes, (2) the limited partnership agreement
for the Operating Partnership and (3) the description thereof in this proxy
statement;
(d) The General Partner has at all times acted independently of the
Limited Partners; and
(e) For each taxable year, less than 10% of the gross income of the
Partnership has been derived from sources other than (1) the exploration,
development, production, processing, refining, transportation or marketing
of any mineral or natural resource, including oil, gas or products thereof,
or (2) other items of qualifying income within the meaning of Section
7704(d) of the Code.
Such factual matters for taxable years beginning after December 31, 1996 are
as follows:
(a) Neither the Partnership nor the Operating Partnership has elected, or
will elect, to be treated as an association or corporation;
(b) The Partnership has been and will be operated in accordance with (1)
all applicable partnership statutes, (2) the Partnership Agreement, and (3)
the description thereof in this Prospectus;
(c) The Operating Partnership has been and will be operated in accordance
with (1) all applicable partnership statutes, (2) the Operating Partnership
Agreement, and (3) the description thereof in this Prospectus; and
(d) For each taxable year, more than 90% of the gross income of the
Partnership has been and will be (1) derived from the exploration,
development, production, processing, refining, transportation or marketing
of any mineral or natural resource, including oil, gas or products thereof;
or (2) other items of "qualifying income" within the meaning of Section
7704(d) of the Code.
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<PAGE>
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships, 90% or more of whose gross income for every taxable year consists
of "qualifying income." Qualifying income includes interest (from other than a
financial business), dividends and income and gains from the transportation and
marketing of crude oil, natural gas, and products thereof, including the retail
and wholesale marketing of propane and the transportation of propane and
natural gas liquids. Based upon the representations of the Partnership and the
General Partner and a review of the applicable legal authorities, Counsel is of
the opinion that least 90% of the Partnership's gross income will constitute
qualifying income. The Partnership estimates that less than % of its gross
income for each taxable year will not constitute qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure that is determined by the IRS to be inadvertent and is cured within a
reasonable time after discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to
Unitholders and the Partnership, so long as the Partnership, at that time, does
not have liabilities in excess of the tax basis of its assets. Thereafter, the
Partnership would be treated as a corporation for federal income tax purposes.
If the Partnership or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would
be taxed to the Partnership or the Operating Partnership at corporate rates. In
addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
nontaxable return of capital (to the extent of the Unitholder's tax basis in
his Units) or taxable capital gain (after the Unitholder's tax basis in the
Units is reduced to zero). Accordingly, treatment of either the Partnership or
the Operating Partnership as an association taxable as a corporation would
result in a material reduction in a Unitholder's cash flow and after-tax return
and thus would likely result in a substantial reduction of the value of the
Units.
The discussion below is based on the assumption that the Partnership will be
classified as a Partnership for federal income tax purposes.
Limited Partner Status. Unitholders who have become limited partners of the
Partnership will be treated as partners of the Partnership for federal income
tax purposes. Counsel is of the opinion that (a) assignees who have executed
and delivered Transfer Applications, and are awaiting admission as limited
partners and (b) Unitholders whose Units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their Units will be treated as
partners of the Partnership for federal income tax purposes. As there is no
direct authority addressing assignees of Units who are entitled to execute and
deliver Transfer Applications and thereby become entitled to direct the
exercise of
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<PAGE>
attendant rights, but who fail to execute and deliver Transfer Applications,
Counsel's opinion does not extend to these persons. (Furthermore, a purchaser
or other transferee of Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Units unless the Units are held in a nominee or
street name account and the nominee or broker has executed and delivered a
Transfer Application with respect to such Units.)
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such Units for federal income tax purposes. See "--Tax
Treatment of Operations--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
Unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a Unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Partnership for federal income tax
purposes.
Flow-through of Taxable Income. No federal income tax will be paid by the
Partnership. Instead, each Unitholder will be required to report on his income
tax return his allocable share of the income, gains, losses and deductions of
the Partnership without regard to whether corresponding cash distributions are
received by such Unitholder. Consequently, a Unitholder may be allocated income
from the Partnership even if he has not received a cash distribution. Each
Unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the taxable year of the
Partnership ending with or within the taxable year of the Unitholder.
Although it is not expected that the Corporate Group will pay significant
federal income tax for several years, it is possible that the Corporate Group
may generate earnings and profits during that time such that distributions from
them to the Partnership may result in taxable dividend income to the
Partnership and thus, to the Unitholders. Such dividend income cannot be offset
by past or future losses generated by the Partnership's propane activities.
Treatment of Partnership Distributions. Our distributions by the Partnership
to a Unitholder generally will not be taxable to him for federal income tax
purposes to the extent of his tax basis in his Units immediately before the
distribution. Our cash distributions in excess of a Unitholder's tax basis
generally will be considered to be gain from the sale or exchange of the Units,
taxable in accordance with the rules described under "Disposition of Units"
below. Any reduction in a Unitholder's share of our liabilities for which no
partner, including the General Partner, bears the economic risk of loss
("nonrecourse liabilities") will be treated as a distribution of cash to that
Unitholder. To the extent that Partnership distributions cause a Unitholder's
"at risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. See "--Limitations on
Deductibility of Partnership Losses."
A decrease in a Unitholder's percentage interest in us because of our
issuance of additional Units will decrease his share of our nonrecourse
liabilities, and will result in a corresponding deemed distribution of cash. A
non-pro rata distribution of money or property may result in ordinary income to
a Unitholder, regardless of his tax basis in his Units, if such distribution
reduces his share of our
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"unrealized receivables" (including depreciation recapture) and/or
substantially appreciated "inventory items" (both as defined in Section 751 of
the Code) (collectively, "Section 751 Assets"). To that extent, he will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with us in return for the non-pro rata
portion of the actual distribution made to him. This latter deemed exchange
will generally result in his realization of ordinary income under Section
751(b) of the Code. That income will equal the excess of (1) the non-pro rata
portion of such distribution over (2) his tax basis for the share of such
Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a holder who
acquires Units through the Transaction and holds such Units through December
31, 2001, will be allocated, on a cumulative basis, an amount of federal
taxable income for such period that will be less than 15% of the cash
distributed with respect to that period. The Partnership further estimates that
for taxable years after the taxable year ending December 31, 2001, the taxable
income allocable to a Unitholder will constitute a significantly higher
percentage of cash distributed to him. These estimates are based upon the
assumption that gross income from operations will approximate the amount
required to make the Minimum Quarterly Distribution with respect to all Units
and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond our control. Further, the estimates are based on
current tax law and certain tax reporting positions that we have adopted or
intend to adopt and with which the IRS could disagree. Accordingly, no
assurance can be given that these estimates will prove to be correct. The
actual percentage of distributions that will constitute taxable income could be
higher or lower, and any differences could be material and could materially
affect the value of the Units.
Basis of Units. A Unitholder will generally have an initial tax basis for his
Units equal to the fair market value of the Units received. His basis will be
increased by his share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased (but not below zero) by
distributions from the Partnership, by his share of our losses, by any decrease
in his share of our nonrecourse liabilities and by his share of our
expenditures that are not deductible in computing our taxable income and are
not required to be capitalized. A limited partner will have no share of our
debt which is recourse to the General Partner, but will have a share, generally
based on his share of profits, of our nonrecourse liabilities. See "--
Disposition of Units--Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses. The deduction by a
Unitholder of his share of our losses will be limited to the tax basis in his
Units and, in the case of an individual Unitholder or a corporate Unitholder
(if more than 50% of the value of its stock is owned directly or indirectly by
five or fewer individuals or certain tax-exempt organizations), to the amount
for which the Unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A Unitholder must recapture
losses deducted in previous years to the extent that Partnership distributions
made to him by us cause his at risk amount to be less than zero at the end of
any taxable year. Losses disallowed to a Unitholder or recaptured as a result
of these limitations will carry forward and will be allowable to the extent
that his tax basis or "at risk" amount (whichever is the limiting factor) is
subsequently increased. Upon the taxable disposition of a Unit, any gain
recognized by a Unitholder can be offset by losses that were previously
suspended by the at risk
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limitation but may not be offset by losses suspended by the basis limitation.
Any excess loss (above such gain) previously suspended by the at risk or basis
limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money the Unitholder borrows
to acquire or hold his Units if the lender of such borrowed funds owns an
interest in us, is related to such a person or can look only to Units for
repayment. A Unitholder's at risk amount will increase or decrease as the tax
basis of his Units increases or decreases (other than tax basis increases or
decreases attributable to increases or decreases in his share of our
nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by us will only be available to offset our future
passive income generated and will not be available to offset income from other
passive activities or investments (including other publicly-traded companies),
interest and dividend income generated by us, such as dividends from the
Corporate Group, or salary or active business income. Passive losses which are
not deductible because they exceed a Unitholder's income generated by us may be
deducted in full when he disposes of his entire investment in us in a fully
taxable transaction to an unrelated party. The passive activity loss rules are
applied after other applicable limitations on deductions such as the at risk
rules and the basis limitation.
A Unitholder's share of our net income may be offset by any suspended passive
losses, but it may not be offset by any other current or carryover losses from
other passive activities, including those attributable to other publicly-traded
companies. The IRS has announced that Treasury Regulations will be issued that
characterize net passive income from a publicly-traded partnership as
investment income for purposes of the limitations on the deductibility of
investment interest.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
such taxpayer's "net investment income." As noted, a Unitholder's share of our
net passive income will be treated as investment income for this purpose. In
addition, the Unitholder's share of our portfolio income will be treated as
investment income. Investment interest expense includes (i) interest on
indebtedness properly allocable to property held for investment, (ii) our
interest expense attributed to portfolio income, and (iii) the portion of
interest expense incurred to purchase or carry an interest in a passive
activity to the extent attributable to portfolio income. The computation of a
Unitholder's investment interest expense will take into account interest on any
margin account borrowing or other loan incurred to purchase or carry a Unit.
Net investment income includes gross income from property held for investment
and amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the
production of investment income, but generally does not include gains
attributable to the disposition of property held for investment.
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ALLOCATION OF OUR INCOME, GAIN, LOSS AND DEDUCTION
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among the General Partner and the Unitholders in
accordance with their respective percentage interests in us. At any time that
distributions are made to the Common Units and not to the Senior Subordinated
Units or Junior Subordinated Units, or that Incentive Distributions are made to
holders of Senior Subordinated Units, Junior Subordinated Units or General
Partner Units or to holders of Senior Subordinated Units and not to Junior
Subordinated Units or General Partner Units, gross income will be allocated to
the recipients to the extent of such distributions. If we have a net loss,
items of income, gain, loss and deduction will generally be allocated first, to
the General Partner and the Unitholders in accordance with their respective
percentage interests to the extent of their positive capital accounts (as
maintained under our Amended and Restated Partnership Agreement) and, second,
to the General Partner.
As required by Section 704(c) of the Code and as permitted by its
Regulations, certain items of our income, deduction, gain and loss will be
allocated to account for the difference between the tax basis and fair market
value of property contributed or deemed contributed to us by each of the
partners ("Contributed Property"). The effect of these allocations to a
Unitholder will be essentially the same as if the tax basis of the Contributed
Property were equal to their fair market value at the time of contribution or
deemed contribution. In addition, certain items of recapture income will be
allocated to the extent possible to the partner allocated the deduction giving
rise to the treatment of such gain as recapture income in order to minimize the
recognition of ordinary income by some Unitholders. Finally, although we do not
expect that our operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of our income
and gain will be allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by
taking into account all the facts and circumstances, including the partner's
relative contributions to the partnership, the interests of the partners in
economic profits and losses, the interest of the partners in cash flow and
other nonliquidating distributions and rights of the partners to distributions
of capital upon liquidation.
Counsel is of the opinion that allocations under our Amended and Restated
Partnership Agreement, with the exception of the allocation of recapture income
discussed above, will be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction.
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TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We use the year ending December 31 as our
taxable year and we have adopted the accrual method of accounting for federal
income tax purposes. Each Unitholder will be required to include in income his
allocable share of our income, gain, loss and deduction for our taxable year
ending within or with his taxable year of the Unitholder. In addition, a
Unitholder who has a taxable year ending on a date other than December 31 and
who disposes of all of his Units following the close of our taxable year but
before the close of his taxable year must include his allocable share of our
income, gain, loss and deduction in income for his taxable year with the result
that he will be required to report in income for his taxable year his share of
more than one year of our income, gain, loss and deduction. See "--Disposition
of Units--Allocations Between Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our assets
will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of such assets. The
federal income tax burden associated with the difference between the fair
market value of property contributed and the tax basis established for such
property will be borne by the contributors of such property. See "--Allocation
of Our Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions in the early years
assets are placed in service. We will not be entitled to any amortization
deductions with respect to goodwill conveyed to us on formation. Property
subsequently acquired or constructed by us may be depreciated using accelerated
methods permitted by the Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise, all
or a portion of any gain (determined by reference to the amount of depreciation
previously deducted and the nature of the property) may be subject to the
recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions
with respect to our property may be required to recapture such deductions as
ordinary income upon a sale of his interest in us. See "--Allocation of Our
Income, Gain, Loss and Deduction" and "--Disposition of Units--Recognition of
Gain or Loss."
Section 754 Election. We have made the election permitted by Section 754 of
the Code, which generally permits us to adjust a Unit purchaser's tax basis in
our assets ("inside basis") pursuant to Section 743(b) of the Code to reflect
his purchase price. That election is irrevocable without the consent of the
IRS. The Section 743(b) adjustment belongs to the purchaser and not to other
Unitholders. (For purposes of this discussion, a Unitholder's inside basis in
our assets will be considered to have two components: (1) his share of our tax
basis in such assets ("Basis") and (2) his Section 743(b) adjustment to that
basis.)
Proposed Treasury regulations under Section 743 of the Code would require, if
adopted in their current form, the remedial allocation method is adopted (which
we have done), a portion of the Section 743(b) adjustment attributable to
recovery property to be depreciated over the remaining cost recovery period for
the Section 704(c) built-in gain. Nevertheless, the proposed regulations under
Section 197 indicate that the Section 743(b) adjustment attributable to an
amortizable Section 197
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intangible should be treated as a newly-acquired asset placed in service in the
month when the purchaser acquires the Unit. Under Treasury Regulation Section
1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject
to depreciation under Section 167 of the Code rather than cost recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. Although
the proposed regulations under Section 743 will likely eliminate many of the
problems if finalized in their current form, the depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment may
differ from the methods and useful lives generally used to depreciate the basis
in such properties. Pursuant to our Amended and Restated Partnership Agreement,
the General Partner is authorized to adopt a convention to preserve the
uniformity of Units even if such convention is not consistent with certain
Treasury Regulations. See "--Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
we intend to depreciate the portion of a Section 743(b) adjustment attributable
to unrealized appreciation in the value of Contributed Property (to the extent
of any unamortized Book-Tax Disparity) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Basis of such property, or treat that portion as non-
amortizable to the extent attributable to property the Basis of which is not
amortizable. This method is consistent with the proposed regulations under
Section 743 but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6) and Proposed Treasury Regulation Section 1.197-2(g)(3)
(neither of which is expected to directly apply to a material portion of the
Partnership's assets). To the extent such Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized Book-Tax
Disparity, we will apply the rules described in the Regulations and legislative
history. If we determine that such position cannot reasonably be taken, we may
adopt a depreciation or amortization convention under which all purchasers
acquiring Units in the same month would receive depreciation or amortization,
whether attributable to Basis or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in our assets. Such
an aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain Unitholders. See "--
Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by us to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than our tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to us of our
assets immediately prior to the transfer. In such a case, as a result of the
election, the transferee would have a higher tax basis in his share of our
assets for purposes of calculating, among other items, his depreciation and
depletion deductions and his share of any gain or loss on a sale of the
Partnership's assets. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in such Units is lower than such Unit's share of the
aggregate tax basis of the Partnership's assets immediately prior to the
transfer. Thus, the fair market value of the Units may be affected either
favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and we will
make them on the basis of certain assumptions as to the value of our assets and
other matters. There is no assurance
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that our determinations will not be successfully challenged by the IRS and that
the deductions resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and
should, in our opinion, the expense of compliance exceed the benefit of the
election, we may seek permission from the IRS to revoke our Section 754
election. If such permission is granted, a subsequent purchaser of Units may be
allocated more income than he would have been allocated had the election not
been revoked.
Alternative Minimum Tax. Each Unitholder will be required to take into
account his distributive share of any items of our income, gain, deduction, or
loss for purposes of the alternative minimum tax. The minimum tax rate for non-
corporate taxpayers is 26% on the first $175,000 of alternative minimum taxable
income in excess of the exemption amount and 28% on any additional alternative
minimum taxable income. Prospective Unitholders should consult with their tax
advisors as to the impact of an investment in Units on their liability for the
alternative minimum tax.
Valuation of Partnership Property and Basis of Properties. The federal income
tax consequences of the ownership and disposition of Units will depend in part
on our estimates of the relative fair market values, and determinations of the
initial tax bases, of our assets. Although we may from time to time consult
with professional appraisers with respect to valuation matters, we will make
many of the relative fair market value estimates. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are subsequently found to be incorrect, the character and amount of items
of income, gain, loss or deductions previously reported by Unitholders might
change, and Unitholders might be required to adjust their tax liability for
prior years.
Treatment of Short Sales. A Unitholder whose Units are loaned to a "short
seller" to cover a short sale of Units may be considered as having disposed of
ownership of those Units. If so, he would no longer be a partner with respect
to those Units during the period of the loan and may recognize gain or loss
from the disposition. As a result, during this period, any of our income, gain,
deduction or loss with respect to those Units would not be reportable by the
Unitholder, any cash distributions received by the Unitholder with respect to
those Units would be fully taxable and all of such distributions would appear
to be treated as ordinary income. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any applicable
brokerage account agreements to prohibit their brokers from borrowing their
Units. The IRS has announced that it is actively studying issues relating to
the tax treatment of short sales of partnership interests. See also "--
Disposition of Units--Recognition of Gain or Loss."
DISPOSITION OF UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
Units equal to the difference between the amount realized and the Unitholder's
tax basis for the Units sold. A Unitholder's amount realized will be measured
by the sum of the cash or the fair market value of other property received plus
his share of our nonrecourse liabilities. Because the amount realized includes
a Unitholder's share of our nonrecourse liabilities, the gain recognized on the
sale of Units could result in a tax liability in excess of any cash received
from such sale.
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Prior distributions from us in excess of cumulative net taxable income in
respect of a Unit that decreased a Unitholder's tax basis in such Unit will, in
effect, become taxable income if the Unit is sold at a price greater than the
Unitholder's tax basis in such Unit, even if the price is less than his
original cost.
Should the IRS successfully contest our convention to amortize only a portion
of the Section 743(b) adjustment (described under "--Tax Treatment of
Operations--Section 754 Election") attributable to an amortizable Section 197
intangible after a sale by the General Partner of Units, a Unitholder could
realize additional gain from the sale of Units than had such convention been
respected. In that case, the Unitholder may have been entitled to additional
deductions against income in prior years but may be unable to claim them, with
the result to him of greater overall taxable income than appropriate. Counsel
is unable to opine as to the validity of the convention but believes such a
contest by the IRS to be unlikely because a successful contest could result in
substantial additional deductions to other Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized on the sale of Units
held more than 12 months will generally be taxed a maximum rate of 20%. A
portion of this gain or loss (which could be substantial), however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" owned by
us. The term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the Unit and may be recognized even if there is
a net taxable loss realized on the sale of the Unit. Thus, a Unitholder may
recognize both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income in the case
of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Units, a Unitholder will be unable to
select high or low basis Units to sell as would be the case with corporate
stock. It is not clear whether the ruling applies to us, because, as is the
case with corporate stock, interests in us are evidenced by separate
certificates. Accordingly, Counsel is unable to opine as to the effect such
ruling will have on the Unitholders. A Unitholder considering the purchase of
additional Units or a sale of Units purchased in separate transactions should
consult his tax advisor as to the possible consequences of such ruling.
Certain provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a
taxpayer as having sold an "appreciated" partnership interest (one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value) if the taxpayer or related persons enters into (1) a short sale
of, (2) an offsetting notional principal contract, or (3) a futures or forward
contract with respect to the partnership
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interest or substantially identical property. Moreover, if a taxpayer has
previously entered into a short sale, an offsetting notional principal contract
or a futures or forward contract with respect to a partnership interest, the
taxpayer will be treated as having sold such position if the taxpayer or a
related party then acquires the partnership interest or substantially identical
property. The Secretary of Treasury is also authorized to issue regulations
that treat a taxpayer who or that enters into transactions or positions that
have substantially the same effect as the preceding transactions as having
constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the Unitholders in proportion
to the number of Units owned by each of them as of the opening of the principal
national securities exchange on which the Units are then traded on the first
business day of the month (the "Allocation Date"). However, gain or loss
realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the Unitholders on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a Unitholder transferring Units in the open market may be allocated
income, gain, loss and deduction accrued after the date of transfer.
The use of this allocation method may not be permitted under existing
Treasury Regulations. Accordingly, Counsel is unable to opine on the validity
of this method of allocating income and deductions between the transferors and
the transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), our taxable income or losses might be reallocated among the
Unitholders. We are authorized to revise our method of allocation between
transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted under
future Treasury Regulations.
A Unitholder who owns Units any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect to
such quarter will be allocated items of our income, gain, loss and deductions
attributable to such quarter but will not be entitled to receive that cash
distribution.
Notification Requirements. A Unitholder who sells or exchanges Units is
required to notify the Partnership in writing of that sale or exchange within
30 days after the sale or exchange and in any event by no later than January 15
of the year following the calendar year in which the sale or exchange occurred.
The Partnership is required to notify the IRS of that transaction and to
furnish certain information to the transferor and transferee. However, these
reporting requirements do not apply with respect to a sale by an individual who
is a citizen of the United States and who effects the sale or exchange through
a broker. Additionally, a transferor and a transferee of a Unit will be
required to furnish statements to the IRS, filed with their income tax returns
for the taxable year in which the sale or exchange occurred, that set forth the
amount of the consideration received for the Unit that is allocated to our
goodwill or going concern value. Failure to satisfy these reporting obligations
may lead to the imposition of substantial penalties.
Constructive Termination. The Partnership and the Operating Partnership will
be considered to have been terminated if there is a sale or exchange of 50% or
more of the total interests in
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Partnership capital and profits within a 12-month period. A termination of the
Partnership will cause a termination of the Operating Partnership. A
termination of the Partnership will result in the closing of the Partnership's
taxable year for all Unitholders. In the case of a Unitholder reporting on a
taxable year other than a fiscal year ending December 31, the closing of the
tax year of the Partnership may result in more than 12 months' taxable income
or loss of the Partnership being includable in his taxable income for the year
of termination. Tax elections required to be made by the Partnership, including
a new election under Section 754 of the Code, must be made subsequent to a
termination and a termination could result in a deferral of Partnership
deductions for depreciation. A termination could also result in penalties if
the Partnership were unable to determine that the termination had occurred.
Moreover, a termination might either accelerate the application of, or subject
the Partnership to, any tax legislation enacted prior to the termination.
Entity-Level Collections. If we are required or elect under applicable law to
pay any federal, state or local income tax on behalf of any Unitholder or any
General Partner or any former Unitholder, the Partnership is authorized to pay
those taxes from our funds. That payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be determined,
we are authorized to treat the payment as a distribution to current
Unitholders. The Partnership is authorized to amend the Partnership Agreement
in the manner necessary to maintain uniformity of intrinsic tax characteristics
of Units and to adjust subsequent distributions, so that after giving effect to
such distributions, the priority and characterization of distributions
otherwise applicable under the Partnership Agreement is maintained as nearly as
is practicable. Payments by the Partnership as described above could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance with
a number of federal income tax requirements, both statutory and regulatory,
could be substantially diminished. A lack of uniformity can result from a
literal application of Treasury Regulation Section 1.167(c)-1(a)(6) and
Proposed Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could
have a negative impact on the value of the Units. See "--Tax Treatment of
Operations--Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property or
adjusted property (to the extent of any unamortized Book-Tax Disparity) using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the basis of such property, or
treat that portion as nonamortizable, to the extent attributable to property
the basis of which is not amortizable consistent with the proposed regulations
under Section 743 (but despite its inconsistency with Treasury Regulation
Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation Section 1.197-2(g)(3)
(neither of which is expected to directly apply to a material portion of the
Partnership's assets)). See "--Tax Treatment of Operations--Section 754
Election." To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized
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Book-Tax Disparity, we will apply the rules described in the Regulations and
legislative history. If we determine that such a position cannot reasonably be
taken, we may adopt a depreciation and amortization convention under which all
purchasers acquiring Units in the same month would receive depreciation and
amortization deductions, whether attributable to basis or Section 743(b) basis,
based upon the same applicable rate as if they had purchased a direct interest
in our property. If such an aggregate approach is adopted, it may result in
lower annual depreciation and amortization deductions than would otherwise be
allowable to certain Unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that such deductions are
otherwise allowable. This convention will not be adopted if we determine that
the loss of depreciation and amortization deductions will have a material
adverse effect on the Unitholders. If the Partnership chooses not to utilize
this aggregate method, we may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any Units that would not have a material adverse effect on
the Unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of Units might be affected, and the gain from the
sale of Units might be increased without the benefit of additional deductions.
See "--Disposition of Units--Recognition of Gain or Loss."
Tax-exempt Organizations and Certain Other Investors. Ownership of Units by
employee benefit plans, other tax-exempt organizations, nonresident aliens,
foreign corporations, other foreign persons and regulated investment companies
raises issues unique to such persons and, as described below, may have
substantially adverse tax consequences. Employee benefit plans and most other
organizations exempt from federal income tax (including individual retirement
accounts ("IRAs") and other retirement plans) are subject to federal income tax
on unrelated business taxable income. Virtually all of the taxable income
derived by such an organization from the ownership of a Unit will be unrelated
business taxable income and thus will be taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income at least in the next few years.
Under current rules applicable to publicly-traded partnerships, we are
required to withhold as taxes 39.6% of any cash distributions made to foreign
Unitholders. A foreign Unitholder may claim a credit for those taxes. If that
tax exceeds the taxes due from the foreign Unitholder, he may claim a refund.
Each foreign Unitholder must obtain a taxpayer identification number from the
IRS and submit that number to our Transfer Agent on a Form W-8 in order to
obtain a credit for the taxes withheld. A change in applicable law may require
the Partnership to change these procedures. In addition, non-resident aliens
and foreign corporations, trusts or estates which own Units will be considered
to be engaged in business in the United States on account of ownership of
Units. As a consequence, they will be required to file federal tax returns in
respect of their share of our income, gain, loss or deduction and pay federal
income tax at regular rates on any net income or gain.
Because a foreign corporation that owns Units will be treated as engaged in a
United States trade or business, such a corporation may be subject to United
States branch profits tax a rate of 30%, in addition to regular federal income
tax, on its share of our income and gain (as adjusted for
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changes in the foreign corporation's "U.S. net equity") which are effectively
connected with the conduct of a United States trade or business. That tax may
be reduced or eliminated by an income tax treaty between the United States and
the country with respect to which the foreign corporate Unitholder is a
"qualified resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS, a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business. Except to the extent the
ruling applied (as to which counsel has not opined), a foreign Unitholder will
not be taxed or subject to withholding upon the disposition of a Unit if he has
owned less than 5% in value of the Units during the five-year period ending on
the date of the disposition and if the Units are regularly traded on an
established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
Unitholder, within 90 days after the close of each calendar year, certain tax
information, including a Schedule K-1, which sets forth each Unitholder's share
of our income, gain, loss and deduction for our preceding taxable year. In
preparing this information, which will generally not be reviewed by counsel, we
will use various accounting and reporting conventions, some of which have been
mentioned earlier, to determine the Unitholder's share of income, gain, loss
and deduction. There is no assurance that any of those conventions will yield a
result that conforms to the requirements of the Code, regulations or
administrative interpretations of the IRS. Neither we nor counsel can assure
prospective Unitholders that the IRS will not successfully contend in court
that such accounting and reporting conventions are impermissible. Any such
challenge by the IRS could negatively affect the value of the Units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any such audit may require each Unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of the Unitholder's
own return. Any audit of a Unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of Partnership items of
income, gain, loss and deduction are determined in a Partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner of the Partnership.
The Tax Matters Partner will make certain elections on our behalf and on
behalf of Unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against Unitholders
with respect to items in our returns. The Tax Matters Partner may bind a
Unitholder with less than a 1% profits interest in us to a settlement with the
IRS unless that Unitholder elects, by filing a statement with the IRS, not to
give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review (by which all the Unitholders are bound) of a final
Partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial
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review, such review may be sought by any Unitholder having at least a 1%
interest in profits and by the Unitholders having in the aggregate at least a
5% profits interest. However, only one action for judicial review will go
forward, and each Unitholder with an interest in the outcome may participate.
However, if the Partnership elects to be treated as a large partnership (which
we do not currently intend to do), a Unitholder will not have the right to
participate in settlement conferences with the IRS or to seek a refund.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a Unitholder to substantial penalties.
However, if we elect to be treated as a large partnership (which we do not
currently intend to do), its partners would be required to treat all
partnership items in a manner consistent with our return.
Each partner in a partnership that elects to be treated as a "large
partnership" takes into account separately his share of the following items,
determined at the partnership level: (1) taxable income or loss from passive
loss limitation activities; (2) taxable income or loss from other activities
(such as portfolio income or loss); (3) net capital gains to the extent
allocable to passive loss limitation activities and other activities; (4) tax
exempt interest; (5) a net alternative minimum tax adjustment separately
computed for passive loss limitation activities and other activities; (6)
general credits; (7) low-income housing credit; (8) rehabilitation credit; (9)
foreign income taxes; (10) credit for producing fuel from a nonconventional
source; and (11) any other items the Secretary of Treasury deems appropriate.
Moreover, miscellaneous itemized deductions are not passed through to the
partners and 30% of such deductions are used at the partnership level.
A number of changes have also been made to the tax compliance and
administrative rules relating to electing large partnerships. One provision
would require that each partner in an electing large partnership, take into
account his share of any adjustments to partnership items in the year such
adjustments are made. Under prior law, adjustments relating to partnership
items for a previous taxable year are taken into account by those persons who
were partners in the previous taxable year. Alternatively, a partnership could
elect to or, in some circumstances, could be required to directly pay the tax
resulting from any such adjustments. In either case, therefore, Unitholders
could bear significant economic burdens associated with tax adjustments
relating to periods predating their acquisition of Units. Although we are
authorized under our Partnership Agreement to do so, we do not expect to elect
to have the large partnership provisions apply to us because of the cost of
their application.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us (a) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (b) whether the
beneficial owner is (1) a person that is not a United States person, (2) a
foreign government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (3) a tax-exempt entity; (c) the
amount and description of Units held, acquired or transferred for the
beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and
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certain information on Units they acquire, hold or transfer for their own
account. A penalty of $50 per failure (up to a maximum of $100,000 per calendar
year) is imposed by the Code for failure to report such information to the
Partnership. The nominee is required to supply the beneficial owner of the
Units with the information furnished to us.
Registration as a Tax Shelter. The Code requires that "tax shelters" be
registered with the Secretary of the Treasury. The temporary Treasury
Regulations interpreting the tax shelter registration provisions of the Code
are extremely broad. Nevertheless, it is arguable that we are not subject to
the registration requirement on the basis that it will not constitute a tax
shelter. However, the predecessor general partner, as our organizer, has
registered us as a tax shelter with the Secretary of the Treasury in the
absence of assurance that we will not be subject to tax shelter registration
and in light of the substantial penalties which might be imposed if
registration is required and not undertaken.
The IRS has issued the following tax shelter registration number to the
Partnership: 96026000016. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN
REVIEWED, EXAMINED OR APPROVED BY THE IRS.
We must furnish the registration number to the Unitholders, and a Unitholder
who sells or otherwise transfers a Unit in a subsequent transaction must
furnish the registration number to the transferee. The penalty for failure of
the transferor of a Unit to furnish the registration number to the transferee
is $100 for each such failure. The Unitholders must disclose the tax shelter
registration number of the Partnership on Form 8271 to be attached to the tax
return on which any deduction, loss or other benefit generated by the
Partnership is claimed or income of the Partnership is included. A Unitholder
who fails to disclose the tax shelter registration number on his return,
without reasonable cause for that failure, will be subject to a $250 penalty
for each failure. Any penalties discussed herein are not deductible for federal
income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and substantial
valuation misstatements, is imposed by the Code. No penalty will be imposed,
however, with respect to any portion of an underpayment if it is shown that
there was a reasonable cause for that portion and that the taxpayer acted in
good faith with respect to that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (1)
with respect to which there is, or was, "substantial authority" or (2) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters,"
a term that in this context does not appear to include the Partnership. If any
Partnership item of income, gain, loss or deduction included in the
distributive shares of Unitholders might result in such an "understatement" of
income for which no "substantial authority" exists, the Partnership must
disclose the pertinent facts on its return. In addition, the Partnership will
make a
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reasonable effort to furnish sufficient information for Unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, a Unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he or she resides in which the Partnership does business
or owns property. Although an analysis of those various taxes is not presented
here, each prospective Unitholder should consider their potential impact on his
investment in the Partnership. A Unitholder will likely be required to file
state and local income tax returns and pay state and local income taxes in some
or all of the various jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those requirements. Star
Gas anticipates that substantially all of the Partnership's income will be
generated in the following states: Connecticut, Indiana, Kentucky, Maine,
Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, and West Virginia. Each of these states currently
imposes a personal income tax; however, New Hampshire's tax only applies to
interest and dividend incomes. Some of them may require the Partnership, or the
Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder who is not a resident of the state. A Unitholder
will be required to file state income tax returns and to pay state income taxes
in some or all of these states and may be subject to penalties for failure to
comply with those requirements. In certain states, tax losses may not produce a
tax benefit in the year incurred (if, for example, the Partnership has no
income from sources within that state) and also may not be available to offset
income in subsequent taxable years. Withholding, the amount of which may be
greater or less than a particular Unitholder's income tax liability to the
state, generally does not relieve the non-resident Unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to Unitholders for purposes of determining the amounts distributed
by us. See "--Disposition of Units--Entity-Level Collections." Based on current
law and our estimate of our future operations, we do not anticipate that any
amounts required to be withheld will not be material.
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND TAX
CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE
MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE
AND LOCAL, AS WELL AS U.S. FEDERAL, TAX RETURNS THAT MAY BE REQUIRED. COUNSEL
HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL TAX CONSEQUENCES OF AN
INVESTMENT IN US.
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DISSENTERS' RIGHTS
Sections 302A.471 and 302A.473 of the MBCA provide to each Common Stockholder
the right to dissent from the Acquisition Proposal and obtain payment for the
"fair value" of such Common Stockholder's shares following the Transaction.
Common Unitholders do not have dissenters' rights under the DRULPA or the
Partnership Agreement.
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such sections, the
full texts of which are attached as Appendix E to this proxy statement. These
Sections should be reviewed carefully by any Common Stockholder who wishes to
exercise dissenters' rights or who wishes to preserve the right to do so, since
failure to comply with the procedures described herein and set forth therein
will result in the loss of dissenters' rights.
Under the MBCA, Common Stockholders will have the right, by fully complying
with the applicable provisions of Sections 302A.471 and 302A.473, to dissent
with respect to the Transaction and to receive from Petro payment in cash of
the "fair value" of their shares of Common Stock after the Transaction is
completed. The term "fair value" means the value of such shares of Common Stock
immediately before the Effective Time. Pursuant to the Merger Agreement, the
Partnership has agreed to make payment of the fair value of the shares of
dissenting Common Stockholders.
All references in Sections 302A.471 and 302A.473 of the MBCA to a
"shareholder" are to a record holder of shares of Common Stock as to which
dissenters' rights are asserted by such Common Stockholder. A person having
beneficial ownership of shares of Common Stock that are held of record in the
name of another person, such as a broker, nominee, trustee or custodian, must
act promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner in order to perfect whatever dissenters' rights
such beneficial owner may have.
Common Stockholders who desire to exercise their dissenters' rights must
satisfy all of the following conditions:
A written notice of intent to demand fair value (a "Dissent Notice") for his
or its shares of Common Stock must be delivered by such a Common Stockholder to
Petro at the address specified below before the taking of the vote of
shareholders on the Acquisition Proposal. Such Dissent Notice is in addition to
and separate from any proxy or vote against the Transaction Proposal. Voting
against, abstaining from voting or failing to vote on the Acquisition Proposal
does not constitute a Dissent Notice or demand for appraisal within the meaning
of the MBCA. Only Common Stockholders of record as of the Record Date, and
beneficial owners of Common Stock as of such date who hold through such Common
Stockholders, are entitled to exercise dissenters' rights.
Holders of Common Stock electing to exercise dissenters' rights under the
MBCA must not vote for the Transaction Proposal. A Common Stockholder's failure
to vote against the Acquisition Proposal will not constitute a waiver of
dissenters' rights. However, if a Common Stockholder returns a signed proxy but
does not specify a vote against the Acquisition Proposal or a direction to
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abstain, the proxy will be voted for the Acquisition Proposal, which will have
the effect of waiving that Common Stockholder's dissenters' rights.
A Common Stockholder may not assert dissenters' rights as to less than all of
the shares of Common Stock registered in such holder's name and/or beneficially
owned by such Common Stockholder, except where shares are beneficially owned by
another person but registered in such Common Stockholder's name. If a Common
Stockholder, such as a broker, nominee, trustee or custodian, wishes to dissent
with respect to shares of Common Stock beneficially owned by another person,
such Common Stockholder must dissent with respect to all of such shares and
must disclose the name and address of the beneficial owner on whose behalf the
dissent is made. A beneficial owner of shares of Common Stock who is not the
record owner of such shares may assert dissenters' rights as to shares held on
such person's behalf, provided that such beneficial owner submits a written
consent of the record owner to Petro at or before the time such rights are
asserted.
A Common Stockholder who elects to exercise dissenters' rights must send a
Dissent Notice to Petro at the following address before the taking of the vote
on the Acquisition Proposal: Petroleum Heat and Power Co., Inc., P.O. Box 1457,
Stamford, CT 06902, Attention: Treasurer. The Dissent Notice should specify the
Common Stockholder's name and mailing address, the number of shares of each
class of Common Stock owned by such Common Stockholder and that the Common
Stockholder intends to demand the fair value of such shares.
If the Acquisition Proposal is approved by Common Stockholders at the Special
Meeting, Petro will send a written notice to each Common Stockholder (the
"Advisory Notice") who filed a Dissent Notice. The Advisory Notice will contain
the address to which the Common Stockholder should send a demand for the
payment of the fair value of his or its shares of Common Stock (the "Fair Value
Demand") and the certificates representing such shares in order to obtain
payment and the date by which they must be received by Petro, a form to be used
to make such Fair Value Demand and other related information.
In order to receive fair value for his or its shares of Common Stock, a
dissenting Common Stockholder must, within 30 days after the date the Advisory
Notice was given, send his or its stock certificates, a Fair Value Demand and
all other information specified in the Advisory Notice from Petro, to the
address specified in the Advisory Notice. A dissenting Common Stockholder will
retain all rights as a Common Stockholder until the Effective Time. After the
later of (1) the date of receipt by Petro of a valid Fair Value Demand and the
related stock certificates and other information are received and (2) the
Effective Time, the Partnership, on behalf of Petro, will remit to each
dissenting Common Stockholder who has complied with the statutory requirements
the amount that Petro estimates to be the fair value of such Common
Stockholder's shares of Common Stock, with interest commencing five days after
the Effective Time at a rate prescribed by statute. Remittance will be
accompanied by Petro's balance sheet and statement of operations for a fiscal
year ending not more than 16 months before the Effective Time, together with
the latest available interim financial data, an estimate of the fair value of
such dissenting Common Stockholder's shares of Common Stock and a brief
description of the method used to reach such estimate, a brief description of
the procedure to be followed if such holder is demanding supplemental payment
and copies of Sections 302A.471 and 302A.473 of the MBCA.
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If the dissenting Common Stockholder believes that the amount remitted by the
Partnership, on behalf of Petro, is less than the fair value of such Common
Stockholder's shares, plus interest, the dissenting Common Stockholder may give
written notice to Petro of such Common Stockholder's own estimate of the fair
value of the shares, plus interest, within 30 days after the mailing date of
the remittance and demand payment of the difference (a "Supplemental Payment
Demand"). Such Supplemental Payment Demand must be given to Petro at the
address specified in the Advisory Notice. A Common Stockholder who fails to
give such written notice within this time period is entitled only to the amount
remitted by the Partnership.
Within 60 days after receipt of a Supplemental Payment Demand, Petro must
either (1) pay the Common Stockholder the amount demanded or agreed to by such
Common Stockholder after discussion with Petro or (2) petition a state court in
Hennepin County, Minnesota for the determination of the fair value of the
shares, plus interest. The petition must name as parties all Common
Stockholders who have demanded supplemental payment and have not reached an
agreement with Petro. The court, after determining that the dissenting Common
Stockholder or Stockholders in question have complied with all statutory
requirements, may use any valuation method or combination of methods it deems
appropriate, whether or not used by Petro or the dissenting Common Stockholder,
and may appoint appraisers to recommend the amount of the fair value of the
class of Common Stock to be valued. The court's determination will be binding
on all Common Stockholders who properly exercised dissenters' rights and did
not agree with Petro as to the fair value of such shares. Dissenting Common
Stockholders are entitled to judgment for the amount by which the court-
determined fair value per share, plus interest, exceeds the amount per share,
plus interest, remitted to the Common Stockholders by the Partnership. The
Common Stockholders will not be liable to Petro or the Partnership for any
amounts paid by Petro or the Partnership that exceed the fair value of the
shares as determined by the court, plus interest. The costs and expenses of
such a proceeding, including the expenses and compensation of any appraisers,
will be determined by the court and assessed against Petro, except that the
court may, in its discretion, assess part or all of those costs and expenses
against any Common Stockholder whose action in demanding supplemental payment
is found to be arbitrary, vexatious or not in good faith. The court may award
fees and expenses to an attorney for the dissenting Common Stockholders out of
the amount, if any, awarded to such Common Stockholders. Fees and expenses of
experts or attorneys may also be assessed against any person who acted
arbitrarily, vexatiously or not in good faith in bringing the proceeding.
The Partnership may withhold the remittance of the estimated fair value, plus
interest, for any shares of Common Stock owned by any person who was not a
Common Stockholder, or who is dissenting on behalf of a person who was not a
beneficial owner, on August 14, 1998, the date on which the proposed
Transaction was first announced to the public (the "Public Announcement Date").
Petro will forward to any such dissenting Common Stockholder who has complied
with all requirements in exercising dissenters' rights the Advisory Notice and
all other materials sent after approval by the Common Stockholders of the
Acquisition Proposal to all Common Stockholders who have properly exercised
dissenters' rights, together with a statement of the reason for withholding the
remittance and an offer to pay the dissenting Common Stockholder the amount
listed in the materials, if such Common Stockholder agrees to accept that
amount in full satisfaction. A dissenting Common Stockholder may decline such
offer and demand payment by following the same procedure as that
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described for a Supplemental Payment Demand by Common Stockholders who owned
their shares as of the Public Announcement Date. Any Common Stockholder who did
not own shares on the Public Announcement Date and who fails properly to demand
payment will be entitled only to the amount offered by Petro. Upon proper
demand by any such Common Stockholder, rules and procedures applicable to
receipt by the Partnership of a Supplemental Payment Demand given by a
dissenting Common Stockholder who owned shares on the Public Announcement Date
will also apply to any Common Stockholder properly giving a demand for payment
but who did not own shares of record or beneficially on the Public Announcement
Date, except that any such Common Stockholder is not entitled to receive any
remittance from Petro or the Partnership until the fair value of the shares,
plus interest, has been determined pursuant to such rules and procedures.
Common Stockholders considering exercising dissenters' rights should bear in
mind that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
Acquisition Proposal if they do not seek appraisal of their shares, and that
the opinion of any investment banking firm as to fairness, from a financial
point of view, is not an opinion as to fair value under Sections 302A.471 and
302A.473.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "Certain Federal Income Tax
Considerations."
A COMMON STOCKHOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE
SUMMARIZED ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE
TRANSACTION CONSIDERATION FOR HIS OR HER SHARES. SEE APPENDIX F.
Pursuant to the Merger Agreement, from and after the Effective Time, the
Partnership will be responsible for the payment of any and all consideration
that may be determined pursuant to Section 320a-473 to be due to the holders of
Common Stock who have perfected their rights to receive the fair value of their
shares as described above.
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LEGAL MATTERS
The validity of the Common Units and the Senior Subordinated Units to be
issued in the Transaction will be passed upon for the Partnership by Phillips
Nizer Benjamin Krim & Ballon LLP, New York, New York. Certain tax matters will
be passed upon for the Partnership by Andrews & Kurth L.L.P., New York, New
York.
EXPERTS
The consolidated financial statements and schedules of Star Gas Partners,
L.P. and its subsidiary and the Star Gas Group (Predecessor) as of September
30, 1997 and 1998 and for the fiscal years ended September 30, 1996, 1997 and
1998, incorporated by reference in this proxy statement, have been incorporated
by reference in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference and upon the authority
of that firm as experts in accounting and auditing.
The consolidated financial statements and schedules of Petroleum Heat and
Power Co., Inc. as of December 31, 1996 and 1997 and for the fiscal years ended
December 31, 1995, 1996 and 1997, have been incorporated by reference in this
proxy statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference and upon
the authority of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
The Partnership and Petro file annual, quarterly and special reports, proxy
statements (Petro only) and other information with the Commission. You may read
and copy any reports, statement or other information that the Partnership and
Petro file with the Commission at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. These Commission filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the Commission at "http://www.sec.gov." Reports and other
information concerning the Partnership should also be available for inspection
at the offices of the NYSE.
The Partnership filed a Registration Statement on Form S-4 (the "Registration
Statement") to register with the Commission the Common Units and Senior
Subordinated Units to be issued in the Transaction. This proxy statement is a
part of that Registration Statement and constitutes a prospectus of the
Partnership. As allowed by Commission rules, this proxy statement does not
contain all the information you can find in the Partnership's Registration
Statement or the exhibits to the Registration Statement.
The Commission allows the Partnership and Petro to "incorporate by reference"
information into this proxy statement, which means that they can disclose
important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
considered part of this proxy statement, except for any information superseded
by information contained directly in this proxy statement or in later filed
documents incorporated by reference in this proxy statement.
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This proxy statement includes information required by the Commission to be
disclosed under Rule 13e-3 of the Exchange Act which governs so-called "going
private" transactions by certain issuers or their affiliates. In accordance
with that rule, Petro filed with the Commission under the Exchange Act, a
Schedule 13E-3 with respect to the Transaction. This proxy statement does
not contain all of the information in the Schedule 13E-3, parts of which are
omitted in accordance with the regulations of the Commission. The Schedule 13E-
3, and its amendments, including exhibits filed with it, will be available for
inspection and copying at the offices of the Commission as set forth above.
This proxy statement incorporates by reference the documents set forth below
that the Partnership and Petro have previously filed with the Commission. These
documents contain important information about the Partnership and Petro and
their finances.
<TABLE>
<CAPTION>
THE PARTNERSHIP COMMISSION FILINGS
(FILE NO. 33-78490) PERIOD/AS OF DATE
---------------------------------- -----------------
<S> <C>
Annual Report on Form 10-K Year ended September 30, 1998
<CAPTION>
PETRO COMMISSION FILINGS (FILE NO. 1-9358) PERIOD/AS OF DATE
------------------------------------------ -----------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly Report on Form 10-Q Quarter ended September 30, 1998
Proxy Statement April 30, 1998
</TABLE>
You should rely only on the information contained or incorporated by
reference in this proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement. This proxy statement is dated . You should not assume
that the information contained in this joint proxy statement-prospectus is
accurate as of any date other than the date of the proxy statement. Neither the
mailing of this proxy statement to Securityholders nor the issuance of Units in
the Transaction creates any implication to the contrary.
STATEMENT OF FORWARD-LOOKING DISCLOSURE
Some of the information in this proxy statement may contain forward-looking
statements. You can identify these statements by our use of "will," "believe,"
"expect," "anticipate," "estimate," "continue," "think" or other similar words.
These statements discuss future expectations, contain projections of results of
operations or of financial condition, or state other "forward-looking"
information. When considering these forward-looking statements, you should keep
in mind the risk factors and other cautionary statements in this proxy
statement. The risk factors noted under "Risk Factors" and other factors noted
throughout this proxy statement, including certain risks and uncertainties,
could cause our actual results to differ materially from those contained in any
forward-looking statement.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed by the Partnership with the Commission (File No.
33-98490) is incorporated by reference in this proxy statement:
(1) the Partnership's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
In addition, all other reports and documents filed by the Partnership
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date hereof and prior to the Unitholders Meeting and the Special Meeting
shall be deemed incorporated by reference into this proxy statement from the
date of filing of such reports and documents. Any statement contained herein or
in a document, all or a portion of which is incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or superseded
for purposes of this proxy statement to the extent that a statement contained
herein (and, in case of any statement in an incorporated document prior to the
date of this proxy statement), or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this proxy statement.
The following documents filed by Petro with the Commission are also
incorporated by reference in this proxy statement:
(1) Petro's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, which accompanies this proxy statement; and
(2) Petro's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998, which accompanies
this proxy statement.
(3) Petro's proxy statement dated April 30, 1998.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
INCLUDED WITH THIS PROXY STATEMENT. SUCH DOCUMENTS (EXCLUDING EXHIBITS TO SUCH
DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS
DELIVERED. FOR DOCUMENTS RELATING TO THE PARTNERSHIP, CONTACT STAR GAS
CORPORATION, 2187 ATLANTIC STREET, STAMFORD, CONNECTICUT 06902, ATTENTION:
RICHARD F. AMBURY, VICE PRESIDENT-FINANCE, TELEPHONE (203) 328-7313. FOR
DOCUMENTS RELATING TO PETRO, CONTACT PETROLEUM HEAT AND POWER CO., INC., 2187
ATLANTIC AVENUE, STAMFORD, CONNECTICUT 06902, ATTENTION: GEORGE LEIBOWITZ,
TREASURER, TELEPHONE (203) 325-5470. TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1999.
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UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information gives effect to the acquisition of Petroleum Heat and Power Co.,
Inc., by Star Gas Partner's, L.P., the Transaction, including the Equity
Offering, the Debt Offering and the application of the net proceeds therefrom
as described in "Uses of Funds From this Offering and the Debt Offering." The
information presented is derived from, should be read in conjunction with, and
is qualified in its entirety by reference to the historical financial
statements, and notes thereto, appearing elsewhere and incorporated by
reference in this prospectus.
The unaudited pro forma condensed consolidated balance sheet was prepared as
if the Transaction had occurred on September 30, 1998. The unaudited pro forma
condensed consolidated statement of operations for the twelve months ended
September 30, 1998 was prepared as if the Transaction had occurred on October
1, 1997.
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions, and therefore, the actual adjustments may
differ from the unaudited pro forma adjustments. However, management believes
that the assumptions provide a reasonable basis for representing the
significant effects of the Transaction as contemplated and that the unaudited
pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the unaudited pro forma condensed consolidated financial
statements. The unaudited pro forma condensed consolidated balance sheet and
statement of operations are not necessarily indicative of the financial
position or results of operations of the Partnership if the Transaction had
actually occurred on the dates indicated above. Likewise, the unaudited pro
forma condensed consolidated financial information is not necessarily
indicative of future financial combined position or future results of combined
operations of the Partnership.
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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS, L.P.
STAR GAS PRO FORMA PRO FORMA THE ADJUSTED
PARTNERS, L.P. PETRO ADJUSTMENTS COMBINED OFFERINGS PRO FORMA
-------------- --------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 1,115 $ 18,667 $ 19,782 $ 115,400 (g) $ 16,550
128,300 (h)
(246,932)(o)
Accounts receivable.... 5,279 38,163 43,442 43,442
Inventories............ 10,608 13,997 24,605 24,605
Prepaid expenses and
other current assets.. 945 11,885 12,830 12,830
-------- --------- -------- --------- --------
Total current assets... 17,947 82,712 100,659 (3,232) 97,427
-------- --------- -------- --------- --------
Cash collateral
account............... 6,900 6,900 6,900
Property and equipment,
net................... 110,262 28,799 $ 11,310 (f) 150,371 150,371
Intangible and other
assets, net........... 51,398 80,267 288,997 (f) 420,662 4,600 (g) 425,262
-------- --------- -------- -------- --------- --------
Total assets........... $179,607 $ 198,678 $300,307 $678,592 $ 1,368 $679,960
======== ========= ======== ======== ========= ========
LIABILITIES AND
PARTNERS' CAPITAL
Current liabilities:
Current debt and
preferred stock....... $ 692 $ 12,188 $ 12,880 $ (9,797)(o) $ 3,083
Bank credit facility
borrowings............ 4,770 -- 4,770 4,770
Accounts payable....... 3,097 6,320 9,417 9,417
Unearned service
contract revenue...... 13,599 13,599 13,599
Accrued expenses and
income taxes.......... 2,830 29,281 $ 4,600 (d) 42,782 (6,071)(o) 36,711
6,071 (e)
Accrued interest and
dividends............. 485 -- 583 (a) 1,068 1,068
Customer credit
balances.............. 6,038 28,803 34,841 34,841
-------- --------- -------- -------- --------- --------
Total current
liabilities........... 17,912 90,191 11,254 119,357 (15,868) 103,489
-------- --------- -------- -------- --------- --------
Long-term debt.......... 104,308 278,864 6,286 (b) 389,458 120,000 (g) 305,994
(203,464)(o)
Deferred income taxes... 50,000 (d) 50,000 50,000
Other long-term
liabilities............ 40 10,686 (3,500)(d) 7,226 7,226
Redeemable and
exchangeable preferred
stock.................. 28,555 (955)(b) 27,600 (27,600)(o)
Partners' capital
Common Unitholders..... 58,686 2,055 (c) 60,741 128,300 (h) 189,041
Subordinated
Unitholders........... (1,446) 60,006 (f) 22,544 22,544
(36,016)(f)
General partner........ 107 4,434 (f) 1,666 1,666
(2,875)(f)
Petro's stockholders'
deficiency............ (209,618) (583)(a)
(5,331)(b)
(2,055)(c)
(51,100)(d)
(6,071)(e)
274,758 (f)
-------- --------- -------- -------- --------- --------
Total Partners'
Capital............... 57,347 (209,618) 237,222 84,951 128,300 213,251
-------- --------- -------- -------- --------- --------
Total Liabilities and
Partners' Capital..... $179,607 $ 198,678 $300,307 $678,592 $ 1,368 $679,960
======== ========= ======== ======== ========= ========
</TABLE>
183
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
STAR GAS
COMBINED PARTNERS, L.P.
STAR GAS PROPANE PROPANE PRO FORMA PRO FORMA THE ADJUSTED
PARTNERS, L.P. ACQUISITIONS(I) OPERATIONS PETRO(J) ADJUSTMENTS COMBINED OFFERINGS PRO FORMA
-------------- --------------- ---------- -------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.............. $111,685 $4,386 $116,071 $452,765 $(2,681)(k) $566,155 $566,155
Cost of sales
(exclusive of
depreciation shown
separately
below)............ 49,498 1,972 51,470 299,987 (1,985)(k) 349,472 349,472
-------- ------ -------- -------- ------- -------- --------
Gross margin..... 62,187 2,414 64,601 152,778 (696)(k) 216,683 216,683
Operating
expenses.......... 43,281 1,090 44,371 117,849 (669)(k) 161,551 161,551
Restructuring
charges........... 2,085 2,085 2,085
Transaction
expenses.......... 1,029 1,029 1,029
Corporate identity
expenses.......... 1,100 1,100 1,100
Provision for
supplemental
benefits.......... 409 409 409
Depreciation and
amortization...... 11,462 548 12,010 27,514 (87)(k) 37,434 37,434
(2,003)(l)
Net gain (loss) on
sales of assets... (271) (271) 11,507 (11,284)(k) (48) (48)
-------- ------ -------- -------- ------- -------- ------- --------
Operating income... 7,173 776 7,949 14,299 (9,221) 13,027 13,027
Interest (income)
expense, net...... 7,927 427 8,354 30,803 39,157 $12,298 (p) 26,859
Amortization of
debt issuance
costs............. 176 -- 176 1,432 -- 1,608 (972) (n) 636
-------- ------ -------- -------- ------- -------- ------- --------
Income (loss)
before income
taxes............. (930) 349 (581) (17,936) (9,221) (27,738) 13,270 (14,468)
-------- ------ -------- -------- ------- -------- ------- --------
Income tax
expense........... 25 25 475 500 500
--------
Income before
equity interest
in Star Gas
Corporation....... (18,411)
Share of income
(loss) of Star Gas
Corporation....... (317) 317 (m) --
-------- ------ -------- -------- ------- -------- ------- --------
Net income (loss).. $ (955) $ 349 $ (606) $(18,728) $(8,904) $(28,238) $13,270 $(14,968)
======== ====== ======== ======== ======= ======== ======= ========
General Partner's
interest
in net income
(loss)............ (19) (299)
======== ========
Limited Partners'
interest
in net income
(loss)............ $ (936) $(14,669)
======== ========
Basic and diluted
net income (loss)
per Limited
Partner Unit...... $ (0.16) $ (1.04)(q)
======== ========
Weighted average
number of Limited
Partner Units
outstanding....... 6,035 220 6,255 103 (c) 7,297 6,800 (h) 14,097 (q)
(2,396)(f)
568 (f)
2,767 (f)
</TABLE>
184
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following pro forma adjustments give effect to (1) the offering of
809,000 Common Units by the Partnership on December 16, 1997, (2) the
acquisition of Petro, (3) the Debt Offering and (4) the Equity Offering, as if
each transaction had taken place on September 30, 1998, in the case of the pro
forma condensed consolidated balance sheet, or as of October 1, 1997, in the
case of the pro forma condensed consolidated statement of operations. The pro
forma adjustments are based upon currently available information, certain
estimates and assumptions and a preliminary determination and allocation of the
total purchase price for Petro and therefore the actual results may differ from
the pro forma results. However, management believes that the assumptions
provide a reasonable basis for presenting the significant effects of the
transactions as contemplated, and that the pro forma adjustments give
appropriate effect to those assumptions and are properly applied in the pro
forma financial information.
TRANSACTION RELATED ADJUSTMENTS
(a) Reflects the accrued dividends payable on Petro's redeemable and
exchangeable preferred stock.
(b) Reflects the negotiated premium of approximately $6.3 million to
refinance Petro's Private Debt and Petro's Public Debt and the negotiated
discount of approximately $1.0 million to redeem Petro's public preferred
stock.
(c) Reflects the issue of 0.8 million shares of Junior Preferred Stock of
Petro, which will be converted into 0.1 million Common Units upon completion of
the Transaction at an assumed value of $20.00 per Unit. The Junior Preferred
Stock was issued to the holders of Petro's 9 3/8% Subordinated Debentures, 10
1/8% Subordinated Notes, and 12 1/4% Subordinated Debentures, and 12 7/8%
Exchangeable Preferred Stock as consideration for consenting to the early
redemption of such securities.
THE TRANSACTION (MERGER AND EXCHANGE)
(d) Represents: (1) the estimated amount of current federal and state taxes
to be incurred of $4.6 million (2) the estimated amount of deferred federal and
state income taxes to be recognized of $50.0 million, and (3) the elimination
of the tax liability associated with the Pearl Gas conveyance of $3.5 million.
(e) Reflects the estimated additional amount to be recorded by Petro of
legal, professional and advisory fees (estimated to be $6.1 million) incurred
by Petro and the Partnership in the Transaction.
(f) Represents the exchange of 26.6 million shares of Petro's Class A Common
Stock and Class C Common Stock valued at $64.4 million for 2.8 million Senior
Subordinated Units valued at $51.2 million, 0.6 million Junior Subordinated
Units valued at $8.8 million and 0.3 million General Partner Units valued at
$4.4 million. The values used to determine the fair market value of Petro's
common stock and the Partnership's senior subordinated units were based on a
report received from A.G. Edwards & Sons, Inc to the Special Committee.
185
<PAGE>
The Partnership's 2.4 subordinated units and General Partner's interest held
by Petro were converted into common units and senior subordinated units to
facilitate the exchange of Petro's junior preferred and common stock.
The table below summarizes the preliminary allocation by the Partnership of
the excess of purchase price over book value related to the acquisition of
Petro. The allocation of the purchase price is based on the results of a
preliminary appraisal of the assets and the liabilities of Petro. The amounts
used in this pro forma are based on assets and liabilities as of September 30,
1998. These amounts will change based upon the fair value of assets and
liabilities on the closing date. The preliminary allocation is as follows (in
thousands):
<TABLE>
<S> <C>
Consideration given for the exchange of Petro shares................... $64,440
</TABLE>
<TABLE>
<S> <C>
Fair market value of Petro's asset and liabilities as of September
30, 1998:
Current assets.................................................... $(82,712)
Cash collateral account........................................... (6,900)
Property, plant and equipment (1)................................. (40,109)
Value of Petro's investment in Star Gas........................... (38,891)
Current liabilities............................................... 101,445
Long-term debt.................................................... 285,150
Deferred income taxes............................................. 50,000
Other liabilities................................................. 7,186
Preferred stock................................................... 27,600
Junior preferred stock............................................ 2,055
--------
</TABLE>
<TABLE>
<S> <C>
Subtotal.......................................................... 304,824
--------
Total value assigned to intangibles and other assets.................. 369,264
Carrying amount of intangibles and other assets....................... (80,267)
--------
Allocation of excess purchase price to intangibles.................... $288,997
========
CONSISTING OF:
Customer Lists...................................................... $ 95,000
Goodwill............................................................ 273,268
Other assets........................................................ 996
--------
Total Intangibles and Other Assets................................ $369,264
========
</TABLE>
- --------
(1) Includes fair market value adjustment of $11.3 million.
THE DEBT OFFERING AND THE EQUITY OFFERING
(g) Reflects the estimated net proceeds to Petro of $115.4 million from the
$120.0 million Debt Offering, net of underwriting discounts and commissions
(estimated to be $3.6 million) and offering expenses (estimated to be $1.0
million). These costs are being amortized over the term of the related debt
which is assumed to be 10 years.
(h) Reflects the estimated net proceeds to the Partnership of $128.3 million
from the issuance and sale of 6.8 million Common Units in the Equity Offering
at an assumed offering price of $20.00 per Common Unit, net of underwriting
discounts and commissions (estimated to be $6.8 million) and offering expenses
(estimated to be $0.9 million).
186
<PAGE>
THE PROPANE ACQUISITIONS
(i) Represents the results of certain propane distributors acquired by the
Partnership in fiscal 1998 from October 1, 1997 to their dates of acquisition.
Results of such distributors from the dates of acquisition to September 30,
1998 are included in the Partnership's twelve months ended September 30, 1998
results adjusted for:
(1) certain cost savings of $0.3 million, primarily executive
compensation and legal expenses relating to selling shareholders;
(2) additional depreciation and amortization of $0.5 million; and
(3) additional interest expense of $0.4 million.
THE TRANSACTION (ACQUISITION OF PETRO)
(j) Represents the results of operations of Petro for the twelve months ended
September 30, 1998. Estimated expenses of $7.1 million to be incurred by Petro
as a direct result of its acquisition by the Partnership will be included in
Petro's actual statement of operations. For the twelve months ended September
30, 1998, Petro has recorded $1.0 million of these expenses.
(k) Adjustment to reflect the disposition of Petro's Hartford, CT operations
in November 1997. Petro received cash proceeds of $15.6 million and recorded a
gain of $11.3 million. The carrying value of these assets at the time of sale
was $4.3 million.
(l) Adjustment to depreciation and amortization expense attributable to the
acquisition of Petro.
The following table summarizes the effect on depreciation and amortization of
the acquisition of Petro.
<TABLE>
<CAPTION>
AMOUNT PER PETRO'S FINANCIALS AMOUNT PER APPRAISAL DIFFERENCE
----------------------------------- ------------------------------------ ------------
PROPERTY AND EQUIPMENT,
NET ASSET LIFE DEPRECIATION ASSET LIFE DEPRECIATION DEPRECIATION
- ----------------------- ------- -------------- ------------ -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Land.................... $ 2,092 $ -- $ 3,300 $ -- $ --
Buildings............... 4,920 20-45 years 419 4,300 30 years 143 (276)
Fleet................... 6,342 5 to 7 years 2,866 12,800 6 years 2,135 (731)
Leasehold............... 4,353 term of leases 562 5,900 term of leases 457 (105)
Computer, furniture and
fixtures............... 7,593 5 to 7 years 2,491 9,700 5 to 7 years 1,661 (830)
Service & other
equipment.............. 3,499 5 to 13 years 692 4,109 5 to 13 years 557 (135)
------- ------- -------- ------- -------
Total Property and
equipment............. $28,799 $ 7,030 $ 40,109 $ 4,953 $(2,077)
<CAPTION>
INTANGIBLE AND OTHER
ASSETS, NET ASSET LIFE AMORTIZATION ASSET LIFE AMORTIZATION AMORTIZATION
- -------------------- ------- -------------- ------------ -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Customer list........... $56,298 6.5 years $17,380 $ 95,000 10 years $ 9,500 $(7,880)
Goodwill................ 9,122 25 years 436 273,268 25 years 10,971 10,535
Covenants not to compete
and other acquisition
related................ 5,211 5 to 7 years 2,581 -- (2,581)
Debt issuance costs..... 8,640 --
Other assets............ 996 996 --
------- ------- -------- ------- -------
Total intangible and
other assets.......... $80,267 $20,397 $369,264 $20,471 $ 74
------- ------- -------
Totals................. 27,427 $25,424 $(2,003)
======= ======= =======
</TABLE>
(m) Reflects the elimination of Petro's equity interest in the Partnership.
187
<PAGE>
THE OFFERINGS
(n) Net adjustment to amortization of debt issuance costs of $1.0 million
attributable to the Debt Offering and the acquisition of Petro. Amortization of
debt issuance costs is decreased by $1.4 million relating to the repayment
and/or exchange of Petro debt and is increased by $0.5 million relating to the
9.75% Notes.
(o) Reflects the use of the net proceeds from the Equity Offering, the Debt
Offering and $3.2 million of Petro's cash to repay $84.1 million of Petro's 12
1/4% Senior Subordinated Debentures due 2005 including $2.8 million of
premiums, to repay $50.0 million of Petro's 10 1/8% Senior Subordinated Notes
due 2003, to repay $75.0 million of Petro's 9 3/8% Senior Subordinated
Debentures due 2006, to retire $27.6 million of Petro's 12 7/8% Exchangeable
Preferred Stock, to retire $4.1 million of Petro's 14.33% Exchangeable
Preferred Stock and to pay $6.1 million of Transaction expenses. In addition,
Petro has entered into Private Debt Agreements with the Private Noteholders of:
(i) its outstanding Senior Notes in the aggregate principal amount of $60
million; and
(ii) its Petro Private Debt in the aggregate principal amount of $4.1
million (after payment of the January 1999 installment).
Pursuant to the Private Debt Agreements at the effective time of the
Transaction:
(i) the holders of the Senior Notes will exchange such Notes for $63.1
million aggregate principal amount of New 9% Notes; and
(ii) the holders of the 14.1% Notes will exchange such notes for $4.3
million aggregate principal amount of 10 1/4% Notes. The New Private Notes
will be guaranteed by the Partnership and Petro Holdings.
(p) Reflects the net reduction to interest expense of $12.3 million for the
twelve months ended September 30, 1998. This amount reflects interest expense
on the $120.0 million in principal amount of the Notes at an assumed interest
rate of 9.75% ($11.7 million of additional expense annually) offset by an
annual reduction in interest expense of $24.0 million due to the repayment of
$206.3 million of Petro Public Debt with the proceeds of this offering and the
Debt Offering and a reduction in the interest rate attributable to the Private
Debt Agreements described above.
The following table summarizes the effect on interest expense of the
Transaction:
<TABLE>
<CAPTION>
INTEREST INTEREST
AMOUNT RATE EXPENSE
------- -------- --------
<S> <C> <C> <C>
DEBT REPAID OR MODIFIED
Petro 12 1/4% Senior Subordinated Debentures......... $84,094 12.25% $9,953
Petro 10 1/8% Senior Subordinated Notes.............. 50,000 10.125% 5,063
Petro 9 3/8% Senior Subordinated Debentures.......... 75,000 9.375% 7,031
Petro 11.96% Notes(1)................................ 60,000 11.96% 7,176
Petro 14.10% Notes(1)................................ 6,884 14.10% 971
Lower letter of credit fees on Acquisition Notes..... 181
------
Total Reductions to Interest Expense................. 30,375
------
</TABLE>
188
<PAGE>
<TABLE>
<CAPTION>
INTEREST INTEREST
AMOUNT RATE EXPENSE
-------- -------- --------
<S> <C> <C> <C>
NEW DEBT ISSUED OR MODIFIED DEBT AMOUNTS
Petro 9.75% Notes due 2010........................ $120,000 9.75% $(11,700)
Petro 9.0% Senior Notes(1)........................ 63,126 9.00% (5,680)
Petro 10% Senior and Subordinated Notes(1)........ 6,884 10.25% (697)
--------
Total Additions to Interest Expense.............. (18,077)
--------
Net Reduction to Interest Expense.................. $ 12,298
========
</TABLE>
- --------
(1)Notes to be exchanged under the Private Debt Agreement.
(q) The Partnership Agreement provides that for each full non-overlapping
four quarter period ending on or after the first anniversary of the completion
of the Transaction, but prior to the fifth anniversary of the completion of the
Transaction, in which the dollar amount of Petro Adjusted Operating Surplus per
Petro Unit equals or exceeds $2.90, The Partnership will issue 303,000 Senior
Subordinated Units (or 303,000 Class B Common Units if such issuance occurs
after the end of the Subordination Period) to the holders of the Senior
Subordinated Units, Junior Subordinated Units and the General Partner Units,
provided that the Partnership may not issue more than 909,000 Senior
Subordinated Units or Class B Common Units in the aggregate pursuant to this
provision.
If these Senior Subordinated Units are issued and they are converted into
Class B Common Units, the Class A Common Units would be diluted in terms of
available cash to be used for payment of the quarterly distributions.
189
<PAGE>
GLOSSARY OF TERMS
Acquisition: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other form
of investment) control over all or a portion of the assets, properties or
business of another person for the purpose of increasing the operating capacity
of the Partnership Group over the operating capacity of the Partnership Group
existing immediately prior to such transaction.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period as adjusted to (a) decrease Operating Surplus by
(i) any net increase in working capital borrowings during such period and (ii)
any net reduction in cash reserves for Operating Expenditures during such
period not relating to an Operating Expenditure made during such period, and
(b) increase Operating Surplus by (i) any net decrease in working capital
borrowings during such period and (ii) any net increase in cash reserves for
Operating Expenditures during such period required by any debt instrument for
the repayment of principal, interest or premium. Adjusted Operating Surplus
does not include that portion of Operating Surplus included in clause (a)(i) of
the definition of Operating Surplus.
Affiliate: With respect to any person, any other person that directly, or
indirectly through one or more intermediaries controls, is controlled by or is
under common control with, the person in question. As used herein, the term
"control" means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person, whether through
ownership of voting securities, by contract or otherwise.
Audit Committee: A committee of the board of directors of the general partner
composed entirely of two or more directors who are neither members, officers
nor employees of the general partner or members, stockholders (other than
holders of Common Units or Senior Subordinated Units), officers, directors or
employees of any Affiliate of the general partner.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from Working
Capital Borrowings subsequent to the end of such quarter; less
(b) the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the general partner to (i) provide for the proper
conduct of the business of the Partnership Group (including reserves for
future capital expenditures) subsequent to such quarter, (ii) provide funds
for Minimum Quarterly Distributions and Cumulative Common Unit Arrearages
in respect of any one or more of the next four quarters, or (iii) comply
with applicable law or any debt instrument or other agreement or obligation
to which any member of the Partnership Group is a party or its assets are
subject; provided, however, that the General Partner may not establish cash
reserves for distributions to the Senior-Subordinated Units unless the
General Partner has determined that in its judgment the establishment of
reserves will not prevent the Partnership from distributing the Minimum
Quarterly Distribution on all Common Units and any Common Unit Arrearages
thereon with respect to the next four quarters; and,
190
<PAGE>
provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash with respect
to such quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining Available Cash, within such quarter
if the General Partner so determines.
Capital Account: The capital account maintained for a Partner pursuant to the
Partnership Agreement. The Capital Account in respect of a Common Unit, a
Subordinated Unit, a Junior Subordinated Unit, a General Partner Unit or any
other specified interest in the Partnership shall be the amount which such
Capital Account would be if such Common Unit, Subordinated Unit, Junior
Subordinated Unit, General Partner Unit or other interest in the Partnership
were the only interest in the Partnership held by a Partner.
Capital Improvements: Additions or improvements to the capital assets owned
by any member of the Partnership Group or the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities and related assets), made
to increase the operating capacity of the Partnership Group from the operating
capacity of the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
Capital Surplus: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Partnership equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
Cause: A court of competent jurisdiction has entered a final, non-appealable
judgment finding the general partner liable for actual fraud, gross negligence
or willful or wanton misconduct in its capacity as a general partner of the
Partnership.
Class A Common Unit: A Unit representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees and having the rights and
obligations specified with respect to Class A Common Units in this Agreement;
no Class A Common Units shall be outstanding until the expiration of the
Subordination Period, at which time all Common Units Outstanding immediately
prior to the expiration of the Subordination Period shall be redesignated as
Class A Common Units.
Class B Common Unit: A Unit representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees and having the rights and
obligations specified with respect to Class B Common Units in this Agreement;
no Class B Common Units shall be outstanding until the expiration of the
Subordination Period, at which time each Outstanding Senior Subordinated Unit
and Junior Subordinated Unit shall convert into one Class B Common Unit.
Common Unit: A Unit representing a fractional part of the partnership
interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership
Agreement. All references in the Amended and Restated Partnership Agreement to
Common Units after the expiration of the Subordination Period shall be deemed
to be references to both Class A Common Units and Class B Common Units, unless
otherwise indicated.
191
<PAGE>
Common Unit Arrearage: With respect to any Common Unit, whenever issued, and
as to any quarter within the Subordination Period, the excess, if any, of (a)
the Minimum Quarterly Distribution with respect to such Common Unit over (b)
the sum of all Available Cash distributed with respect to such Common Unit in
respect of such quarter.
Cumulative Common Unit Arrearage: With respect to any Common Unit, whenever
issued, and as of the end of any quarter, the excess, if any, of (a) the sum
resulting from adding together the Common Unit Arrearage as to a Common Unit
issued in the Initial Offering for each of the quarters within the
Subordination Period ending on or before the last day of such quarter over (b)
the sum of any distributions of Operating Surplus theretofore made with respect
to such Common Unit (including any distributions to be made in respect of the
last of such quarters).
Current Market Price: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date. "Closing
Price" for any day means the last sale price on such day, regular way, or in
case no such sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange on
which the Units of such class are listed or admitted to trading or, if the
Units of such class are not listed or admitted to trading on any national
securities exchange, the last quoted price on such day, or, if not so quoted,
the average of the high bid and low asked prices on such day in the over-the-
counter market, as reported by the Nasdaq Stock Market or such other system
then in use, or if on any such day the Units of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in the Units of
such class selected by the Board of Directors of the general partner, or if on
any such day no market maker is making a market in the Units of such class, the
fair value of such Units on such day as determined reasonably and in good faith
by the Board of Directors of the general partner. "Trading Day" means a day on
which the principal national securities exchange on which Units of any class
are listed or admitted to trading is open for the transaction of business or,
if the Units of a class are not listed or admitted to trading on any national
securities exchange, a day on which banking institutions in New York City
generally are open.
Degree Day: Degree days measure the amount by which the average of the high
and low temperature on a given day is below 65 degrees Fahrenheit. For example,
if the high temperature is 60 degrees and the low temperature is 40 degrees for
a National Oceanic and Atmospheric Administration measurement location, the
average temperature is 50 degrees and the number of degree days for that day is
15.
EBITDA: Operating income plus depreciation, amortization and non-cash charges
(excluding expenses related to the Merger and the transactions contemplated
thereby). As used in this proxy statement, EBITDA is not intended to be
construed as an alternative to net income as an indicator of operating
performance, or as an alternative to cash flow as a measure of liquidity or
ability to service debt obligations.
192
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General Partner: Star Gas Corporation, a Delaware Corporation, until the
Effective Time and Star Gas LLC, a Delaware limited liability company, and its
successors, following the Effective Time.
General Partner Interest: The ownership interest of the General Partner in
the Partnership (in its capacity as a general partner without reference to any
Limited Partner Interest held by it) which after the Closing will be evidenced
by General Partner Units and includes any and all benefits to which the General
Partner is entitled as provided in this Agreement, together with all
obligations of the General Partner to comply with the terms and provisions of
this Agreement.
General Partner Unit: A Unit representing a fractional part of the General
Partner Interest and having the rights and obligations specified with respect
to the General Partner Interest.
Initial Common Units: The Common Units sold in the Initial Offering.
Initial Unit Price: With respect to each Common Unit, Senior Subordinated
Unit, Junior Subordinated Unit and General Partner Unit, $22.00 or with respect
to any other class or series of Units, the price per Unit at which such class
or series of Units is initially sold by the Partnership, as determined by the
General Partner, in each case adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
Units.
Interim Capital Transactions: (a) borrowings, refinancings or refundings of
indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any member of the Partnership Group, (b) sales of equity
interests (including Common Units sold to the underwriters pursuant to the
exercise of their over-allotment option) by any member of the Partnership Group
and (c) sales or other voluntary or involuntary dispositions of any assets of
any member of the Partnership Group (other than (i) sales or other dispositions
of inventory in the ordinary course of business, (ii) sales or other
dispositions of other current assets, including, without limitation,
receivables and accounts, in the ordinary course of business and (iii) sales or
other dispositions of assets as a part of normal retirements or replacements),
in each case prior to the commencement of the dissolution and liquidation of
the Partnership.
Initial Closing Date: December 20, 1995.
Initial Offering: The initial offering and sale of Common Units to the public
on December 20, 1995.
Junior Subordinated Unit: A Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Junior Subordinated Units in
the Amended and Restated Partnership Agreement.
Limited Partner Interest: The ownership interest of a Limited Partner in the
Partnership which is evidenced by Common Units, Senior Subordinated Units and
Junior Subordinated Units or other Partnership Securities and includes any and
all benefits to which a Limited Partner is entitled as provided in the Amended
and Restated Partnership Agreement, together with all obligations of a Limited
Partner to comply with the terms and provisions of the Amended and Restated
Partnership Agreement.
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Minimum Quarterly Distribution: $0.575 per Unit per Quarter; provided,
however, the Minimum Quarterly Distribution with respect to the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units for the
period commencing on the Effective Time and ending on June 30, 1999, shall be
equal to the product of $0.575 multiplied by a fraction of which the numerator
is the number of days in such period and of which the denominator is 91,
subject to adjustment as described in "Cash Distribution Policy--Distributions
from Capital Surplus" and "Cash Distribution Policy--Adjustment of Minimum
Quarterly Distribution and Target Distribution Levels."
Operating Expenditures: All Partnership Group expenditures, including taxes,
reimbursements of the general partner, debt service payments, and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a debt
shall not be an Operating Expenditure if the payment is (i) required for
the sale or other disposition of assets or (ii) made for the refinancing or
refunding of indebtedness with the proceeds from new indebtedness or from
the sale of equity interests. For purposes of the foregoing, at the
election and in the reasonable discretion of the general partner, any
payment of principal or premium shall be deemed to be refunded or
refinanced by any indebtedness incurred or to be incurred by the
Partnership Group within 180 days before or after such payment to the
extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements (as opposed to capital
expenditures made to maintain assets), (ii) payment of transaction expenses
relating to Interim Capital Transactions (iii) payment of transaction
expenses related to the Merger and the transactions contemplated thereby or
(iv) distributions to partners. Where capital expenditures are made in part
for Acquisitions or Capital Improvements and in part for other purposes,
the general partner's good faith allocation between the amounts paid for
each shall be conclusive.
Operating Partnership: Star Gas Propane, L.P., a Delaware limited
partnership, and any of its successors.
Operating Partnership Agreement: The Amended and Restated Partnership
Agreement for the Operating Partnership (the form of which has been filed as an
exhibit to the Registration Statement of which this proxy statement is a part).
Operating Surplus: As to any period prior to liquidation:
(a) the sum of (i) $16.7 million plus all cash of the Partnership Group
on hand as of the close of business on the Initial Closing Date, (ii) all
the cash receipts of the Partnership Group for the period beginning on the
Initial Closing Date and ending with the last day of such period, other
than cash receipts from Interim Capital Transactions (except to the extent
specified in the Amended and Restated Partnership Agreement and (iii) all
cash receipts of the Partnership Group after the end of such period but on
or before the date of determination of Operating Surplus with respect to
such period resulting from borrowings for working capital purposes, less
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(b) the sum of (i) Operating Expenditures for the period beginning on the
Initial Closing Date and ending with the last day of such period and (ii)
the amount of cash reserves that is necessary or advisable in the
reasonable discretion of the general partner to provide funds for future
Operating Expenditures; provided, however, that disbursements made
(including contributions to a Group Member or disbursements on behalf of a
Group Member) or cash reserves established, increased or reduced after the
end of such period but on or before the date of determination of Available
Cash with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining Operating
Surplus, within such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
Opinion of Counsel: An opinion of counsel to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Partnership or cause the Partnership to be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes.
Partnership: Star Gas Partners, L.P., a Delaware limited partnership, and any
of its successors
Partnership Agreement: The partnership agreement for the Partnership, as
currently in effect, and unless the context requires otherwise, references to
the Partnership Agreement constitute references to the Partnership Agreements
of the Partnership and of the Operating Partnership, collectively.
Partnership Group: The Partnership, the Operating Partnership and any
subsidiary of either such entity, treated as a single consolidated entity.
Petro Adjusted Operating Surplus: With respect to any four-quarter period,
the Adjusted Operating Surplus generated by Petro (which for purposes of this
definition includes all subsidiaries of the Partnership primarily engaged in
the home heating oil business) during such four-quarter period, as determined
in good faith by a majority of the members of the Board of Directors of the
General Partner (with the concurrence of the Audit Committee). In calculating
Petro Adjusted Operating Surplus, (i) debt service (including the payment of
principal, interest and premium) on all debt incurred or assumed by Petro or
any of its affiliates, the proceeds of which are used by or for the benefit of
Petro (including the proceeds from the Debt Offering), shall be included to the
extent such debt service is included in the calculation of Operating Surplus,
and (ii) debt service (including the payment of principal, interest and
premium) on all debt incurred or assumed by Petro or any of its affiliates, the
proceeds of which are not used by or for the benefit of Petro, shall be
excluded.
Petro Units: With respect to any date, means the sum of (i) the excess of the
number of Units outstanding at the Effective Time over the number of Units
outstanding immediately prior to the
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Effective Time (assuming the simultaneous closing of the Equity Offering), (ii)
the number of Units issued by the Partnership thereafter to the extent the net
proceeds of which are contributed to Petro (which for purposes hereof includes
all subsidiaries of the Partnership primarily engaged in the home heating oil
business), (iii) the number of additional Senior Subordinated Units or Class B
Common Units issued pursuant to the Amended and Restated Partnership Agreement
if Petro meets certain financial targets, and (iv) the deemed number of Units
outstanding based upon a contribution of capital to Petro by the Partnership or
any affiliate thereof after the Effective Time (which contribution is not
covered by (ii) above or traceable to debt proceeds), which number of deemed
Units is obtained by dividing (A) the amount of such contribution by (B) the
Current Market Price of a Common Unit (or of a Class A Common Unit after the
termination of the Subordination Period). If Petro pays down debt of Petro or
debt allocated to Petro from internally generated funds of Petro and if those
internally generated funds exist at Petro only because Petro has not paid
dividends up to the Partnership in an amount equal to the distributions that
would have been paid on the Petro Units had they been actual outstanding Units
of the Partnership, then the amount used to pay down such debt will be treated
as if it were contributed to Petro by the Partnership. The distribution per
Senior Subordinated Unit of the Partnership shall be the amount that the
Partnership would have been deemed to have distributed per Petro Unit had they
been actual outstanding Units of the Partnership. For purposes of the number of
deemed outstanding Units in (iv) above, such Units shall be deemed to be issued
on the date of such Capital Contribution. For this purpose, Common Unit means
Class A Common Units upon expiration of the Subordination Period.
Senior Subordinated Unit: A Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees, and having the
rights and obligations specified with respect to Senior Subordinated Units in
the Amended and Restated Partnership Agreement.
Subordination Period: The Subordination Period will extend from the Initial
Closing Date until the first to occur of the following: (a) the first day of
any quarter beginning on or after October 1, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units, Senior Subordinated Units, Junior Subordinated Units
and General Partner Units equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Junior Subordinated
Units with respect to each of the three non-overlapping four-quarter periods
immediately preceding such date, (ii) the Adjusted Operating Surplus, generated
during each of the three immediately preceding, non-overlapping four quarter
periods equaled or exceeded the sum of Minimum Quarterly Distribution on all of
the Common Units, Senior Subordinated Units, Junior Subordinated Units and
General Partner Units that were outstanding during such periods on a fully
diluted basis with respect to employee options or other employee incentive
compensation (i.e., taking into account for purposes of such determination all
outstanding Common Units, Senior Subordinated Units, Junior Subordinated Units
and General Partner Units and all Common Units issuable upon exercise of
employee options that have, as of the date of determination, already vested or
are scheduled to vest prior to the end of the quarter immediately following the
quarter with respect to which determination is made, and all Units that have as
of the date of determination been earned by but not yet issued to management of
the Partnership in respect of incentive compensation) and (iii) there are no
arrearages in payment of the Minimum Quarterly Distribution on the Common
Units; and (b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by Limited Partners
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under circumstances where Cause does not exist; provided, however, that if the
General Partner is removed during the Subordination Period within 12 months
after the end of a six-quarter period in which the Minimum Quarterly
Distribution was not made on the Common Units with respect to more than one of
such quarters (excluding for this purpose the payment of any Common Unit
Arrearages) and the first quarter of such six-quarter period that the Minimum
Quarterly Distribution on Common Units was not made occurs after March 31,
2001, then the Subordination Period will not end. In the event that the General
Partner is removed under the circumstances described in the above proviso, the
Junior Subordinated Units shall convert into Senior Subordinated Units on a
one-for-one basis and the distribution rights on the General Partner Units will
rank equally with the Senior Subordinated Units.
Transfer Application: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
proxy statement as Appendix A, or in a form substantially to the same effect in
a separate instrument.
Unit: A Partnership Interest of a Partner or Assignee representing a
fractional part of the Partnership Interests of all Partners and Assignees and
shall include Common Units (Class A Common Units and Class B Common Units after
the expiration of the Subordination Period), Senior Subordinated Units, Junior
Subordinated Units and General Partner Units; provided that each Unit at any
time Outstanding shall represent the same fractional part of the Partnership
Interests of all Partners and Assignees holding Units as each other Unit. A
Unit shall not include a Petro Unit.
Unitholders: Holders of Units.
Unit Majority: During the Subordination Period, at least (i) a majority of
the outstanding Common Units voting as a class and (ii) a majority of the
outstanding Senior Subordinated Units and Junior Subordinated Units voting as a
single class, in each case excluding Units owned by the General Partner or any
Affiliate, and, after the Subordination Period has ended, at least a majority
of the outstanding Common Units.
Unrecovered Initial Unit Price: At any time, with respect to Common Units,
Senior Subordinated Units, Junior Subordinated Units or General Partner Units,
the Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any distributions in kind)
for the dissolution and liquidation of the Partnership theretofore made in
respect of an Initial Common Unit, adjusted as the General Partner determines
to be appropriate to give effect to any distribution, subdivision or
combination of Units.
Working Capital Borrowings: Borrowings pursuant to a facility or other
arrangement requiring all of its borrowings to be reduced to a relatively small
amount each year for an economically meaningful period of time. Borrowings that
are not intended exclusively for working capital purposes shall not be treated
as Working Capital Borrowings.
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APPENDIX A
No transfer of the Units evidenced hereby will be registered on the books of
the Partnership unless the Certificate evidencing the Units to be transferred
is surrendered for registration or transfer and an Application for Transfer of
Units has been executed by a transferee either (a) on the form set forth below
or (b) on a separate application that the Partnership will furnish on request
without charge. A transferor of the Units shall have no duty to the transferee
with respect to execution of the transfer application in order for such
transferee to obtain registration of the transfer of the Units.
APPLICATION FOR TRANSFER OF UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner
(evidenced by a credit to the account of the undersigned at The Depository
Trust Company in the name of its nominee, Cede & Co.) and agrees to comply with
and be bound by, and hereby executes, the Agreement of Limited Partnership of
Star Gas Partners, L.P. (the "Partnership"), as amended, supplemented or
restated to the date hereof (the "Partnership Agreement") (b) represents and
warrants that the Assignee has all right, power and authority and, if an
individual, the capacity necessary to enter into the Partnership Agreement, (c)
appoints the General Partner and, if a Liquidator shall be appointed, the
Liquidator of the Partnership as the Assignee's attorney-in fact to execute,
swear to, acknowledge and file any document, including, without limitation, the
Partnership Agreement and any amendment thereto and the Certificate of Limited
Partnership of the Partnership and any amendment thereto, necessary or
appropriate for the Assignee's admission as a Substituted Limited Partner and
as a party to the Partnership Agreement, (d) gives the powers of attorney
provided for in the Partnership Agreement and (e) makes the waivers and gives
the consents and approvals contained in the Partnership Agreement. Capitalized
terms not defined herein have the meanings assigned to such terms in the
Partnership Agreement.
Date: ___________________________
- -------------------------------------
Signature of Assignee
- -------------------------------------
Social Security or other identifying number of Assignee
- -------------------------------------
- -------------------------------------
- -------------------------------------
App-1
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Name and Address of Assignee
- -------------------------------------
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual
[_] Trust
[_] Partnership
[_] Other (specify) _______________________________________________
[_] Corporation
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Foreign Corporation
[_] Non-resident Alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income
taxation.
2. My U.S. taxpayer identification number (Social Security Number)
is _____________________________________________________________________
3. My home address is ________________________________________________
B. Partnership, Corporation or Other Interestholder
1. (Name of Interestholder) is not a foreign corporation,
foreign partnership, foreign trust or foreign estate (as those terms
are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is _______
3. The interestholder's office address and place of incorporation (if
applicable) is _________________________________________________________
------------------------------------------------------------------------
App-2
<PAGE>
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
(Name of Interestholder)
-------------------------
Signature and Date -------------------------
Title (if applicable)-------------------------
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Units shall
be made to the best of the Assignee's knowledge.
App-3
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PETROLEUM HEAT AND POWER CO., INC.
STAR GAS PARTNERS L.P.
PETRO/MERGECO, INC.
AND
STAR GAS PROPANE, L.P.
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
PAGE
ARTICLE I.
CERTAIN DEFINITIONS
<TABLE>
<C> <S> <C>
1.1. Certain Definitions................................................. 1
ARTICLE II.
THE MERGER; EFFECTS OF THE MERGER
2.1. The Merger.......................................................... 11
2.2. Effective Date And Closing.......................................... 12
ARTICLE III.
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.1. Merger Consideration................................................ 12
3.2. Rights As Stockholders; Stock Transfers............................. 13
3.3. Fractional Shares................................................... 13
3.4. Exchange Procedures................................................. 14
3.5. Anti-Dilution Provisions............................................ 16
3.6. Shares of Dissenting Common Holders................................. 16
3.7. Options............................................................. 16
ARTICLE IV.
ACTIONS PENDING MERGER
4.1. Ordinary Course..................................................... 17
4.2. Capital Stock....................................................... 17
4.3. Dividends, Distributions............................................ 17
4.4. Compensation; Employment Agreements................................. 18
4.5. Benefit Plans....................................................... 18
4.6. Acquisitions And Dispositions....................................... 18
4.7. Amendments.......................................................... 19
4.8. Accounting Methods.................................................. 19
4.9. Insurance........................................................... 19
4.10. Notification........................................................ 19
4.11. Taxes............................................................... 19
4.12. Debt, Capital Expenditures and the Like............................. 19
4.13. No Dissolution...................................................... 19
4.14. Adverse Actions..................................................... 20
4.15. Agreements.......................................................... 20
ARTICLE V.
REPRESENTATIONS AND WARRANT
5.1. Disclosure Schedule................................................. 20
5.2. Standard............................................................ 20
5.3. Representations And Warranties...................................... 20
ARTICLE VI.
COVENANTS
6.1. Best Efforts........................................................ 31
6.2. Equityholder Approvals.............................................. 31
6.3. Registration Statements............................................. 32
6.4. Modification of Petro Indentures and Preferred Stock................ 33
</TABLE>
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<TABLE>
<C> <S> <C>
6.5. Press Releases..................................................... 34
6.6. Access; Information................................................ 34
6.7. Acquisition Proposals.............................................. 35
6.8. Affiliate Arrangements............................................. 35
6.9. Takeover Laws...................................................... 36
6.10. No Rights Triggered................................................ 36
6.11. Senior Subordinated Units Listed................................... 36
6.12. Third Party Approvals.............................................. 36
6.13. Indemnification; Directors' and Officers' Insurance................ 37
6.14. Benefit Plans...................................................... 39
6.15. Notification Of Certain Matters.................................... 40
6.16. New Director for Star Gas LLC...................................... 40
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1. Shareholder Vote................................................... 40
7.2. Governmental Approvals............................................. 40
7.3. No Injunction...................................................... 40
7.4. Representations, Warranties And Covenants Of Star Partners......... 41
7.5. Representations, Warranties And Covenants Of Petro................. 41
7.6. Effective Merger Registration Statement............................ 41
7.7. Opinion............................................................ 42
7.8. Opinion of Petro's Counsel......................................... 42
7.9. NYSE Listing....................................................... 43
7.10. Affiliate Arrangements............................................. 43
7.11. Fairness Opinion................................................... 43
7.12. Public Offerings................................................... 43
7.13. Refinancing Conditions............................................. 43
7.14. Dissenters' Rights................................................. 45
7.15. Covenant Not to Compete............................................ 45
7.16. Working Capital Loan............................................... 45
7.17. Debt Offering...................................................... 45
7.18. Restructuring Transactions......................................... 45
7.19. Special Committee.................................................. 45
7.20. Custody Agreement.................................................. 45
ARTICLE VIII.
TERMINATION
8.1. Termination........................................................ 45
8.2... Effect Of Termination And Abandonment.............................. 46
ARTICLE IX
MISCELLANEOUS
9.1. Survival........................................................... 47
9.2. Waiver; Amendment.................................................. 47
9.3. Counterparts....................................................... 47
9.4. Governing Law...................................................... 47
9.5. Expenses........................................................... 47
9.6. Confidentiality.................................................... 47
9.7. Notices............................................................ 47
9.8. Entire Understanding; No Third Party Beneficiaries................. 48
9.9. Headings........................................................... 49
</TABLE>
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EXHIBITS
<TABLE>
<C> <S>
Exhibit A Amended and Restated Partnership Agreement
Exhibit B Amended and Restated Operating Partnership Agreement
Exhibit C Petro Conveyance Agreement
Exhibit D Star LLC Conveyance Agreement
Exhibit E Covenant Not To Compete of Irik P. Sevin
</TABLE>
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DISCLOSURE SCHEDULES
<TABLE>
<C> <C> <S>
(S) 4.2 (Petro only) Capital stock; issuance of additional shares
(S) 4.4 (Petro only) Compensation; Employment Agreements
(S) 4.6 (Petro only) Acquisition and Dispositions
(S) 4.12 (Petro only) 1998 Capital Budget
Shares; Shares/Units reserved for issuance;
(S) 5.3 (b) stock options
(S) 5.3 (c) Subsidiaries
(S) 5.3 (f) No defaults
(S) 5.3 (h) Litigation
Compliance with laws (exception for no
(S) 5.3 (i) Material Adverse Effect)
(S) 5.3 (l) (i) Compensation and Benefit Plans
Disclosures concerning pension plans, multi-
(S) 5.3 (l) (iv) employer plans
Excess of benefit liabilities over current
(S) 5.3 (l) (vi) value of assets
(S) 5.3 (l) (viii) Golden parachutes, etc.
(S) 5.3 (m) Collective bargaining agreement
(S) 5.3 (p) Regulatory approval
(S) 5.3 (t) Intellectual property
</TABLE>
iv
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AGREEMENT AND PLAN OF MERGER, dated as of October 22, 1998 (this
"Agreement"), by and among PETROLEUM HEAT AND POWER CO., INC., a Minnesota
corporation ("Petro"), STAR GAS PARTNERS, L.P., a Delaware limited partnership
("Star Partners"), STAR GAS PROPANE, L.P., a Delaware limited partnership
("Star Propane"), and PETRO/MERGECO, INC., a Minnesota corporation ("Mergeco")
and an indirect, wholly owned subsidiary of Star Partners.
WITNESSETH:
WHEREAS, the Board of Directors of Petro and the Board of Directors of Star
Gas Corporation, the general partner of Star Partners and Star Propane, upon
the recommendation of the Special Committee of the Board of Directors of the
General Partner, have determined that it is in the best interests of their
respective companies and their equity holders to consummate the business
combination provided for herein pursuant to which Mergeco will, subject to the
terms and conditions set forth herein, merge (the "Merger") with and into
Petro, with Petro surviving as an indirect, wholly owned subsidiary of Star
Partners;
WHEREAS, on or prior to the date hereof, the Tax Free Group (as defined
herein) and Star Partners have executed the Exchange Agreement (as defined
herein);
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS
1.1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
"Affiliate" shall have the meaning set forth in Section 6.8(a).
"Agreement" shall have the meaning set forth in the introductory paragraph to
this Agreement.
"Amended and Restated Operating Partnership Agreement" shall mean the Amended
and Restated Operating Partnership Agreement substantially in the form attached
hereto as Exhibit B.
"Amended and Restated Partnership Agreement" shall mean the Amended and
Restated Partnership Agreement substantially in the form attached hereto as
Exhibit A.
"Articles of Merger" shall have the meaning set forth in Section 2.1(b).
"Certificate of Merger" shall have the meaning set forth in Section 2.1(b).
"Certificates" shall have the meaning set forth in Section 3.4(b).
A-1
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"Closing" shall have the meaning set forth in Section 2.2.
"Closing Date" shall have the meaning set forth in Section 2.2.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Units" shall mean the common units representing limited partner
interests of Star Partners having the rights and obligations specified with
respect to Common Units in the Amended and Restated Partnership Agreement.
"Compensation and Benefit Plans" shall have the meaning set forth in Section
5.3(1).
"Cost of Capital" shall mean the sum of (a) the number of Common Units and
Subordinated Units issued in the Equity Offering (excluding any Common Units or
Subordinated Units issued pursuant to the exercise of an over-allotment option)
multiplied by $2.30 and (b) the principal amount of debt issued in the Debt
Offering multiplied by the interest rate on such debt.
"Custody Agreement" shall mean the Custody Agreement among the members of the
Tax Free Group and American Stock Transfer and Trust substantially in the form
annexed to the Exchange Agreement.
"Dain Rauscher Wessels" shall mean Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated.
"Debt Offering" shall mean a public offering by a wholly owned subsidiary of
Star Propane of nonconvertible debt securities with gross proceeds of not more
than $120 million with total underwriting discounts and commissions not to
exceed 3% of the aggregate principal amount offered to the public, the proceeds
of which shall be used to refinance a portion of the Public Debt.
"Debt Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Designated Percentage" shall mean a percentage of between 0% and 100%
recommended by the Chief Financial Officer of Petro and approved by the Special
Committee, not more than 10 business days and not less than two business days
before the Closing Date.
"DGCL" shall mean the Delaware General Corporation Law.
"Disclosure Schedule" shall have the meaning set forth in Section 5.1.
"Dissenting Common Holders" shall mean Petro shareholders who comply with all
provisions of the MBCA concerning their right to object to and dissent from the
Merger and demand "fair value" for their shares.
"Effective Time" shall have the meaning set forth in Section 2.1(b).
"Environmental Laws" shall mean all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the
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Clean Water Act, the Federal Clean Air Act, and the Occupational Safety and
Health Act, each as amended, regulations promulgated thereunder, and state
counterparts.
"Equity Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Equity Offering" shall mean a public offering by Star Partners of Common
Units or Senior Subordinated Units with gross proceeds of not less than $110
million and not more than $140 million, as determined by Petro (excluding any
proceeds received from the exercise of the underwriters' over-allotment option,
which will not exceed 15% of the number of Common Units or Senior Subordinated
Units initially issued in the public offering), with total underwriting
discounts and commissions not to exceed 5% of the aggregate price to the
public.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall have the meaning set forth in Section 5.3(1)(iv).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" shall mean American Stock Transfer & Trust Company or such
other entity as may be selected by Star Partners subject to the reasonable
approval of Petro.
"Exchange Agreement" shall mean the Exchange Agreement among the members of
the Tax Free Group and Star Partners dated as of October 17, 1998.
"Exchange Fund" shall have the meaning set forth in Section 3.4(a).
"General Partner" shall mean Star Gas Corporation, a Delaware corporation,
and its successors and permitted assigns as general partner of Star Partners
and Star Propane.
"General Partner Units" shall mean the general partner units representing a
general partner interest in Star Partners having the rights and obligations
specified with respect to General Partner Units in the Amended and Restated
Partnership Agreement.
"HSRA" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder.
"Indemnified Party" shall have the meaning set forth in Section 6.13(a).
"Joint Proxy Statement" shall have the meaning set forth in Section 6.3(a).
"Junior Preferred Stock" shall mean Petro's 1998 Junior Convertible Preferred
Stock.
"Junior Subordinated Units" shall mean the junior subordinated units
representing limited partner interests of Star Partners having the rights and
obligations specified with respect to Junior Subordinated Units in the Amended
and Restated Partnership Agreement.
"Lien" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
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"MBCA" shall mean the Minnesota Business Corporation Act.
"Material Adverse Effect" shall mean, with respect to either Petro or Star
Partners, any effect that (i) is material and adverse to the financial
position, results of operations, business or prospects of Petro and its
Subsidiaries taken as a whole, or Star Partners and its Subsidiaries taken as a
whole, respectively, or (ii) would materially impair the ability of Petro or
Star Partners, respectively, to perform its obligations under this Agreement or
otherwise materially threaten or materially impede the consummation of the
Merger and the other transactions contemplated by this Agreement; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of (a) actions or omissions of Petro or Star Partners taken with the prior
written consent of Petro or the Special Committee, as applicable, in connection
with the transactions contemplated hereby (as long as the material facts known
to the requesting party concerning such actions or omissions were disclosed to
the consenting party at the time it gave its consent), (b) circumstances
affecting home heating oil companies or propane companies generally, and (c)
the effects of the Merger and compliance by either party with the provisions of
this Agreement on the business, financial condition or results of operations of
such party and its Subsidiaries, or the other party and its Subsidiaries, as
the case may be.
"Meeting" shall have the meaning set forth in Section 6.2.
"Merger" shall have the meaning set forth in the recitals to this Agreement
and in Section 2.1(a).
"Merger Consideration" shall have the meaning set forth in Sections 2.1(a)
and 3(1).
"Merger Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Multiemployer Plans" shall have the meaning set forth in Section
5.3(1)(iii).
"New Certificates" shall have the meaning set forth in Section 3.4(a).
"Newco" shall mean Petro Holdings Inc., a Minnesota corporation and a wholly
owned subsidiary of Parentco."
"Non-Compliance Event" shall have the meaning set forth in Section
5(3)(i)(i).
"Non-Compliance Notification" shall have the meaning set forth in Section
5(3)(i)(iii).
"NYSE" shall mean the New York Stock Exchange.
"Old Subordinated Units" shall mean the subordinated units representing
limited partner interests of Star Partners having the rights and obligations
specified with respect to Subordinated Units in the Partnership Agreement.
"Operating Partnership Agreement" shall mean the Agreement of Limited
Partnership of Star Propane, as in effect immediately prior to the Effective
Time.
"Operating Partnership Agreement Amendments" shall mean the amendments to the
Operating Partnership Agreement effected in the Amended and Restated Operating
Partnership Agreement.
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"Parentco" shall mean Star/Petro, Inc., a Minnesota corporation and a wholly
owned subsidiary of the Star Propane.
"Partnership Agreement" shall mean the Agreement of Limited Partnership of
Star Partners, as in effect immediately prior to the Effective Time.
"Partnership Agreement Amendments" shall mean the amendments to the
Partnership Agreement effected in the Amended and Restated Partnership
Agreement.
"Pension Plan" shall have the meaning set forth in Section 5.3(1)(iii).
"Permitting Violation" shall have the meaning set forth in Section
5(3)(i)(ii).
"Person" or "person" shall mean any individual, bank, corporation,
partnership, limited liability company, association, joint-stock company,
business trust or unincorporated organization.
"Petro Class A Common Stock" means the Class A Common Stock, par value $.10
per share of Petro.
"Petro Class B Common Stock" means the Class B common Stock, par value $.10
per share of Petro.
"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
per share of Petro.
"Petro Common Stock" shall mean shares of Petro Class A Common Stock and
Class C Common Stock without distinction as to class.
"Petro Conveyance Agreement" shall mean the Conveyance and Contribution
Agreement among Petro, Star Partners and Star Propane to be entered into as of
the Closing Date substantially in the form of Exhibit C.
"Petro Directors" shall mean the members of the Board of Directors of Petro.
"Petro's Disclosure Schedule" shall mean the Disclosure Schedule delivered by
Petro pursuant to Section 5.1.
"Petro Insiders" shall mean Irik P. Sevin, Audrey L. Sevin, Phillip Ean
Cohen, Thomas J. Edelman, Richard O'Connell, Brentwood Corp., Gabes S.A.,
Minneford Corp., Fernando Montero, M.M. Warburg & Co., Hanseatic Corp.,
Hanseatic Americas LDC, Barcel Corp., Hubertus Langen, Tortosa GmbH, Paul
Biddelman and United Capital Corp.
"Petro Meeting" shall have the meaning set forth in Section 6.2.
"Petro Preferred Stock" shall mean collectively the Junior Preferred Stock,
the Private Preferred Stock and the Public Preferred Stock.
"Petro Stock Option" shall have the meaning set forth in Section 3.7.
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"Petro Stock Option Plans" shall have the meaning set forth in Section 3.7.
"Plans" shall have the meaning set forth in Section 5(3)(l)(iii).
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule.
"Private Debt" means Petro's 11.85% Senior Notes due October 1, 2002, Petro's
12.17% Senior Notes due October 1, 2002 and Petro's 12.18% Senior Notes due
October 1, 2002.
"Private Preferred Stock" shall mean Petro's 1989 Preferred Stock due 1999.
"Public Debt" means Petro's 10 1/8% Subordinated Notes due 2003, Petro's 9
3/8% Subordinated Debentures due 2006 and Petro's 12 1/4% Subordinated
Debentures due 2005.
"Public Preferred Stock" means Petro's 12 7/8% Series B and Series C
Exchangeable Preferred Stock due 2009.
"Registration Statements" shall have the meaning set forth in Section 6.3.
"Regulatory Authorities" shall have the meaning set forth in Section
5.3(h)(ii).
"Restructuring Transactions" shall mean the following, collectively:
1. the sale of the Designated Percentage of certain assets (the
"Transferred Assets") by Petro or Subsidiaries of Petro to Star Propane in
exchange for a note (the "Bridge Note"), as contemplated by the Petro
Conveyance Agreement;
2. the sale by the General Partner of its general partnership interests
in Star Partners and Star Propane and its subordinated limited partnership
interests and common limited partnership interests in Star Partners to
Petro for a note in the principal amount of $41,146,000;
3. the contribution by Petro of (i) all of its general partner interest
in Star Propane (other than a portion of such interest with a value of
approximately $1,000) to Star Partners in exchange for 54,316 newly issued
Senior Subordinated Units and (ii) all of its general partner interest in
Star Partners (other than a portion of such interest with a value of
approximately $1,000) to Star Partners in exchange for 54,316 newly issued
Senior Subordinated Units) as contemplated by the Petro Conveyance
Agreement;
4. the conversion of all of Petro's Old Subordinated Units into 1,992,673
newly issued Senior Subordinated Units and 42,046 newly issued Common
Units;
5. the contribution by certain Petro Insiders of 1,753,546 shares of
Class A Common Stock Class C Common Stock (the "Insider Stock") to a newly
formed Delaware limited liability company ("Star Gas LLC") in exchange for
all the member interests in Star Gas LLC as contemplated in the Exchange
Agreement, the formation certificate and operating agreement to be subject
in form and substance to the approval of the Special Committee;
6. the contribution by Star Gas LLC of 9,244 of its Class A Common Stock
to Star Propane in exchange for a .01% general partner interest in Star
Propane as contemplated by the Star LLC Conveyance Agreement;
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7. the contribution by Star Gas LLC of 1,744,302 of its Class A and Class
C Common Stock to Star Partners in exchange for a 1.99% general partner
interest in Star Partners as contemplated by the Star LLC Conveyance
Agreement;
8. the contribution by certain members of the Tax Free Group of 8,733,735
their Class A and Class C Common Stock to Star Partners in exchange for
577,205 Junior Subordinated Units and 666,994 Senior Subordinated Units, as
contemplated in the Exchange Agreement;
9. the contribution by Star Partners of the Petro Common Stock owned by
it to Star Propane;
10. the contribution by Star Propane to Parentco of the Transferred
Assets, the stock of Petro and the stock of Stellar Propane Corp. in
exchange for all the capital stock of Parentco and the assumption by
Parentco of $85 million of Star Propane's 8.04% First Mortgage Notes and
$11 million of Star Propane's 7.17% First Mortgage Notes.
11. the contribution by Parentco of the Petro Common Stock and the
Transferred Assets owned by it to Newco free of any liability with respect
to the outstanding First Mortgage Notes of Star Partners; and
12. the contribution by Newco of the Petro Common Stock owned by it to
Mergeco.
"Rights" shall mean, with respect to any person, securities or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or acquire, or any options, calls or commitments relating to,
equity securities of such person.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 5.3(g).
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Senior Subordinated Units" shall mean the senior subordinated units
representing limited partner interests of Star Partners having the rights and
obligations specified with respect to Senior Subordinated Units in the Amended
and Restated Partnership Agreement.
"Significant Subsidiaries" shall have the meaning ascribed to such term in
Section 1-01(w) of Regulation S-X under the Securities Act.
"Special Committee" means the special committee of the Board of Directors of
the General Partner consisting of William Nicoletti and Elizabeth Lanier.
"Star Gas LLC" shall mean Star Gas LLC, a newly-created Delaware limited
liability company that will succeed Star Gas Corporation as the general partner
of the partnership.
"Star LLC Conveyance Agreement" shall mean the Conveyance and Contribution
Agreement among Star Gas LLC, Star Propane and Star Partners to be entered into
as of the Closing Date substantially in the form of Exhibit D.
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"Star Partners" shall have the meaning set forth in the introductory
paragraph to this Agreement.
"Star Partners' Disclosure Schedule" shall mean the Disclosure Schedule
delivered by Star Partners pursuant to Section 5.1.
"Star Partners Meeting" shall have the meaning set forth in Section 6.2.
"Star Propane" shall have the meaning set forth in the introductory paragraph
to this Agreement.
"Star Propane Debt Conditions" shall mean the Holders of Star Propane's 8.04%
First Mortgage Notes due 2009 and Star Propane's outstanding bank credit
facilities shall have consented to the execution, delivery and performance of
this Agreement by Star Propane or shall have entered into amendments permitting
the execution, delivery and performance of this Agreement by Star Propane
without violation of the terms of such indebtedness and without a requirement
that such indebtedness be repurchased (or an offer be made to purchase such
indebtedness).
"Subsidiary" shall have the meaning ascribed to such term in Rule 1-02 of
Regulation S-X under the Securities Act.
"Surviving Corporation" shall have the meaning set forth in Section 2.1(a).
"Takeover Law" means any "fair price", "moratorium", "control share
acquisition" or any other anti-takeover statute or similar statute enacted
under state or federal law.
"Takeover Proposal" shall mean, with respect to Petro, any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving Petro or any of its Subsidiaries or any proposal or offer to acquire
in any manner a substantial equity interest in, or a substantial portion of the
assets of, Petro or any of its Subsidiaries other than the transactions
contemplated or permitted by this Agreement.
"Tax Returns" shall have the meaning set forth in Section 5.3(o).
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
including, without limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, goods and services, capital, transfer, franchise,
profits, license, withholding, payroll, employment, employer health, excise,
estimated, severance, stamp, occupation, property or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
"Treasury Shares" shall mean shares of Petro Common Stock owned by Petro at
the Effective Time.
"Working Capital" when applied to Petro, shall mean Petro's current assets
minus current liabilities determined in accordance with generally accepted
accounting principles applied on a consistent basis provided that (i)
restricted cash shall be excluded from current assets to the extent such
restricted cash remains restricted immediately following the Effective Time and
relates to
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indebtedness due in more than one year, (ii) draws under Petro's bank working
capital facility shall be included in current liabilities, (iii) the current
maturities of all other Petro long-term indebtedness and preferred stock shall
be excluded from current liabilities, and (iv) expenses of the type described
in Section 7.13(d) shall be included as a current liability to the extent not
financed in the Debt Offering or the Equity Offering.
ARTICLE II.ARTICLE II.
THE MERGER; EFFECTS OF THE MERGER
2.1. The Merger.
(a) The Surviving Corporation. Subject to the terms and conditions of this
Agreement, at the Effective Time, Mergeco shall merge with and into Petro (the
"Merger"), the separate corporate existence of Mergeco shall cease and Petro
shall survive and continue to exist as a Minnesota corporation (Petro, as the
surviving corporation in the Merger, sometimes being referred to herein as the
"Surviving Corporation"). Star Partners, with the consent of the Special
Committee, may at any time change the method of effecting the Merger
(including, without limitation, the provisions of this Article II) if and to
the extent it deems such change to be desirable; provided, however, that no
such change shall (A) alter or change the amount or kind of consideration to be
issued to holders of Petro Common Stock or Petro Preferred Stock as provided
for in this Agreement (the "Merger Consideration"), (B) adversely affect the
tax treatment of Petro's stockholders as a result of receiving the Merger
Consideration or (C) materially impede or delay consummation of the
transactions contemplated by this Agreement.
(b) Effectiveness And Effects Of The Merger. Subject to the satisfaction or
waiver of the conditions set forth in Article VII in accordance with this
Agreement, the Merger shall become effective upon the later to occur of (i) the
filing in the office of the Secretary of State of Delaware of a properly
executed certificate of merger (the "Certificate of Merger") and (ii) the
filing with the Department of State of Minnesota of properly executed articles
of merger (the "Articles of Merger"), or such later date and time as may be set
forth in the Certificate of Merger and the Articles of Merger (the "Effective
Time"), in accordance with the DGCL and the MBCA. The Merger shall have the
effects prescribed in DGCL and the MBCA.
(c) Certificate Of Incorporation And By-Laws. The certificate of
incorporation and by-laws of Petro in effect immediately prior to the Effective
Time shall be the certificate of incorporation and bylaws of the Surviving
Corporation, until duly amended in accordance with applicable law.
(d) Directors of the Surviving Corporation. The directors of Petro who are
also employees of Petro immediately prior to the Effective time shall be the
directors of the Surviving Corporation as of the Effective Time.
(e) Officers of the Surviving Corporation. The officers of Petro immediately
prior to the Effective Time shall be the officers of the Surviving Corporation
as of the Effective Time.
2.2. Effective Date And Closing. Subject to the satisfaction or waiver of the
conditions as set forth in Article VII in accordance with this Agreement, the
closing of the Merger and the other
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transactions contemplated hereby (the "Closing") shall occur on (a) the third
business day to occur after the day on which the last of the conditions set
forth in Article VII shall have been satisfied or waived in accordance with the
terms of this Agreement provided that such date shall not be earlier than
February 15, 1999 or (b) such other date to which the parties may agree in
writing. The date on which the Closing occurs is referred to as the "Closing
Date." The Closing of the transactions contemplated by this Agreement shall
take place at the offices of Phillips Nizer Benjamin Krim & Ballon LLP, 666
Fifth Avenue, New York, New York 10103 at 10:00 a.m. New York City time on the
Closing Date.
ARTICLE III.
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.1. Merger Consideration. Subject to the provisions of this Agreement, at
the Effective Time, by virtue of the Merger and without any action on the part
of any holder of capital stock of any party:
(a) Each share of the common stock, par value $.01 per share, of Mergeco
outstanding immediately prior to the Effective Time shall be converted into
and become one fully paid and nonassessable share of Common Stock, par
value $.10, of the Surviving Corporation.
(b) Each Treasury Share and each share of Petro Common Stock owned by
Mergeco shall cease to be outstanding and shall be canceled and retired
without payment of any consideration therefor, and no partnership interest
of Star Partners or other consideration shall be delivered in exchange
therefor.
(c) Each share of Petro Common Stock issued and outstanding immediately
prior to the Effective Time (other than Treasury Shares, shares held by
Mergeco, and shares of Dissenting Common Holders) shall be converted into
the right to receive .13064 fully paid and nonassessable Senior
Subordinated Units.
(d) Each share of Junior Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive .13064 fully paid and nonassessable Common Units.
(e) Each share of Public Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive $23 in cash plus accrued and unpaid dividends as of the
Effective Time.
(f) Each share of Petro's Class B Common Stock, $.10 par value,
outstanding immediately prior to the Effective Time, shall be unchanged and
shall remain outstanding with the same relative rights, preferences and
privileges which it had immediately prior to the Effective Time.
3.2. Rights As Stockholders; Stock Transfers. At the Effective Time, holders
of Petro Common Stock, Junior Preferred Stock and Public Preferred Stock shall
cease to be, and shall have no rights, as stockholders of Petro, other than to
receive (a) any dividend or other distribution with respect to such Petro
Common Stock, Junior Preferred Stock or Public Preferred Stock with a record
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date occurring prior to the Effective Time that may have been declared or made
by Petro on such shares of Petro Common Stock, Junior Preferred Stock or Public
Preferred Stock in accordance with the terms of this Agreement or prior to the
date hereof and which remain unpaid at the Effective Time and (b) the
consideration provided under this Article III. After the Effective Time, there
shall be no transfers on the stock transfer books of the shares of Petro Common
Stock or Petro Preferred Stock.
3.3. Fractional Shares. No certificates or scrip representing fractional
Common Units or Senior Subordinated Units shall be issued upon the surrender
for exchange of Certificates pursuant to this Article III, and, except as
provided in Section 3.2 and this Section 3.3, no dividend or other
distribution, stock split or interest shall relate to any such fractional
security, and such fractional interests shall not entitle the owner thereof to
vote or to any rights of a security holder of Star Partners. In lieu thereof,
each holder of shares of Petro Common Stock who would otherwise have been
entitled to a fraction of a Senior Subordinated Unit upon surrender of
Certificates for exchange pursuant to this Article III will be paid an amount
in cash (without interest) equal to the closing price of the Senior
Subordinated Units on the first day of trading thereof on the NYSE (as reported
in The Wall Street Journal or, if not reported therein, in another
authoritative source) multiplied by the fractional interest the holder would
otherwise be entitled to receive, and each holder of shares of Junior Preferred
Stock who would otherwise have been entitled to a fraction of a Common Unit
upon surrender of Certificates for exchange pursuant to this Article III will
be paid an amount in cash (without interest) equal to such fraction multiplied
by the average of the last sales prices of the Common Units on the New York
Stock Exchange Composite Transactions tape (as reported in The Wall Street
Journal or, if not reported therein, in another authoritative source) for the
five consecutive trading days ending immediately prior to the second trading
day prior to the Closing Date.
3.4. Exchange Procedures. (a) At or prior to the Effective Time, Star
Partners shall deposit, or shall cause to be deposited, with the Exchange
Agent, for the benefit of the holders of the Petro Common Stock and the Junior
Preferred Stock for exchange in accordance with this Article III (i)
certificates representing the Senior Subordinated Units and Common Units ("New
Certificates") issuable pursuant to Section 3.1 in exchange for outstanding
shares of Petro Common Stock and Junior Preferred Stock, (ii) the amount of
cash necessary to be distributed to the holders of Public Preferred Stock in
accordance with the foregoing sections of this Article III and (iii) an amount
of cash to be paid in lieu of fractional Senior Subordinated Units and Common
Units as provided herein (such cash and New Certificates, together with any
dividends or distributions with respect thereto (but without any interest
thereon), being hereinafter referred to as the "Exchange Fund").
(b) Promptly after the Effective Time, the Exchange Agent shall mail to each
holder of record of a certificate or certificates which, immediately prior to
the Effective Time, represented outstanding shares of Petro Common Stock and
Junior Preferred Stock (the "Certificates"), which holder's shares of Petro
Common Stock or Junior Preferred Stock were converted into the right to receive
Senior Subordinated Units or Common Units pursuant to Section 3.1 (i) a letter
of transmittal, which shall specify that delivery shall be effected and risk of
loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Star Partners may reasonably specify and (ii) instructions
for use in effecting the
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surrender of the Certificates in exchange for certificates representing Senior
Subordinated Units and Common Units. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed, and any other required documents, the holder of such Certificate
shall be entitled to receive in exchange therefor a New Certificate
representing the number of whole Senior Subordinated Units or Common Units that
such holder has the right to receive pursuant to this Article III, and cash in
lieu of any fractional Senior Subordinated Units or Common Units, as
contemplated by Section 3.3, and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of Petro Common Stock or
Junior Preferred Stock that is not registered in the transfer records of Petro,
a certificate representing the proper number of Senior Subordinated Units or
Common Units may be issued to a transferee only on the condition that the
Certificate formerly representing such shares of Petro Common Stock or Junior
Preferred Stock is presented to the Exchange Agent, properly endorsed, and
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid or that no
such taxes are applicable. The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to Senior Subordinated Units or
Common Units held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect thereto for the account of persons entitled thereto.
(c) If any Certificate shall have been lost, stolen, mislaid or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen, mislaid or destroyed, and if required by Star
Partners, the posting by such Person of a bond in such reasonable amount as
Star Partners may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen, mislaid or destroyed Certificate the
consideration deliverable in respect thereof as determined in accordance with
this Article III.
(d) Notwithstanding the foregoing, neither the Exchange Agent nor any party
hereto shall be liable to any former holder of Petro Common Stock or Junior
Preferred Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(e) No distributions with respect to the Common Units or Senior Subordinated
Units declared or made after the Effective Time with a record date occurring
after the Effective Time shall be paid to the holder of any unsurrendered old
Certificate, and no cash payment in lieu of fractional Senior Subordinated
Units or Common Units shall be paid to any such holder pursuant to Section 3.3
until the holder thereof shall surrender such Certificates in accordance with
this Article III. After the surrender of certificates in accordance with this
Article III, and subject to the effect of applicable laws, there shall be paid
to the holder of Senior Subordinated Units or Common Units issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
distributions with a record date after the Effective Time theretofore payable
with respect to such Senior Subordinated Units or Common Units and not paid,
less the amount of any withholding taxes which may be required thereon, and
(ii) at the appropriate payment date, the amount of distributions with a record
date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such Senior Subordinated Units
or Common Units, less the amount of any withholding taxes which may be required
thereon.
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(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of Petro for twelve months after the Closing shall be paid to Star
Partners. Any stockholders of Petro who have not theretofore complied with this
Article III shall thereafter look only to Star Partners for payment of the
Common Units or Senior Subordinated Units, cash in lieu of any fractional
Common Units or Senior Subordinated Units and unpaid distributions on the
Common Units and the Senior Subordinated Units deliverable in respect of each
share of Petro Common Stock and Junior Preferred Stock such stockholder holds
as determined pursuant to this Agreement, in each case, without any interest
thereon.
3.5. Anti-Dilution Provisions. In the event of any subdivisions,
reclassifications, recapitalizations, splits, combinations or dividends in the
form of equity interests with respect to the Common Units, and the Petro Common
Stock (in each case, as permitted pursuant to Section 4.3) the number of Senior
Subordinated Units and Common Units to be issued in the Merger and the average
closing sales prices of the Common Units determined in accordance with Section
3.3 will be correspondingly adjusted.
3.6. Shares of Dissenting Common Holders. Any issued and outstanding shares
of Petro Common Stock held by Dissenting Common Holders shall not be converted
as described in Section 3.1(c) but shall from and after the Effective Time
represent only the right to receive such consideration as may be determined to
be due to such Dissenting Common Holder pursuant to the MBCA; provided,
however, that shares of Petro Common Stock outstanding immediately prior to the
Effective Time and held by a Dissenting Common Holder who shall, after the
Effective Time, withdraw his demand for fair value or lose his dissenters'
rights pursuant to the MBCA, shall be deemed to be converted, as of the
Effective Time, into the right to receive Senior Subordinated Units as
specified in Section 3.1(c), without interest.
3.7. Options. (a) At the Closing, all employee and director stock options to
purchase shares of Petro Common Stock (each, a "Petro Stock Option"), which are
then outstanding and unexercised, shall cease to represent a right to acquire
shares of Petro Stock. To the extent any such stock option is not vested at the
Effective Time and does not become vested by reason of the Merger, such stock
option shall be cancelled. To the extent that any stock option is vested as of
the Effective Time or becomes vested by reason of the Merger, such stock option
to the extent so vested shall be converted automatically into options to
purchase .13064 Senior Subordinated Units at a price equal to the original
exercise price divided by .13064 and Star Partners shall assume each such Petro
Stock Option subject to the terms of any of the stock option plans listed under
"Stock Option Plans" in Section 5.3 of Petro's Disclosure Schedule
(collectively, the "Petro Stock Option Plans"), and the agreements evidencing
grants thereunder, including but not limited to the accelerated vesting of such
options which shall occur in connection with and by virtue of the Merger as and
to the extent required by such plans and agreements.
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ARTICLE IV.
ACTIONS PENDING MERGER
From the date hereof until the Effective Time, except as expressly contemplated
by this Agreement, (a) without the prior written consent of the Special
Committee (which consent shall not be unreasonably withheld or delayed) Petro
will not, and will cause each of its Subsidiaries not to, and (b) without the
prior written consent of Petro (which consent shall not be unreasonably
withheld or delayed) Star Partners will not, and will cause each of its
Subsidiaries not to:
4.1. Ordinary Course. Conduct the business of it and its Subsidiaries other
than in the ordinary and usual course or, to the extent consistent therewith,
fail to use reasonable best efforts to preserve intact its business
organizations, goodwill and assets and maintain its rights, franchises and
existing relations with customers, suppliers, employees and business
associates, or take any action that would (a) adversely affect the ability of
any party to obtain any approvals required under the HSRA for the transactions
contemplated hereby or (b) adversely affect its ability to perform any of its
material obligations under this Agreement.
4.2. Capital Stock. In the case of Petro and its Subsidiaries, other than (a)
pursuant to stock options Previously Disclosed in its Disclosure Schedule, (b)
pursuant to the Petro dividend reinvestment program or (c) as otherwise set
forth on Section 4.2 of Petro's Disclosure Schedule, (i) issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of capital stock, any stock appreciation rights or any
Rights, (ii) enter into any agreement with respect to the foregoing or (iii)
permit any additional shares of capital stock to become subject to new grants
of employee stock options, stock appreciation rights or similar stock-based
employee rights.
4.3. Dividends, Distributions. (a) Make, declare or pay any dividend (other
than (i) in the case of Star Propane, distributions of Available Cash (as
defined in the Operating Partnership Agreement) to its partners, (ii) in the
case of Star Partners, regular quarterly cash distributions of Available Cash
on the Common Units, Subordinated Units and general partner interest of Star
Partners and (iii) in the case of Petro, regular quarterly dividends on the
Petro Preferred Stock), in each case in the ordinary course consistent with
past practice), on or in respect of, or declare or make any distribution on any
shares of its equity securities other than as Previously Disclosed, (b) split,
combine or reclassify any of its capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (c) repurchase, redeem or
otherwise acquire, or permit any of its Subsidiaries to purchase, redeem or
otherwise acquire any shares of its capital stock, except as required by the
terms of its securities outstanding on the date hereof or as contemplated by
any existing Compensation and Benefit Plan.
4.4. Compensation; Employment Agreements. In the case of Petro and its
Subsidiaries, except as set forth on Section 4.4 of Petro's Disclosure
Schedule, enter into or amend any written employment, severance or similar
agreements or arrangements with any of its directors, officers or employees, or
grant any salary or wage increase or increase any employee benefit (including
incentive or bonus payments), except for (a) normal individual increases in
compensation to employees (other than officers and directors) in the ordinary
course of business consistent with past practice or (b) other changes as are
provided for herein or as may be required by law or to
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satisfy contractual obligations existing as of the date hereof or (c)
additional grants of awards to newly hired employees consistent with past
practice.
4.5. Benefit Plans. In the case of Petro and its Subsidiaries, except as set
forth on Section 4.5 of the Petro Disclosure Schedule, enter into or amend
(except as may be required by applicable law, to satisfy contractual
obligations existing as of the date hereof or amendments which, either
individually or in the aggregate, would not reasonably be expected to result in
a material liability to Petro or its Subsidiaries) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors, officers or other employees, including,
without limitation, taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
4.6. Acquisitions And Dispositions. In the case of Petro and its
Subsidiaries, and except for the sale of the Transferred Assets to Star
Propane, sell, lease, dispose of or discontinue any portion of its assets,
business or properties, which is material to it and its Subsidiaries taken as a
whole, or acquire, by merger or otherwise, or lease (other than by way of
foreclosures or acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case in the
ordinary and usual course of business consistent with past practice) any assets
or all or any portion of, the business or property of any other entity which,
in either case, is material to it and its Subsidiaries taken as a whole, or
would be likely to have a Material Adverse Effect on the ability of the parties
to consummate the transactions contemplated by this Agreement or to delay
materially the Effective Time. In the case of Star Partners, Star Partners will
not, and will cause its Subsidiaries not to, make any acquisition or take any
other action which would have a Material Adverse Effect on its ability to
consummate the transactions contemplated by this Agreement.
4.7. Amendments. In the case of Petro, amend its Articles of Incorporation or
By-laws.
4.8. Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by law or
generally accepted accounting principles.
4.9. Insurance. Fail to use reasonable best efforts to maintain with
financially responsible insurance companies, insurance in such amounts and
against such risks and losses as has been customarily maintained by it in the
past.
4.10. Notification. Fail to promptly notify the other of any material change
in its condition (financial or otherwise) or business or any material
litigation or material governmental complaints, investigations or hearings or
the breach in any material respect of any of its representations or warranties
contained herein.
4.11. Taxes. (a) Make or rescind any material express or deemed election
relating to Taxes unless it is reasonably expected that such action will not
materially and adversely affect it, including elections for any and all joint
ventures, partnerships, limited liability companies, working interests or other
investments where it has the capacity to make such binding election, (b) settle
or compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, except
where such settlement or compromise will not materially and adversely
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affect it or (c) change in any material respect any of its methods of reporting
income, or deductions for federal income tax purposes from those employed in
the preparation of its federal income tax return for the most recent taxable
year for which a return has been filed, except as may be required by applicable
law or except for such changes that are reasonably expected not to materially
adversely affect it.
4.12. Debt, Capital Expenditures and the Like. In the case of Petro, except
as provided in Section 6.4, (a) incur any indebtedness for borrowed money
(except for working capital under existing credit facilities) or guarantee any
such indebtedness of others, (b) enter into any material lease (whether
operating or capital), (c) create any material mortgages, liens, security
interests or other encumbrances on the property of Petro or its Subsidiaries in
connection with any pre-existing indebtedness, new indebtedness or lease or (d)
make or commit to make aggregate capital expenditures in excess of $2.0 million
over Petro's fiscal 1998 capital expenditure budget identified in Section 4.12
of the Petro Disclosure Schedule and Previously Disclosed to Star Gas.
4.13. No Dissolution. Authorize, recommend, propose or announce an intention
to adopt a plan of complete or partial dissolution or liquidation.
4.14. Adverse Actions. Knowingly take any action that is intended or is
reasonably likely to result in (a) any of its representations and warranties
set forth in this Agreement being or becoming untrue in any material respect at
any time prior to the Closing, (b) any of the conditions to the Merger set
forth in Article VII not being satisfied or (c) a material violation of any
provision of this Agreement except, in each case, as may be required by
applicable law.
4.15. Agreements. Agree or commit to do anything prohibited by Sections 4.1
through 4.14.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
5.1. Disclosure Schedule. On or prior to the date hereof, Star Partners has
delivered to Petro and Petro has delivered to Star Partners a schedule
(respectively, its "Disclosure Schedule") setting forth, among other things,
items the disclosure of which is necessary or appropriate in relation to any or
all of its representations and warranties; provided, however, that (a) no such
item is required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence is not reasonably likely to result in
the related representation or warranty being deemed untrue or incorrect under
the standard established by Section 5.2, and (b) the mere inclusion of an item
in a Disclosure Schedule shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect.
5.2. Standard. No representation or warranty of Star Partners or Petro
contained in Section 5.3 (except Sections 5.3(b), 5.3(c)(i), 5.3(c)(ii), 5.3(d)
and 5.3(e)) shall be deemed untrue or incorrect, and no party hereto shall be
deemed to have breached a representation or warranty, as a consequence of the
existence of any fact, circumstance or event unless such fact, circumstance or
event, individually or taken together with all other facts, circumstances or
events inconsistent with any paragraph of Section 5.3, has had or is reasonably
expected to have a Material Adverse Effect.
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5.3. Representations and Warranties. Subject to Sections 5.1 and 5.2 and
except as Previously Disclosed, Petro hereby represents and warrants to Star
Partners, and Star Partners hereby represents and warrants to Petro, to the
extent applicable, in each case with respect to itself and its Subsidiaries, as
follows:
(a) Organization, Standing and Authority. Such party is a corporation, or in
the case of Star Partners and Star Propane, a limited partnership, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Such party (i) is duly qualified to do
business and is in good standing in the states of the United States where its
ownership or leasing of property or the conduct of its business requires it to
be so qualified and (ii) has in effect all federal, state, local, and foreign
governmental authorizations and permits necessary for it to own or lease its
properties and assets and to carry on its business as it is now conducted.
Such party (i) is duly qualified to do business and is in good standing in the
states of the United States where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and (ii) has in effect
all federal, state, local, and foreign governmental authorizations and permits
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted.
(b) Shares. (i) In the case of Petro, as of the date hereof, the authorized
capital stock of Petro consists solely of 81,909,722 shares of stock, $.10 par
value, of which, as of the date hereof, 23,964,962 shares of Class A Common
Stock, 11,228 shares of Class B Common Stock, 2,597,519 shares of Class C
Common Stock, 41,668 shares of Private Preferred Stock, no more than 797,000
shares of Junior Preferred Stock and 1,200,000 shares of Public Preferred Stock
are issued and outstanding. Such outstanding shares were duly authorized and
are validly issued and fully paid and non-assessable and are not subject to any
preemptive or similar rights (and were not issued in violation of any
preemptive or similar rights). The holder of the Petro Private Preferred Stock
has consented to the redemption thereof on or prior to the Closing Date at a
price equal to $4.167 million plus accrued and unpaid dividends.
(ii) In the case of Star Partners, as of the date hereof, there are
3,858,999 Common Units and 2,396,078 Old Subordinated Units issued and
outstanding, and all of such Common Units and Old Subordinated Units and
the limited partner interests represented thereby were duly authorized and
validly issued in accordance with the Partnership Agreement and are fully
paid (to the extent required under the Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Merger Registration Statement under the caption
"Description of the Partnership Agreement--Limited Liability"). As of the
date hereof, the General Partner owns a 1% general partner interest in Star
Partners, and such general partner interest was duly authorized and validly
issued in accordance with the Partnership Agreement. As of the date hereof,
Star Partners owns a 98.9899% limited partner interest in Star Propane, and
such limited partner interest was duly authorized and validly issued in
accordance with the Operating Partnership Agreement and is fully paid (to
the extent required under the Operating Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Merger Registration Statement under the caption
"Description of the Partnership Agreement--Limited Liability"). As of the
date hereof, the General Partner owns a 1.0101% general partner interest in
Star Propane, and such general
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partner interest was duly authorized and validly issued in accordance with
the Operating Partnership Agreement.
(iii) As of the date hereof, except as Previously Disclosed in Section
5.3(b) of a party's Disclosure Schedule, there are no shares of capital
stock (in the case of Petro) or interests (in the case of Star Partners),
of such party's equity securities authorized and reserved for issuance,
such party does not have any Rights issued or outstanding with respect to
its equity securities, and such party does not have any commitment to
authorize, issue or sell any such equity securities or Rights, except
pursuant to this Agreement. Since December 31, 1997, Petro has not issued
any shares of its capital stock or rights in respect thereof or reserved
any shares for such purposes except pursuant to plans or commitments
Previously Disclosed in Section 5.3(b) of its Disclosure Schedule.
(iv) The number of shares of Petro Common Stock which are issuable and
reserved for issuance upon exercise of Petro Stock Options as of the date
hereof are Previously Disclosed in Section 5.3(b) of Petro's Disclosure
Schedule, and the number of Common Units and Subordinated Units that are
issuable upon exercise of any employee or director options to purchase
Common Units or Subordinated Units as of the date hereof are Previously
Disclosed in Section 5.3 of Star Partners' Disclosure Schedule.
(c) Subsidiaries. (i) (A) Such party has Previously Disclosed in Section
5.3(c) of its Disclosure Schedule a list of all of its Subsidiaries together
with the jurisdiction of organization of each such Subsidiary, (B) it owns,
directly or indirectly, all of the equity interests of each of its
Subsidiaries, (C) no equity interests of any of its Subsidiaries are or may
become required to be issued by reason of any Rights, (D) there are no
contracts, commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
interests of any such Subsidiaries, (E) there are no contracts, commitments,
understandings, or arrangements relating to its rights to vote or to dispose of
such equity interests, and (F) all of the equity interests of each such
Subsidiary held by it or its Subsidiaries are fully paid and nonassessable and
are owned by it or its Subsidiaries free and clear of any Liens.
(ii) In the case of the representations and warranties of Petro, other
than ownership of its Subsidiaries, Petro does not own beneficially,
directly or indirectly, any equity securities or similar interests of any
person, or any interest in a partnership or joint venture of any kind.
(iii) Each of such party's Subsidiaries has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization and (a) is duly qualified to do business and in good standing
in the jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and (b) has in
effect all federal, state, local, and foreign governmental authorizations
and permits necessary for it to own or lease its properties and assets and
to carry on its business as it is now conducted.
(d) Corporate or Partnership Power. Such party and each of its Subsidiaries
has the corporate power and authority, or in the case of Star Partners and Star
Propane the partnership power and authority to carry on its business as it is
now being conducted and to own all its properties and assets; and it has the
corporate power and authority or, in the case of Star Partners and Star
Propane, the partnership power and authority, to execute, deliver and perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby.
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(e) Equityholder Authority. Subject in the case of this Agreement to approval
by the holders of a majority of the shares of Petro Class A and Class C Common
Stock and Petro Preferred Stock entitled to vote thereon, voting separately by
classes the approval of the holders of a majority of the Petro Class A Common
Stock which is not owned by Petro Insiders or Affiliates, and by the holders of
a majority of the Common Units of Star Partners, excluding Common Units held by
Petro and its Affiliates, this Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action (partnership
action in the case of Star Partners and Star Propane), and this Agreement has
been duly executed and delivered and is a legal, valid and binding agreement of
it, enforceable in accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles). In the case of
Petro, the holders of 100% of the Public Preferred Stock, 100% of the Private
Preferred Stock and 100% of the Junior Preferred Stock have granted Petro an
irrevocable proxy to vote their shares in favor of the Merger.
(f) No Defaults. Except as Previously Disclosed, subject to receipt of the
HSRA approval, the approval of the holders of the Private Debt and 1998
Preferred Stock, the approval of Petro's bank group, the required filings under
federal and state securities laws and the approvals contemplated by Article
VII, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby does not and will not (i)
constitute a breach or violation of, or result in a default (or an event that,
with notice or lapse of time or both, would become a default) under, or result
in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, any note, bond, mortgage, indenture,
deed of trust, license, franchise, lease, contract, agreement, joint venture or
other instrument or obligation to which it or any of its Subsidiaries is a
party or by which it or any of its Subsidiaries or properties is subject or
bound, (ii) constitute a breach or violation of, or a default under, in the
case of Petro its articles of incorporation or by-laws and in the case of Star
Partners and Star Propane its Agreement of Limited Partnership, (iii)
contravene or conflict with or constitute a violation of any provision of any
law, rule, regulation, judgment, order or decree binding upon or applicable to
it or any of its Subsidiaries, (iv) result in the creation of any Lien on any
of its assets or its Subsidiaries' assets or (v) cause the transactions
contemplated by this Agreement to be subject to Takeover Laws.
(g) Financial Reports And SEC Documents. Its Annual Report on Form 10-K, for
the fiscal year ended December 31, 1997 in the case of Petro and for the fiscal
year ended September 30, 1997 in the case of Star Partners, and all other
reports, registration statements, definitive proxy statements or information
statements filed or to be filed by it or any of its Subsidiaries subsequent to
December 31, 1995 under the Securities Act, or under Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act, in the form filed, or to be filed (collectively,
its "SEC Documents"), with the SEC (i) complied or will comply in all material
respects as to form with the applicable requirements under the Securities Act
or the Exchange Act, as the case may be, and (ii) did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading; and
each of the balance sheets contained in or incorporated by reference into any
such SEC Document (including the related notes and schedules thereto) fairly
presents the financial position of the entity or entities to which it relates
as of its date, and each of the statements of
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income and changes in stockholders' equity and cash flows or equivalent
statements in the case of Star Partners in such SEC Documents (including any
related notes and schedules thereto) fairly presents the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may be,
of the entity or entities to which it relates for the periods to which it
relates, in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except in each
case as may be noted therein, subject to normal year-end audit adjustments in
the case of unaudited statements. Except as and to the extent set forth on its
balance sheet as of September 30, 1997 (in the case of Star Partners) and
December 31, 1997 (in the case of Petro), as of such date, neither it nor any
of its Subsidiaries had any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or reserved against in, a balance sheet or in the notes thereto
prepared in accordance with generally accepted accounting principles
consistently applied.
(h) Litigation; Regulatory Action. (i) No litigation, claim or other
proceeding before any court or governmental agency is pending against it or any
of its Subsidiaries and, to the best of its knowledge, no such litigation,
claim or other proceeding has been threatened, other than normal and routine
litigation which is either covered by insurance in amounts sufficient to
discharge any likely exposure. There are no outstanding judgments, decrees,
injunctions, awards or orders against it or any of its Subsidiaries. Section
5.3(h) of its Disclosure Schedule contains, as of the date of this Agreement,
an accurate and complete list of all actions, suits and proceedings pending or,
to the best of its knowledge, threatened against it, except as to routine law
suits arising in the ordinary course of business involving customer complaints
or vehicular accidents which are fully covered by insurance (except for
deductible amounts under such insurance policies which if required to be paid
would not individually or in the aggregate have a Material Adverse Effect).
(ii) Except as Previously Disclosed, neither it nor any of its
Subsidiaries or properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with,
or a commitment letter or similar submission to, any federal or state
governmental agency or court or authority or body or the supervision or
regulation of it or any of its Subsidiaries (collectively, the "Regulatory
Authorities").
(iii) Neither it nor any of its Subsidiaries has been advised by any
Regulatory Authority that such Regulatory Authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of understanding,
commitment letter or similar submission.
(i) Compliance With Laws. Except as set forth in Section 5.3(i) of its
Disclosure Schedule, it and each of its Subsidiaries:
(i) in the conduct of its business, is in compliance with all applicable
federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, (any instance of failure to so comply is
referred to herein as a "Non-Compliance Event").
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to conduct
its businesses substantially as presently conducted; all such permits,
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licenses, certificates of authority, orders and approvals are in full force
and effect and, to the best of its knowledge, no suspension or cancellation
of any of them is threatened (any instance or failure to obtain any of the
foregoing and to maintain them in full force and effect is referred to
herein as a ("Permitting Violation"); and
(iii) has not received, since December 31, 1994, any notification or
communication from any Regulatory Authority asserting that it or any of its
Subsidiaries is not in compliance with any of the statutes, regulations, or
ordinances which such Regulatory Authority enforces or threatening to
revoke any license, franchise, permit, or governmental authorization (nor,
to its knowledge, do any grounds for any of the foregoing exist), any
instance of the foregoing referred to herein as a "Non-Compliance
Notification";
(j) Defaults. Neither it nor any of its Subsidiaries is in default under any
contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which it is a party, by which its respective assets, business, or
operations may be bound or affected, or under which it or its respective
assets, business, or operations receives benefits, and there has not occurred
any event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
(k) No Brokers. No action has been taken by it that would give rise to any
valid claim against any party hereto for a brokerage commission, finder's fee
or other like payment with respect to the transactions contemplated by this
Agreement, excluding, in the case of Petro, fees to be paid to PaineWebber
Incorporated and Dain Rauscher Wessels, and, in the case of Star Partners, fees
to be paid to A.G. Edwards & Sons, Inc., in each case pursuant to letter
agreements which have been heretofore disclosed to the other party.
(l) Compensation and Benefit Plans. (i) Section 5.3(l)(i) of a party's
Disclosure Schedule contains a complete list of all material bonus, vacation,
deferred compensation, pension, retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock and
stock option plans, all employment or severance contracts, all medical, dental,
disability, health and life insurance plans, all other employee benefit and
fringe benefit plans, contracts or arrangements and any applicable "change of
control" or similar provisions in any plan, contract or arrangement maintained
or contributed to by it or any of its Subsidiaries for the benefit of officers,
former officers, employees, former employees, directors, former directors, or
the beneficiaries of any of the foregoing, including all "employee benefit
plans" as defined in ERISA (collectively, "Compensation and Benefit Plans").
(ii) True and complete copies of its Compensation and Benefit Plans,
including, but not limited to, any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto and,
if applicable, the most recent Form 5500 and annual reports for such plans
have been made available to the other party.
(iii) Each of its Compensation and Benefit Plans has been administered in
all material respects in accordance with the terms thereof. All "employee
benefit plans" within the meaning of Section 3(3) of ERISA, other than
"multiemployer plans" within the meaning of Section 3(37) of ERISA
("Multiemployer Plans"), covering employees or former employees of it and
its Subsidiaries (its "Plans"), to the extent subject to ERISA, are in
material compliance with ERISA, the Code, the Age Discrimination in
Employment Act and other applicable laws and no
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prohibited transaction has occurred with respect to any such employee
benefit plan that would result in any such excise tax or other liability
under ERISA or the Code. Each Compensation and Benefit Plan of it or its
Subsidiaries which is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA ("Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service, and it is not aware
of any circumstances reasonably likely to result in the revocation or
denial of any such favorable determination letter. There is no pending or,
to its knowledge, threatened litigation or governmental audit, examination
or investigation relating to the Plans.
(iv) Except as Previously Disclosed in Section 5.3(l)(iv) of a Party's
Disclosure Schedule, no material liability under Title IV of ERISA has been
or is expected to be incurred by it or any of its Subsidiaries with respect
to any ongoing, frozen or terminated "single-employer plan", within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which is
considered one employer with it under Section 4001(a)(15) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Except as Previously
Disclosed in Section 5.3(l)(iv) of a party's Disclosure Schedule, neither
it nor any of its Subsidiaries presently contributes to a Multiemployer
Plan, nor have they contributed to such a plan within the past five
calendar years. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan of it or
any of its Subsidiaries or by any ERISA Affiliate within the past 12
months.
(v) All contributions, premiums and payments required to be made under
the terms of any Compensation and Benefit Plan of it or any of its
Subsidiaries have been made. Neither any Pension Plan of it or any of its
Subsidiaries nor any single-employer plan of an ERISA Affiliate of it or
any of its Subsidiaries has an "accumulated funding deficiency" (whether or
not waived) within the meaning of Section 412 of the Code or Section 302 of
ERISA. Neither it nor any of its Subsidiaries has provided or is required
to provide, security to any Pension Plan or to any single-employer plan of
an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(vi) Except as Previously Disclosed in Section 5.3(l)(vi) of a party's
Disclosure Schedule, under each Pension Plan of it or any of its
Subsidiaries which is a single-employer plan, as of the last day of the
most recent plan year ended prior to the date hereof, the actuarially
determined present value of all "benefit liabilities", within the meaning
of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Plan's most recent actuarial
valuation) did not exceed the then current value of the assets of such
Plan, and there has been no adverse change in the financial condition of
such Plan (with respect to either assets or benefits) since the last day of
the most recent Plan year.
(vii) Neither it nor any of its Subsidiaries has any obligations under
any Compensation and Benefit Plans to provide benefits, including death or
medical benefits, with respect to employees of it or its Subsidiaries
beyond their retirement or other termination of service other than (i)
coverage mandated by Part 6 of Title I of ERISA or Section 4980B of the
Code, (ii) retirement or death benefits under any employee pension benefit
plan (as defined under Section 3(2) of
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ERISA), (iii) disability benefits under any employee welfare plan that have
been fully provided for by insurance or otherwise, or (iv) benefits in the
nature of severance pay.
(viii) Except as Previously Disclosed under Section 5.1(l)(viii) of a
party's Disclosure Schedule, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
(i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due to
any director or any employee of it or any of its Subsidiaries under any
Compensation and Benefit Plan or otherwise from it or any of its
Subsidiaries, (ii) increase any benefits otherwise payable under any
Compensation and Benefit Plan or (iii) result in any acceleration of the
time of payment or vesting of any such benefit.
(m) Labor Matters. Except as set forth in Section 5.3(m) of a party's
Disclosure Schedule, neither it nor any of its Subsidiaries is a party to, or
is bound by, any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is it or any of
its Subsidiaries the subject of a proceeding asserting that it or any such
Subsidiaries has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel it or such Subsidiaries to
bargain with any labor organization as to wages and conditions of employment.
(n) Environmental Matters. Neither (a) the past or present conduct nor
operation of such party or its Subsidiaries nor any condition of any property
or asset presently or previously owned, leased or operated by any of them,
including but not limited to on-site or off-site disposal or release of any
chemical substance, product or waste, violates or violated Environmental Laws,
and no condition has existed or event has occurred with respect to any of them
or any such property that, with notice or the passage of time, or both, is
reasonably likely to result in liability or obligations for any clean-up,
remediation, disposal or corrective action under Environmental Laws or claims
for personal injury, property damage or damage to natural resources and (b)
such party nor any of its Subsidiaries has received any notice from any person
or entity that it or its Subsidiaries or the operation or condition of any
property or asset ever owned, leased, operated, held as collateral or held as a
fiduciary by any of them is or was in violation of or otherwise are alleged to
have liability under any Environmental Law or has entered into any consent
decree or order or is subject to any order of any court or governmental
authority or tribunal under any Environmental Law or relating to the clean-up
of any hazardous materials contamination, including, but not limited to,
responsibility (or potential responsibility) for the cleanup or other
remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on, beneath, or originating from any such property.
(o) Tax Matters. (i) All material returns, declarations, reports, estimates,
information returns and statements required to be filed under federal, state,
local or any foreign tax laws ("Tax Returns") with respect to it or any of its
Subsidiaries, have been timely filed, or requests for extensions have been
timely filed and have not expired; (ii) all Tax Returns filed by it are
complete and accurate in all material respects; (iii) all Taxes shown to be due
on such Tax Returns and all other Taxes, if any, required to be paid by it or
its Subsidiaries for all periods ending through the date hereof have been paid
or adequate reserves have in accordance with generally accepted accounting
principles been established for the payment of such Taxes; and (iv) no material
(A) audit or examination or (B) refund litigation with respect to any Tax
Return is pending. As of the date hereof, neither it nor any of its
Subsidiaries (x) has granted any requests, agreements, consents or
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waivers to extend the statutory period of limitations applicable to the
assessment of any taxes with respect to any tax returns, (y) is a party to any
tax sharing or tax indemnity agreement or (z) is a party to an agreement that
provides for the payment of any amount that would constitute a "parachute
payment" within the meaning of Section 280G of the Code.
(p) Regulatory Approvals. Except as set forth in Section 5.3(p) of a party's
Disclosure Schedule, the only approval of any governmental agency necessary to
consummate the transactions contemplated by this Agreement (other than filings
under the Securities Act) is pursuant to the HSRA. As of the date hereof,
neither Petro nor the Star Partners is aware of any reason why the approvals
under the HSRA will not be received.
(q) No Material Adverse Change. Since September 30, 1997, in the case of Star
Partners, and since December 31, 1997, in the case of Petro, except as
disclosed in its SEC Documents filed with the SEC on or before the date hereof,
(i) it and its Subsidiaries have conducted their respective businesses in the
ordinary and usual course (excluding the incurrence of expenses related to this
Agreement and the transactions contemplated hereby), (ii) it has not made any
material change in its accounting methods, principles or practices or its tax
methods, practices or elections and (iii) no event has occurred or circumstance
arisen that, individually or taken together with all other facts, circumstances
and events is reasonably likely to result in a Material Adverse Effect.
(r) Insurance. It has previously delivered to the other party a schedule
listing the officers' and directors' liability insurance policies, primary and
excess casualty and liability insurance policies providing coverage for bodily
injury and property damage maintained by it and its Subsidiaries. It and its
Subsidiaries maintain insurance coverage reasonably adequate for the operation
of their respective businesses taking into account the cost and availability of
such insurance.
(s) Condition and Sufficiency of Assets. The vehicles, equipment and other
assets used in the business of it and its Subsidiaries are in operating
condition and repair consistent with normal industry standards and are adequate
for the uses to which they are being put and none of such vehicles, equipment
and assets are in need of replacement, maintenance or repairs except for
ordinary and routine maintenance and repairs that are not material in nature or
cost, except for vehicles and equipment which are not in service and the use of
which are not required to conduct the business of it and its Subsidiaries in
the ordinary course consistent with past practices. The vehicles, equipment and
assets in service are sufficient for the continued conduct of its business
after the Closing.
(t) Intellectual Property. Except as may be disclosed in Section 5.3(t) of
its Disclosure Schedule, it and its Subsidiaries own or possess adequate
licenses and other valid rights to use all patents, patent rights, trademarks,
trademark rights and proprietary information used or held for use in connection
with their respective businesses as currently being conducted, and there are no
assertions or claims challenging the validity of any of the foregoing which are
likely to have, individually or in the aggregate, a Material Adverse Effect.
The computer software operated or licensed by it that is material to its
business or its internal operations is capable of providing or is being adapted
to provide uninterrupted millennium functionality to record, store, process and
present calendar dates falling on or after January 1, 2000 in substantially the
same manner and with substantially the same functionality as such software
records, stores, processes and presents such calendar dates falling on or
before December 31, 1999. The costs of the adaptations referred to in the prior
sentence will not have a Material Adverse Effect.
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ARTICLE VI.
COVENANTS
Petro hereby covenants to and agrees with Star Partners, and Star Partners
hereby covenants to and agrees with Petro, that:
6.1. Best Efforts. (a) Subject to the terms and conditions of this Agreement,
it shall use its commercially reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, desirable or advisable under applicable laws, so as to
permit consummation of the Merger promptly and otherwise to enable consummation
of the transactions contemplated hereby, including, without limitation,
obtaining (and cooperating with the other party hereto to obtain) HSRA approval
and any other third party approval that is required to be obtained by Petro or
Star Partners or any of their respective Subsidiaries in connection with the
Merger and the other transactions contemplated by this Agreement, and using
reasonable efforts to lift or rescind any injunction or restraining order or
other order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and using reasonable efforts to defend any
litigation seeking to enjoin, prevent or delay the consummation of the
transactions contemplated hereby or seeking material damages, and each shall
cooperate fully with the other parties hereto to that end, and shall furnish to
the other party copies of all correspondence, filings and communications
between it and its affiliates and any governmental or regulatory authority with
respect to the transactions contemplated hereby. In complying with the
foregoing, neither it nor its Subsidiaries shall be required to take measures
that would have a Material Adverse Effect on it and its Subsidiaries taken as a
whole.
6.2. Equityholder Approvals. Each of them shall take, in accordance with
applicable law, applicable stock exchange rules and its restated articles or
certificate of incorporation and by-laws, in the case of Petro, and Agreement
of Limited Partnership, in the case of Star Partners, all action necessary to
convene, respectively, an appropriate meeting of the holders of the Common
Units of Star Partners to consider and vote upon the approval of the Merger
Agreement, the Amended and Restated Partnership Agreement, the Amended and
Restated Operating Partnership Agreement, and any other matters required to be
approved by them for consummation of the Merger (including any adjournment or
postponement, the "Star Partners Meeting"), and an appropriate meeting of
stockholders of Petro to consider and vote upon the approval of the Merger and
any other matters required to be approved by Petro's stockholders for
consummation of the Merger (including any adjournment or postponement, the
"Petro Meeting"; and each of the Star Partners Meeting and Petro Meeting, a
"Meeting"), respectively, promptly after the date hereof. The Board of
Directors of Petro and the Special Committee shall (subject in the case of
Petro to compliance with its fiduciary duties as advised by counsel) recommend
such approval, and each of Star Partners and Petro shall take all reasonable
lawful action to solicit such approval by its respective equityholders.
6.3. Registration Statements. (a) Each of Star Partners and Petro agrees to
cooperate in the preparation of (i) a registration statement on Form S-4 (the
"Merger Registration Statement") to be filed by Star Partners with the SEC in
connection with the issuance of Senior Subordinated Units and Common Units in
the Merger and the Junior Subordinated and Senior Subordinated Units to be
issued by Star Partners to certain Affiliates of Petro as described under
subparagraph 9 of the definition of "Restructuring Transactions" (including the
joint proxy statement and prospectus and
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other proxy solicitation materials of Star Partners and Petro constituting a
part thereof (the "Joint Proxy Statement") and all related documents), (ii) a
registration statement on Form S-3 to be filed by Star Partners with the SEC in
connection with the Equity Offering (the "Equity Registration Statement") and
(iii) a registration statement to be filed by Star Partners or a subsidiary of
Star Partners with the SEC in connection with the Debt Offering (the "Debt
Registration Statement" and together with the Merger Registration Statement and
the Equity Registration Statement, the "Registration Statements"). Provided
Petro has cooperated as required above, Star Partners agrees to file the
Registration Statements with the SEC as promptly as practicable. Each of Petro
and Star Partners agrees to use all reasonable efforts to cause the
Registration Statements to be declared effective under the Securities Act as
promptly as practicable after filing thereof. Star Partners also agrees to use
commercially reasonable efforts to obtain all necessary state securities law or
"Blue Sky" permits and approvals required to carry out the transactions
contemplated by this Agreement. Petro agrees to furnish to Star Partners all
information concerning Petro, its Subsidiaries, officers, directors and
stockholders and to take such other action as may be reasonably requested in
connection with the foregoing.
(b) Each of Petro and Star Partners agrees, as to itself and its
Subsidiaries, that (i) none of the information supplied or to be supplied by it
for inclusion or incorporation by reference in the Registration Statements
will, at the time the Registration Statements and each amendment or supplement
thereto, if any, becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) the Joint
Proxy Statement and any amendment or supplement thereto will, at the date of
mailing to stockholders and at the times of the Star Partners Meeting and Petro
Meeting, not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Each of Petro and Star Partners further agrees that if it shall
become aware prior to the Closing Date of any information that would cause any
of the statements in the Registration Statements to be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not false or misleading, it will promptly inform the other party
thereof and take the necessary steps to correct the Joint Proxy Statement.
(c) Star Partners will advise Petro, promptly after Star Partners receives
notice thereof, of the time when each of the Registration Statements has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of the Common Units or Senior
Subordinated Units for offering or sale in any jurisdiction, of the initiation
or threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of a Registration Statement or for additional
information.
(d) Each of Star Partners and Petro will use its best efforts to cause the
Joint Proxy Statement to be mailed to its unitholders and stockholders,
respectively, as soon as practicable after the effective date thereof.
6.4. Modification of Petro Indentures and Preferred Stock. Immediately upon
execution of this Agreement, Petro agrees to use its reasonable best efforts in
good faith to accomplish the following prior to the Effective Date:
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(a) As to the Private Debt. The Private Debt consists of (i) $60.0
million of Notes due 2002 at 11.96% interest per annum which shall be
restructured to $63.12 million of Notes due 2002 at 9.0% per annum and (ii)
$4.1 million of Notes due 2001 at 14.1% interest per annum to be
restructured to $2.2 million of Senior Notes due 2001 at 10.25% interest
per annum and $2.2 million of Subordinated Notes due 2001 at 10.25%
interest per annum (the "Private Debt Conditions").
(b) As to the 12 7/8% Series B Exchange Preferred Stock. The 12 7/8%
Series B Exchangeable Preferred Stock will be repurchased at $22 per share
plus accrued and unpaid dividends (the "12 7/8% Preferred Stock
Conditions").
(c) As to the Public Debt. At least 90% of (a) Petro's 9 3/8%
Subordinated Notes due 2003 and 10 1/8% Subordinated Notes due 2003 will be
repurchased at 100% of par plus accrued interest and (b) Petro's 123%
Subordinated Notes due 2005 will be repurchased at 103.5% of par plus
accrued interest (the "Public Debt Conditions").
(d) As to the 1989 Preferred Stock. The 1989 Preferred Stock will be
repurchased for an aggregate of $4.167 million plus accrued and unpaid
dividends (the "1989 Preferred Stock Conditions").
(e) As to the outstanding Star Propane Debt. The Holders of Star
Propane's 8.04% First Mortgage Notes due 2009, Star Propane's 7.17% First
Mortgage Notes due 2010 and Star Propane's outstanding Bank credit
facilities shall have consented to the execution, delivery and performance
of this Agreement by Star Propane or shall have entered into amendments
permitting the execution, delivery and performance of this Agreement by
Star Propane without violation of the terms of such indebtedness and
without a requirement that such indebtedness be repurchased (or an offer be
made to purchase such indebtedness) (the "Star Propane Debt Conditions").
6.5. Press Releases. It will not, without the prior approval of the other
party hereto, issue any press release or written statement for general
circulation relating to the transactions contemplated hereby, except as
otherwise required by applicable law or regulation or the rules of the NYSE, in
which case it will consult with the other party before issuing any such press
release or written statement.
6.6. Access; Information. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, it shall, and shall
cause its Subsidiaries to, afford the other parties and their officers,
employees, counsel, accountants and other authorized representatives, access,
during normal business hours throughout the period prior to the Effective Date,
to all of its properties, books, contracts, commitments and records, and to its
officers, employees, accountants, counsel or other representatives, and, during
such period, it shall, and shall cause its Subsidiaries to, furnish promptly to
such other parties and representatives (i) a copy of each material report,
schedule and other document filed by it pursuant to the requirements of federal
or state securities law (other than reports or documents that Star Partners or
Petro, or their respective Subsidiaries, as the case may be, are not permitted
to disclose under applicable law) and (ii) all other information concerning the
business, properties and personnel of it as the other may reasonably request.
Neither Star Partners nor Petro nor any of its respective Subsidiaries shall be
required to provide access to or to disclose
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information where such access or disclosure would violate or prejudice the
rights of its customers, jeopardize the attorney-client privilege of the
institution in possession or control of such information or contravene any law,
rule, regulation, order, judgment, decree, fiduciary duty or binding agreement
entered into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under the circumstances in which
the restrictions of the preceding sentence apply.
(b) It will not use any information obtained pursuant to this Section 6.6 for
any purpose unrelated to the consummation of the transactions contemplated by
this Agreement and, if this Agreement is terminated, will hold all information
and documents obtained pursuant to this paragraph in confidence. No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant
or agreement in this Agreement, or the conditions to either party's obligation
to consummate the transactions contemplated by this Agreement.
6.7. Acquisition Proposals. Without the prior written consent of Star
Partners, Petro shall not, and shall cause its Subsidiaries and its and its
Subsidiaries' officers, directors, agents, advisors and affiliates not to,
solicit or encourage inquiries or proposals with respect to, or engage in any
negotiations concerning, or provide any confidential information to, or have
any discussions with, any such person relating to, any tender offer or exchange
offer for, or any proposal for the acquisition of a substantial equity interest
in, or a substantial portion of the assets of, or any merger or consolidation
with, Petro or any of its Significant Subsidiaries; provided, however, that
Petro may, and may authorize and permit its officers, directors, employees or
agents to, furnish or cause to be furnished confidential information and may
participate in such discussions and negotiations with a person or entity who
has made an unsolicited bona fide acquisition proposal for Petro or such assets
or Significant Subsidiaries that is superior to the Merger and is reasonably
capable of being financed if Petro's Board of Directors, after having consulted
with and considered the advice of outside counsel, has determined that the
failure to provide such information or participate in such negotiations and
discussions could cause the members of such Board of Directors to breach their
fiduciary duties under applicable laws. Petro shall promptly (within 24 hours)
advise Star Partners of its receipt of any such proposal or inquiry, of the
substance thereof, and of the identity of the person making such proposal or
inquiry. Nothing in this Section 6.7 shall permit Petro to enter into any
agreement with respect to an acquisition proposal during the term of this
Agreement other than a confidentiality and standstill agreement in reasonably
customary form.
6.8. Affiliate Arrangements. (a) Not later than the 15th day after the
mailing of the Joint Proxy Statement, Petro shall deliver to Star Partners a
schedule of each person that, to the best of its knowledge, is or is reasonably
likely to be, as of the date of the relevant Meeting, deemed to be an
"affiliate" of it (an "Affiliate") as that term is used in Rule 145 under the
Securities Act.
(b) Petro shall use its reasonable best efforts to cause its Affiliates not
to sell any securities received under the Merger or Exchange Agreement in
violation of the registration requirements Securities Act, including Rule 145
thereunder.
6.9. Takeover Laws. Neither party shall take any action that would cause the
transactions contemplated by this Agreement to be subject to requirements
imposed by any Takeover Laws, and
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each of them shall take all necessary steps within its control to exempt (or
ensure the continued exemption of) the transactions contemplated by this
Agreement from, or if necessary challenge the validity or applicability of, any
shareholder rights plan adopted by such party or any applicable Takeover Law,
as now or hereafter in effect, including, without limitation, Takeover Laws of
any state that purport to apply to this Agreement. the transactions
contemplated hereby.
6.10. No Rights Triggered. Each of Petro and Star Partners shall take all
steps necessary to ensure that the entering into of this Agreement and the
consummation of the transactions contemplated hereby and any other action or
combination of actions, or any other transactions contemplated hereby, do not
and will not result in the grant of any Rights to any person (i) in the case of
Petro under its articles or certificate of incorporation or by-laws and in the
case of Star Partners under its Agreement of Limited Partnership or (ii) under
any material agreement to which it or any of its Subsidiaries is a party.
6.11. Senior Subordinated Units Listed. In the case of Star Partners, Star
Partners shall use its reasonable best efforts to list, prior to the Closing,
on the NYSE, upon official notice of issuance, the Senior Subordinated Units to
be issued to the holders of Petro Common Stock in the Merger and to certain
Petro Affiliates pursuant to the Exchange Agreement.
6.12. Third Party Approvals. (a) Star Partners and Petro and their respective
Subsidiaries shall cooperate and use their respective commercially reasonable
best efforts to prepare all documentation, to effect all filings, to obtain all
permits, consents, approvals and authorizations of all third parties and HSRA
approval necessary to consummate the transactions contemplated by this
Agreement and to comply with the terms and conditions of such permits,
consents, approvals and authorizations and to cause the Merger to be
consummated as expeditiously as practicable. Each of Star Partners and Petro
shall have the right to review in advance, and to the extent practicable each
will consult with the other, in each case subject to applicable laws relating
to the exchange of information, with respect to, all material written
information submitted to any third party or any Regulatory Authorities in
connection with the transactions contemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto agrees to act reasonably and
promptly. Each party hereto agrees that it will consult with the other parties
hereto with respect to the obtaining of all material permits, consents,
approvals and authorizations of all third parties and Regulatory Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each party will keep the other parties apprised of the status of
material matters relating to completion of the transactions contemplated
hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Registration Statement, the Joint Proxy Statement or any
filing, notice or application made by or on behalf of such other party or any
of its Subsidiaries to any Regulatory Authority in connection with the
transactions contemplated hereby.
6.13. Indemnification; Directors' and Officers' Insurance. (a) In the event
of any threatened or actual claim, action, suit, proceeding or investigation,
whether civil, criminal or administrative, including, without limitation, any
such claim, action, suit, proceeding or investigation in which any person who
is now, or has been at any time prior to the date of this Agreement, or who
becomes
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prior to the Closing, a director, officer or employee of Petro or any of its
Subsidiaries, including, without limitation, the directors of Star Gas (the
"Indemnified Parties" or, individually, an "Indemnified Party") is, or is
threatened to be, made a party based in whole or in part on, or arising in
whole or in part out of, or pertaining to (i) the fact that he is or was a
director, officer or employee of Petro, any of Petro's Subsidiaries or any of
their respective predecessors or was prior to the Closing serving at the
request of any such party as a director, officer, employee, fiduciary or agent
of another corporation, partnership, trust or other enterprise or (ii) this
Agreement or any of the transactions contemplated hereby and thereby and all
actions taken by an Indemnified Party in connection herewith or therewith,
whether in any case asserted or arising before or after the Closing, the
parties hereto agree to cooperate and use their best efforts to defend against
and respond thereto. It is understood and agreed that after the Closing, Star
Partners shall indemnify and hold harmless, as and to the fullest extent
permitted by law, each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of an undertaking from such Indemnified Party to repay such
advanced expenses if it is finally and unappealably determined that such
Indemnified Party was not entitled to indemnification hereunder), judgments,
fines and amounts paid in settlement in connection with any such threatened or
actual claim, action, suit, proceeding or investigation, and in the event of
any such threatened or actual claim, action, suit, proceeding or investigation
(whether asserted or arising before or after the Closing), the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with Star Partners; provided, however, that (1) Star Partners shall have the
right to assume the defense thereof and upon such assumption Star Partners
shall not be liable to any Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by any Indemnified Party in
connection with the defense thereof, except that if Star Partners elects not to
assume such defense, or counsel for the Indemnified Parties reasonably advises
the Indemnified Parties that there are or may be (whether or not any have yet
actually arisen) issues which raise conflicts of interest between Star Partners
and the Indemnified Parties, the Indemnified Parties may retain counsel
reasonably satisfactory to them, and Star Partners shall pay the reasonable
fees and expenses of such counsel for the Indemnified Parties, (2) Star
Partners shall be obligated pursuant to this paragraph to pay for only one firm
of counsel for all Indemnified Parties, (3) Star Partners shall not be liable
for any settlement effected without its prior written consent (which consent
shall not be unreasonably withheld) and (4) Star Partners shall have no
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim indemnification under this Section 6.13,
upon learning of any such claim, action, suit, proceeding or investigation,
shall notify Star Partners thereof provided that the failure to so notify shall
not affect the obligations of Star Partners under this Section 6.13 except (and
only) to the extent such failure to notify materially prejudices Star Partners.
Star Partners's obligations under this Section 6.10 shall continue in full
force and effect for a period of six (6) years from the Closing; provided,
however, that all rights to indemnification in respect of any claim (a "Claim")
asserted or made within such period shall continue until the final disposition
of such Claim.
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(b) Without limiting any of the obligations under paragraph (a) of this
Section 6.13, Star Partners agrees that all rights to indemnification and all
limitations of liability existing in favor of the Indemnified Parties as
provided in Petro's Amended and Restated Articles of Incorporation or Bylaws or
in the governing documents of any of Petro's Subsidiaries as in effect as of
the date of this Agreement with respect to matters occurring on or prior to the
Closing shall survive the Merger and shall continue in full force and effect,
without any amendment thereto, for a period of six (6) years from the Closing;
provided, however, that all rights to indemnification in respect of any Claim
asserted or made within such period shall continue until the final disposition
of such Claim; provided further, however, that nothing contained in this
Section 6.13(b) shall be deemed to preclude the liquidation, consolidation or
merger of Petro or any Company Subsidiary, in which case all of such rights to
indemnification and limitations on liability shall be deemed to so survive and
continue notwithstanding any such liquidation, consolidation or merger and
shall constitute rights which may be asserted against Star Partners. Nothing
contained in this Section 6.13(b) shall be deemed to preclude any rights to
indemnification or limitations on liability provided in Petro's Amended and
Restated Articles of Incorporation or Bylaws or the governing documents of any
of Petro's Subsidiaries with respect to matters occurring subsequent to the
Closing to the extent that the provisions establishing such rights or
limitations are not otherwise amended to the contrary.
(c) Star Partners shall use its reasonable best efforts to cause the persons
serving as officers and directors of Petro and Star Gas immediately prior to
the Closing to be covered for a period of six (6) years from the Closing by the
directors' and officers' liability insurance policy maintained by Petro
(provided that Star Partners may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions which are not less
advantageous to such directors and officers of Petro than the terms and
conditions of such existing policy) with respect to acts or omissions occurring
prior to the Closing which were committed by such officers and directors in
their capacity as such provided that Star Partners shall not be required to pay
annual premiums in excess of the last annual premium paid by Petro prior to the
date hereof but in such case shall purchase as much coverage as reasonably
practicable for such amount.
(d) In the event Star Partners or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Star
Partners shall assume the obligations set forth in this Section 6.13.
(e) The provisions of this Section 6.13 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs
and representatives.
6.14. Benefit Plans. The parties agree to take such actions with respect to
compensation and employee benefit plans, programs, arrangements and other
perquisites as are set forth on Section 6.14 of Petro's Disclosure Schedule.
6.15. Notification Of Certain Matters. Each of Petro and Star Partners shall
give prompt notice to the other of any fact, event or circumstance known to it
that (i) is reasonably likely,
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<PAGE>
individually or taken together with all other facts, events and circumstances
known to it, to result in any Material Adverse Effect with respect to it or
(ii) would cause or constitute a material breach of any of its representations,
warranties, covenants or agreements contained herein.
6.16. New Director for Star Gas LLC. As soon as reasonably practicable
following the Effective Time, Star Gas LLC will appoint a new independent
director to serve on the Audit Committee of Star Gas LLC provided that Star Gas
LLC shall not appoint any such director to which William P. Nicoletti shall
have reasonably objected.
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of each of the parties to consummate the Merger is
conditioned upon the satisfaction at or prior to the Closing of each of the
following:
7.1. Shareholder Vote. The Merger, the Partnership Agreement Amendments and
the other transactions contemplated hereby shall have been approved and adopted
by the affirmative vote of a Unit Majority (as defined in the Partnership
Agreement), and the Merger and the other transactions contemplated hereby shall
have been approved and adopted by the affirmative vote of the holders of a
majority of each class of Petro Common Stock and Petro Preferred Stock and a
majority of the Petro Class A Common Stock held by Persons other than Petro and
Affiliates of Petro. Holders of at least 100% of the Private Preferred Stock
and 90% of the Junior Preferred Stock shall have voted in favor of the Merger.
7.2. Governmental Approvals. Any waiting period (including any extended
waiting period arising as a result of a request for additional information by
the Federal Trade Commission or the U. S. Department of Justice) under the HSRA
shall have expired or been terminated. All other filings required to be made
prior to the Effective Time with, and all other consents, approvals, permits
and authorizations required to be obtained prior to the Effective Time from,
any Regulatory Authority in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby by the
parties hereto or their affiliates shall have been made or obtained, except
where the failure to obtain such consents, approvals, permits and
authorizations would not be reasonably likely to result in a Material Adverse
Effect on Star Partners or Petro or on the ability of Star Partners or Petro to
consummate the transactions contemplated by this Agreement.
7.3. No Injunction. No order, decree or injunction of any court or agency of
competent jurisdiction shall be in effect, and no law, statute or regulation
shall have been enacted or adopted, that enjoins, prohibits or makes illegal
consummation of any of the transactions contemplated hereby, and no action,
proceeding or investigation by any Regulatory Authority with respect to the
Merger or the other transactions contemplated hereby shall be pending that
seeks to restrain, enjoin, prohibit or delay consummation of the Merger or such
other transaction or to impose any material restrictions or requirements
thereon or on Star Partners or Petro with respect thereto; provided, however,
that prior to invoking this condition, each party shall have complied fully
with its obligations under Section 6.1.
7.4. Representations, Warranties And Covenants Of Star Partners. In the case
of Petro's obligation to consummate the Merger (i) each of the representations
and warranties contained herein of Star Partners shall be true and correct as
of the date of this Agreement and upon the Closing Date
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<PAGE>
with the same effect as though all such representations and warranties had been
made on the Closing Date, except for any such representations and warranties
made as of a specified date, which shall be true and correct as of such date,
in any case subject to the standard set forth in Section 5.2, (ii) each and all
of the agreements and covenants of Star Partners to be performed and complied
with pursuant to this Agreement on or prior to the Closing Date shall have been
duly performed and complied with in all material respects, and (iii) Petro
shall have received a certificate signed by the Chief Financial Officer of the
General Partner, dated the Closing Date, to the effect set forth in clauses (i)
and (ii) of this Section 7.4.
7.5. Representations, Warranties And Covenants Of Petro. In the case of Star
Partners's obligation to consummate the Merger (i) each of the representations
and warranties contained herein of Petro shall be true and correct as of the
date of this Agreement and upon the Closing Date with the same effect as though
all such representations and warranties had been made on the Closing Date,
except for any such representations and warranties made as of a specified date,
which shall be true and correct as of such date, in any case subject to the
standard set forth in Section 5.2, (ii) each and all of the agreements and
covenants of Petro to be performed and complied with pursuant to this Agreement
on or prior to the Closing Date shall have been duly performed and complied
with in all material respects, and (iii) Star Partners shall have received a
certificate signed by the Chief Financial Officer of Petro, dated the Closing
Date, to the effect set forth in clauses (i) and (ii) of this Section 7.5.
7.6. Effective Merger Registration Statement. The Merger Registration
Statement shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the Merger Registration Statement shall
have been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC or any other Regulatory Authority.
7.7. Opinion of Andrews & Kurth LLP. Star Partners and Petro shall have
received an opinion from Andrews & Kurth LLP to the effect that:
(a) the Merger and the transactions contemplated by this Agreement will
not result in the loss of limited liability of any limited partner of Star
Partners or Star Propane,
(b) the Merger and the transactions contemplated by this Agreement will
not cause Star Partners or Star Propane to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes,
(c) the Merger Registration Statement accurately sets forth the material
federal income tax consequences to the holders of Common Units of the
transactions contemplated hereby.
7.8. Opinion of Petro's Counsel. In the case of Star Partner's obligation to
consummate the Merger, Star Partners shall have received an opinion from
Phillips Nizer Benjamin Krim & Ballon LLP, counsel to Petro, to the effect
that:
(a) Petro is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Minnesota with all requisite
corporate power and authority to own its properties and assets and to carry
on its business as presently conducted;
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<PAGE>
(b) Petro has all requisite corporate power and authority to effect the
Merger as contemplated by this Agreement; the Board of Directors and
shareholders of Petro have taken all action required by the MBCA and
Petro's Articles of Incorporation and Bylaws to authorize the Merger in
accordance with the terms of this Agreement; the execution and delivery of
this Agreement did not, and the consummation of the Merger will not,
violate any provision of Petro's Articles of Incorporation or Bylaws; and
upon the filing by the Surviving Corporation of the Articles of Merger with
the Secretary of State of the State of Minnesota, the Merger shall become
effective under the MBCA.
In rendering such opinions, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Star Partners, Petro and others and opinions of Minnesota counsel,
reasonably satisfactory in form and substance to such counsel.
7.9. NYSE Listing. The Senior Subordinated Units and Common Units issuable
pursuant to this Agreement and the Exchange Agreement shall have been approved
for listing on the NYSE, subject to official notice of issuance.
7.10. Affiliate Arrangements. Petro shall have taken reasonable action to
cause its Affiliates not to sell any securities received under the Merger
Agreement in violation of the registration requirements of the Securities Act,
including Rule 145 thereunder.
7.11. Fairness Opinion. In the case of Star Partner's obligation to
consummate the Merger, the Special Committee shall have received an opinion of
A.G. Edwards & Sons, Inc. to the effect that, as of the date of the Joint Proxy
Statement, the Merger and the transactions contemplated hereby are fair, from a
financial point of view, to the holders of Common Units (other than Petro and
its affiliates), and the opinion shall not have been withdrawn by A.G. Edwards
& Sons, Inc. In the case of Petro's obligation to consummate the Merger, Petro
shall have received an opinion of Dain Rauscher Wessels to the effect that, as
of the date of the Joint Proxy Statement, the Merger and the transactions
contemplated thereby are fair, from a financial point of view, to the non-
affiliated, public holders of Petro Common Stock, and the opinion shall not
have been withdrawn by Dain Rauscher Wessels.
7.12. Public Offerings. Star Partners shall have consummated the Equity
Offering and the Debt Offering, with the Cost of Capital not to exceed $27.5
million on an annual basis, and with the net proceeds therefrom applied to
reduce indebtedness of Petro outstanding prior to the Effective Time.
7.13. Refinancing Conditions. Immediately prior to the Restructuring
Transactions:
(a) The sum of (i) all indebtedness for borrowed money of Petro and its
Subsidiaries to be outstanding at the Effective Time except indebtedness
outstanding under Petro's working capital bank credit facility and (ii) the
repurchase or redemption price (including the value of the Junior Preferred
Stock, which shall be deemed to be $2.24 million) of all indebtedness for
borrowed money and Petro Preferred Stock to be repurchased or redeemed as
provided in the Refinancing Conditions less the amount, if any, by which
the Working Capital of Petro as of the most recent date for which internal
Petro financial statements are available (but in any event no more than 15
calendar days after the end of the preceding month) shall exceed the amount
of Working Capital of Petro required pursuant to Section 7.13(c), shall not
exceed $331,367,000;
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<PAGE>
(b) Petro and its subsidiaries shall have cash balances of not less than
$500,000;
(c) At the Closing Date, the Working capital of Petro as of the most
recent date for which internal Petro financial statements are available
(which date or the availability of Petro financial statements shall in any
event not be more than 15 calendar days after the end of the preceding
month) shall exceed the following amounts:
<TABLE>
<CAPTION>
PETRO
WORKING
CAPITAL
CLOSING DATE REQUIREMENT
------------ -----------
<S> <C>
February 15, 1999 to the date of availability of Febru-
ary 1999 Petro financial statements.................... $18,000,000
Date of availability of February 1999 Petro financial
statements to date of availability of March 1999 Petro
financial statements................................... $35,000,000
Date of availability of March 1999 Petro financial
statements to date of availability of April 1999 Petro
financial statements................................... $46,000,000
</TABLE>
(d) Petro shall have cash balances in an amount equal to or not less than
(or shall have arranged for payment out of the proceeds of the Debt
Offering or the Equity Offering), and shall pay, all out-of-pocket costs
and expenses associated with the transactions contemplated by this
Agreement, including the underwriting discounts and commissions on the debt
and equity issued pursuant to the Debt Registration Statement and Equity
Registration Statement (excluding any over-allotment option), the financial
and advisory and fairness opinion fees incurred by Petro and Star Partners,
the legal, accounting and printing fees incurred by Petro and Star
Partners, all solicitation and exchange fees related to the retirement or
redemption of Petro debt or Petro Preferred Stock and all appraisals and
environmental reports;
(e) The Private Debt Conditions, 12 7/8% Preferred Stock Conditions, Public
Debt Conditions, 1989 Preferred Stock Conditions and Star Propane Debt
Conditions shall have been satisfied; and
(f) Star Partners shall have received a certificate signed by the Chief
Financial Officer of Petro, dated the Closing Date, to the effect set forth
in clauses (a) through (e) of this Section 7.11.
7.14. Dissenters' Rights. The shares of Petro Common Stock held by Dissenting
Common Holders shall not exceed 10% of the outstanding shares of Petro Common
Stock.
7.15. Covenant Not to Compete. Star Partners shall have received an agreement
from Irik Sevin substantially in the form of Exhibit H.
7.16. Working Capital Loan. Petro shall have entered into a working capital
credit facility of not less than $30 million reasonably satisfactory to the
Special Committee.
7.17. Debt Offering. The Special Committee shall not have reasonably objected
to the restrictive covenants governing the notes issued in the Debt Offering.
7.18. Restructuring Transactions. The Restructuring Transactions shall have
occurred on the terms provided in this Agreement.
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<PAGE>
7.19. Special Committee. The Special Committee shall not have withdrawn its
approval of this Agreement, the Merger and the transactions contemplated hereby
and thereby as of the date of the Joint Proxy Statement.
7.20. Custody Agreement. All of the Petro Insiders have executed a Custody
Agreement substantially in the form attached to the Exchange Agreement on or
prior to December 31, 1998.
ARTICLE VIII.
TERMINATION
8.1. Termination.
(a) This Agreement may be terminated, and the Merger may be abandoned at any
time prior to the Effective Time, whether prior to or after approval by the
Common Unitholders of Star Partners or the stockholders of Petro:
(i) Mutual Consent. By the mutual consent of Star Partners and Petro in a
written instrument, if the Board of Directors of Petro and the Special
Committee each so determines by vote of a majority of its members;
(ii) Breach. By Star Partners (upon the vote of the Special Committee) or
by Petro (upon the vote of a majority of the members of the Board of
Directors) (provided that the terminating party is not then in material
breach of any representation, warranty, covenant or other agreement
contained herein), in the event of either: (i) a breach by the other party
of any representation or warranty contained herein (subject to the standard
set forth in Section 5.02), which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach or (ii) a material breach by the other party of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the
breaching party of such breach;
(iii) No Approval. By Star Partners (upon the vote of the Special
Committee) or by Petro (upon the vote of a majority of the members of the
Board of Directors), if its Board of Directors (or the Special Committee in
the case of Star Partners) so determines by a vote of a majority of the
members of its entire Board, in the event (i) the approval under the HSRA
required for consummation of the Merger and the other transactions
contemplated by the Merger shall have been denied by final nonappealable
action or any governmental entity of competent jurisdiction shall have
issued a final nonappealable order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement; provided,
however, the party seeking termination shall have complied fully with its
obligations under Section 6.01(b) of this Agreement; or (ii) any
stockholder or unitholder approval required by Section 7.01 herein is not
obtained at the Petro Meeting or the Star Partners Meeting, and such
meetings (including adjournments and postponements) have been held; and
(iv) by either the Board of Directors of the General Partner or the Board
of Directors of Petro, if the Board of Directors of the other party shall
have withdrawn, modified or changed in a manner adverse to the terminating
party its approval or recommendation of this Agreement and the transactions
contemplated hereby.
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<PAGE>
(b) This Agreement shall be terminated if the Merger shall not have been
consummated on or prior to April 1, 1999 unless Star Partners (upon the vote of
the Special Committee) and Petro (upon the vote of a majority of the members of
the Board of Directors) elect to extend such termination date.
8.2. Effect Of Termination And Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
no party to this Agreement shall have any liability or further obligation to
any other party hereunder except (i) as set forth in Section 9.1 and (ii) that
termination will not relieve a breaching party from liability for any willful
breach of this Agreement giving rise to such termination.
ARTICLE IX.
MISCELLANEOUS
9.1. Survival. All representations, warranties, agreements and covenants
contained in this Agreement shall not survive the Closing or termination of
this Agreement if this Agreement is terminated prior to the Closing; provided,
however, if the Closing occurs, the agreements of the parties in Sections 3.4,
3.7, 6.15, 9.1, 9.4 and 9.8 shall survive the Closing, and if this Agreement is
terminated prior to the Closing, the agreements of the parties in Sections
6.6(b), 8.2, 9.1, 9.4, 9.5, 9.6, 9.7 and 9.8 shall survive such termination.
9.2. Waiver; Amendment. Subject to compliance with applicable law, prior to
the Closing, any provision of this Agreement may be (i) waived by the party
benefitted by the provision or (ii) amended or modified at any time, by an
agreement in writing between the parties hereto approved by their respective
Boards of Directors (and in the case of Star Partners, by the Special
Committee) and executed in the same manner as this Agreement. Prior to
submission of this Agreement for approval by the stockholders of Petro, Star
Partners may make such amendments as are permitted by Section 2.1, and Petro's
Board of Directors shall approve the supplements and amendments specified in
this sentence.
9.3. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.4. Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of New York, without regard to the
conflict of law principles thereof (except to the extent that mandatory
provisions of federal law govern).
9.5. Expenses. Whether or not the Merger is consummated, all reasonable costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by Petro.
9.6. Confidentiality. Each of the parties hereto and their respective agents,
attorneys and accountants will maintain the confidentiality of all information
provided in connection herewith in accordance, and subject to the limitations
of, the Confidentiality Agreement.
9.7. Notices. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed
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<PAGE>
by registered or certified mail (return receipt requested) to such party at its
address set forth below or such other address as such party may specify by
notice to the parties hereto.
If to Star Partners, to:
Star Gas Corporation
Clearwater House
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Fax: 203-328-739
With copies to:
Elizabeth K. Lanier
GE Power Systems
One River Road
Building 37, 6th Floor
Schenectady, NY 12345
Fax: 518-385-4725
William P. Nicoletti
Managing Director
McDonald & Company Securities, Inc.
One Evertrust Plaza
Jersey City, NJ 07032
Fax: 212-220-6149
Baker & Botts LLP
3000 One Shell Plaza 910 Louisiana
Houston, Tx 77002-4995
Attn: R. Joel Swanson, Esq.
Fax: 713-229-1522
If to Petro, to:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street--5th Fl.
P.O. Box 1457
Stamford, CT 06902
Fax: 203-328-7421
With copies to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attn: Alan Shapiro, Esq.
Fax: 212-262-5152
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<PAGE>
9.8. Entire Understanding; No Third Party Beneficiaries. Except for the
Confidentiality Agreement, which shall remain in effect, this Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made. Except for Sections 6.12 and 6.14, nothing
in this Agreement, expressed or implied, is intended to confer upon any person,
other than the parties hereto or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
9.9. Headings. The headings contained in this Agreement are for reference
purposes only and are not part of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
PETROLEUM HEAT AND POWER CO., INC.
By: _________________________________
Name: William G. Powers, Jr.
Title: President
STAR GAS PARTNERS, L.P.
By: Star Gas Corporation
By: _________________________________
Name: Joseph P. Cavanaugh
Title: President
STAR GAS PROPANE, LP
By: Star Gas Corporation
By: _________________________________
Name: Joseph P. Cavanaugh
Title: President
PETRO/MERGECO, INC.
By: _________________________________
Name: William G. Powers, Jr.
Title: President
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<PAGE>
ANNEX B
EXCHANGE AGREEMENT
Agreement entered into as of this 17th day of October, 1998 ("Agreement") by
and among Star Gas Partners, L.P., a Delaware limited partnership ("Star
Partners"), and the shareholders of Petroleum Heat and Power Co., Inc., a
Minnesota corporation, ("Petro") who have executed this Agreement in such
capacity (individually a "Shareholder" and collectively the "Shareholders").
1. Recitals. This Agreement is entered into with reference to the following
facts:
1.1 Petro, Star Partners and certain direct and indirect subsidiaries of
Star Partners have this date entered into an Agreement and Plan of Merger
(the "Merger Agreement").
1.2 It is a condition to the Merger that immediately prior to the
Effective Time each of the Shareholders shall exchange (the "Exchange")
certain shares of Petro Class A Common Stock, par value $.10 per share, and
Petro Class C Common Stock, par value $.10 per share (collectively the
"Petro Common Stock") with Star Partners for certain units of Senior
Subordinated Limited Partnership Units ("Senior Subordinated Units") and
Junior Subordinated Partnership Units (the "Junior Subordinated Units" and
together with the Senior Subordinated Units, the "Subordinated Units"), all
as set forth on Exhibit 1.2 hereto, except that record and beneficial
ownership of certain shares of Class A Common Stock and Class C Common
Stock owned by Audrey Sevin, Irik Sevin, Wolfgang Traber, Hanseatic
Corporation and Hanseatic Americas LDS (collectively the "GP Group") as
contemplated under clause 6 of the definition of "Restructuring
Transactions" in the Merger Agreement will be transferred by the GP Group
to Star Gas LLC and by Star Gas LLC to Star Partners as part of the
Exchange.
1.3 As a condition to executing the Merger Agreement, Star Partners has
required that the Shareholders execute (i) this Agreement, pursuant to
which each of them agrees to exchange his Petro Common Stock with Star
Partners and Star Partners agrees to issue the Subordinated Units in
exchange for the Petro Common Stock, on the terms and conditions contained
herein and (ii) on or before December 31, 1998, a custody agreement of even
date between them and American Stock Transfer & Trust Company substantially
in the form of Exhibit 1.4 hereto (the "Custody Agreement").
1.4 All terms with initial capitals which are not defined herein shall
have the meaning assigned to them in the Merger Agreement.
2. Exchange of Petro Shares for Subordinated Units.
2.1 Subject to the terms and conditions of this Agreement, and
conditioned on the occurrence of the closing under the Merger Agreement, at
the closing under the Merger Agreement (the "Closing"), each of the
Shareholders agrees to transfer and convey to Star Partners the Petro
Common Stock indicated as owned by such Shareholder on Exhibit 1.2 and Star
Partners agrees to accept such transfers and conveyances and to issue to
each such Petro Shareholder the Subordinated Units issuable to such Petro
Shareholder at the Closing as set forth on Exhibit 1.2, except that the GP
Group agrees that on or before November 1, 1998 they will transfer to Star
Gas LLC those shares of Petro Common Stock specified on Exhibit 1.2 as
<PAGE>
transferable to Star Gas LLC and will cause Star Gas LLC to execute a
Custody Agreement and to transfer and convey such Petro Common Stock to
Star Partners at the Closing.
2.2 As security for the performance of its obligations pursuant to
Section 2.1 each of the Petro Shareholders has entered into the Custody
Agreement.
3. Representations and Warranties of each of the Shareholders.
Each of the Shareholders represents and warrants to Star Partners:
3.1 Each Shareholder is the lawful owner of the number of Petro Shares
listed opposite the name of such Shareholder on Exhibit 1.2 free and clear
of all liens, restrictions, encumbrances and claims of any kind to Star
Partners.
3.2 Upon consummation of the Exchange, Star Partners will acquire good
title to all of the Petro Common Stock owned by such Shareholder, free and
clear of any liens, restrictions, encumbrances and claims of any kind
whatsoever.
4. Representations and Warranties of Star Partners.
4.1 Star Partners hereby represents and warrants to the Petro
Shareholders as follows:
(a) The Subordinated Units to be delivered to the Petro Shareholders at
the Closing, and the additional Senior Subordinated Units which may be
issued to holders of the Senior Subordinated Units upon Petro's achieving
certain specified performance levels during the period of five years
following the Closing ("Contingent Senior Subordinated Units"), (i) have
been duly authorized and will be, when issued to the Petro Shareholders in
accordance with the terms hereof, or in the case of the Contingent Senior
Subordinated Units, when issued in accordance with the terms of the Amended
and Restated Agreement of Limited Partnership of Star Partners (the
"Partnership Agreement"), validly issued in accordance with the Partnership
Agreement, fully paid (to the extent required under the Partnership
Agreement) and nonassessable (except as such nonassessability may be
affected by matters described in the Registration Statement relating to the
Merger Agreement under the caption "Description of the Partnership
Agreement--Limited Liability"), and (ii) in the case of the Senior
Subordinated Units, on the Closing Date shall be approved for trading on
the NYSE subject to official notice of issuance.
(b) Neither the execution and delivery of this Agreement nor (upon the
adoption of the amendments to the Partnership Agreement provided for in the
Merger Agreement) the consummation of the transactions contemplated hereby
will violate any provisions of the Partnership Agreement or other
organizational documents of Star Partners or be in conflict with, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or cause the acceleration of the
maturity of any debt or obligation pursuant to, or result in the creation
or imposition of any security interest, lien or other encumbrance upon any
property or assets of Star Partners, under any agreement or commitment to
which Star Partners is a party or by which Star Partners is bound, or
violate any applicable statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority.
B-2
<PAGE>
(c) When delivered to the Shareholders pursuant to the Exchange, the
Senior Subordinated Units will be registered under the Securities Act of
1933, as amended (the "Securities Act") and will be transferable by the
Petro Shareholders free of any restrictions imposed by the Securities Act.
5. Representations and Acknowledgments of Shareholders Regarding the Junior
Subordinated Units
Each of the Shareholders hereby represents and acknowledges:
5.1 No Distribution.
The Junior Subordinated Units being acquired by such Shareholder as set
forth on Exhibit 1.2 are being acquired for his/its own account, for
investment and not with a view to or for resale in connection with any
"distribution" thereof as such term is used in connection with the
registration provisions of the Securities Act.
5.2 Legend.
The following legend shall be affixed to the certificates for Junior
Subordinated Units issued pursuant to this Agreement:
The securities represented by this Certificate have not been registered
under the Securities Act of 1933, as amended, nor the laws of any
state. Accordingly, these securities may not be offered, sold,
transferred, pledged or hypothecated in the absence of registration, or
the availability, in the opinion of counsel for the issuer, of an
exemption from registration under the Securities Act of 1933, as
amended, or the laws of any state. Therefore, the stock transfer agent
will effect transfer of this Certificate only in accordance with the
above instructions.
5.3 Review of Applicable Laws. Each Shareholder acknowledges that Star
Partners has informed him/it that the Junior Subordinated Units to be
received pursuant to the Exchange have not been registered under the
Securities Act and may not be sold until they have been registered or
unless an exemption from such registration is available.
5.4 Knowledge and Experience. Each Shareholder has the knowledge and
experience in the financial and business matters necessary for making an
informed decision on the merits and risk of his investment in the Junior
Subordinated Units.
6. Registration of Senior Subordinated Units. The Senior Subordinated
Units will be entitled to the registration rights provided in the
Partnership Agreement for the benefit of affiliates of the General Partner.
7. Termination. This Agreement may terminate under any of the following
circumstances:
7.1 If the Closing has not occurred on or before May 1, 1999, then any
party may terminate this Agreement by giving notice as provided in 7.9;
7.2 If Petro and Star Partners publicly announce that they have abandoned
the Merger, then this Agreement shall automatically terminate;
7.3 If the Merger Agreement is terminated, then this Agreement shall
automatically terminate;
B-3
<PAGE>
7.4 At any time, by the written consent of all parties.
7. Miscellaneous.
7.1 Complete Agreement. This Agreement constitutes the entire agreement
of the parties hereto pertaining to the subject matter hereof and
supersedes all prior or contemporaneous conversations, understandings,
negotiations and discussions, whether oral or written, on the subject
matter. It can be amended only in writing signed by all parties. The
representations and warranties set forth herein shall survive the Closing.
7.2 Governing Law. This Agreement is intended to be performed in the
State of New York and shall be construed and enforced in accordance with
the laws of the State of New York.
7.3 The parties hereto agree that they will, at the expense of the
requesting party, from time to time execute and deliver any and all
additional and supplemental instruments, and do such other reasonable acts
and things which may be necessary or desirable to effect the purpose of
this Agreement and the transactions contemplated hereby.
7.4 Waiver by any of the parties hereto of any breach of, or exercise of
any right under this Agreement, shall not be deemed a waiver of similar or
other breaches or rights.
7.5 Captions and section headings used herein are for convenience only,
and are not a part of this Agreement, and shall not be used in construing
it.
7.6 All of the terms and provisions of this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective transferees, successors and assigns. Neither party may assign
this Agreement or any interest therein.
7.7 Each Shareholder will indemnify and hold Star Partners harmless
against and in respect of any claims from brokerage or other commissions
relating to this Agreement or the transactions contemplated hereby
resulting from such Shareholder's own dealing with any person in connection
with the Exchange and Star Partners will indemnify and hold the
Shareholders harmless against and in respect of any claims from brokerage
or other commissions relating to this Agreement or the transactions
contemplated hereby resulting from its own dealing with any person in
connection with the Exchange.
7.8 This Agreement is intended to benefit only the parties hereto and
there shall be no third party beneficiaries of this Agreement.
7.9 Notices. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally
delivered, telecopied (with confirmation) or mailed by registered or
certified mail (return receipt requested) to such party at its address set
forth below or such other address as such party may specify by notice to
the parties hereto.
B-4
<PAGE>
If to Star Partners, to:
Star Gas Corporation
Clearwater House
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Fax: 203-328-7393
Attn: Joseph P. Cavanaugh, President
With copies to:
Baker & Botts
One Shell Plaza
910 Louisiana
Houston, TX 77002-4995
Fax: 713-229-1522
Attn: R. Joel Swanson, Esq.
If to a Shareholder:
To his Address set forth on the
Signature Page
With copies to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attn: Alan Shapiro, Esq.
Fax: 212-262-5152
Star Gas Partners, L.P.
by Star Gas Corporation, its General
Partner
By __________________________________
Joseph P. Cavanaugh, President
Shareholders:
- ------------------------------------- -------------------------------------
Irik P. Sevin Wolfgang Traber
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
B-5
<PAGE>
- ------------------------------------- -------------------------------------
Audrey L. Sevin Paul Biddelman
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
Phillip Ean Cohen Hubertus Langen
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Brentwood Corporation United Capital Corp.
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Barcell Corporation
By: _________________________________ -------------------------------------
Thomas J. Edelman
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
B-6
<PAGE>
GABES SA TORTOSA GmbH
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Minneford Corp. MM Warburg & Co.
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
- -------------------------------------
Fernando Montero
- -------------------------------------
Address
- -------------------------------------
Hanseatic Americas LDC Hanseatic Corporation
By: _________________________________ By: _________________________________
- -------------------------------------
Richard O'Connell
- -------------------------------------
Address
- -------------------------------------
B-7
<PAGE>
EXHIBIT 1.2
<TABLE>
<CAPTION>
SHAREHOLDER CLASS A CLASS C TOTAL
- ----------- --------- --------- ----------
<S> <C> <C> <C>
P. Cohen........................................ 679,262 113,423 792,685
T. Edelman...................................... 653,312 129,019 782,331
R. O'Connell.................................... 1,128,745 302,461 1,431,206
A. Sevin........................................ 1,876,863 477,716 2,354,579
I. Sevin........................................ 740,438 201,641 942,079
W. Traber....................................... -- 9,038 9,038
Brentwood Corp.................................. 681,873 120,985 802,858
Gabes S.A....................................... 597,617 124,314 721,931
Minneford Corp.................................. 73,638 12,000 85,638
Fernando Montero................................ -- 35,287 35,287
M.M. Warburg & Co............................... -- 31,808 31,808
Hanseatic Corp.................................. -- 298,717 298,717
Hanseatic Americas LDC.......................... 1,777,279 -- 1,777,279
Barcel Corp..................................... 605,151 151,231 756,382
Hubertus Langen................................. 734,473 9,038 740,511
Tortosa GmbH.................................... -- 298,717 298,717
P. Biddelman.................................... 2,386 -- 2,386
United Capital Corp............................. 90,000 -- 90,000
--------- --------- ----------
9,638,037 2,315,395 11,953,432
========= ========= ==========
</TABLE>
All shareholders to receive senior subordinated units of Star Partners at the
ratio of .13064 per share, except A. Sevin, I. Sevin, W. Traber, Hanseatic
Corp. and Hanseatic Americas LDC, which will receive junior subordinated units
and general partner units at the ratio of .15920 per share.
B-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX C
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
STAR GAS PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
ORGANIZATIONAL MATTERS
<TABLE>
<C> <S> <C>
Section 1.1 Formation and Continuation................................. 21
Section 1.2 Name....................................................... 12
Section 1.3 Registered Office; Principal Office........................ 12
Section 1.4 Power of Attorney.......................................... 2
Section 1.5 Term....................................................... 34
Section 1.6 Possible Restrictions on Transfer.......................... 34
</TABLE>
ARTICLE II
DEFINITIONS
ARTICLE III
PURPOSE
<TABLE>
<C> <S> <C>
Section 3.1 Purpose and Business...................................... 2225
Section 3.2 Powers.................................................... 2226
</TABLE>
ARTICLE IV
CONTRIBUTIONS AND UNITS
<TABLE>
<C> <S> <C>
Section 4.1 Organization Contributions and Return............. 2226
** 1 Section 4.3 4.2 Contributions by Initial Limited Partners......... 2427
Section 4.2 4.3 General Partner and Subsidiary Contributions...... 2327
* 1 moved from here; text not shown
Section 4.4 Issuances of Additional Partnership Securities.... 2428
Section 4.5 Limitations on Issuance of Additional Partnership
Securities........................................ 2529
Section 4.6 Conversion of Special Issuance of Senior
Subordinated Units and Conversion of Senior
Subordinated Units and Junior Subordinated Units.. 2630
Section 4.7 Limited Preemptive Rights......................... 2731
Section 4.8 Splits and Combinations........................... 2731
Section 4.9 Capital Accounts.................................. 2832
Section 4.10 Interest and Withdrawal........................... 3135
</TABLE>
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
<TABLE>
<C> <S> <C>
Section 5.1 Allocations for Capital Account Purposes................ 3135
Section 5.2 Allocations for Tax Purposes............................ 3943
Section 5.3 Requirement and Characterization of Distributions....... 4245
Section 5.4 Distributions of Operating Surplus...................... 4347
Section 5.5 Distributions of Cash from Capital Surplus.............. 4449
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels..................................... 4549
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
Section 5.7 Special Provisions Relating to the Senior Subordinated
Units and Junior Subordinated Units..................... 4549
Section 5.8 Entity-Level Taxation................................... 4550
</TABLE>
ARTICLE VIMANAGEMENT AND OPERATION OF BUSINESS VI
MANAGEMENT AND OPERATION OF BUSINESS
<TABLE>
<C> <S> <C>
Section 6.1 Management.............................................. 4650
Section 6.2 Certificate of Limited Partnership...................... 4852
Section 6.3 Restrictions on General Partner's Authority............. 4953
Section 6.4 Reimbursement of the General Partner.................... 4953
Section 6.5 Outside Activities...................................... 5054
Section 6.6 Loans from the General Partner; Contracts with
Affiliates; Certain Restrictions on the General
Partner................................................. 5155
Section 6.7 Indemnification......................................... 5357
Section 6.8 Liability of Indemnitees................................ 5558
Section 6.9 Resolution of Conflicts of Interest..................... 5559
Section 6.10 Other Matters Concerning the General Partner............ 5760
Section 6.11 Title to Partnership Assets............................. 5861
Section 6.12 Purchase or Sale of Units............................... 5861
Section 6.13 Registration Rights..................................... 62
Section 6.14 Reliance by Third Parties............................... 6164
</TABLE>
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
<TABLE>
<C> <S> <C>
Section 7.1 Limitation of Liability................................... 6165
Section 7.2 Management of Business.................................... 6165
Section 7.3 Outside Activities........................................ 6265
Section 7.4 Return of Capital......................................... 6265
Section 7.5 Rights of Limited Partners to the Partnership............. 6265
</TABLE>
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
<TABLE>
<C> <S> <C>
Section 8.1 Records and Accounting................................... 6366
Section 8.2 Fiscal Year.............................................. 6366
Section 8.3 Reports.................................................. 6367
</TABLE>
ARTICLE IX
TAX MATTERS
<TABLE>
<C> <S> <C>
Section 9.1 Tax Returns and Information............................... 6467
Section 9.2 Tax Elections............................................. 6467
Section 9.3 Tax Controversies......................................... 6568
Section 9.4 Withholding............................................... 6568
</TABLE>
ii
<PAGE>
ARTICLE X
CERTIFICATES
<TABLE>
<C> <S> <C>
Section 10.1 Certificates............................................. 6568
Section 10.2 Registration, Registration of Transfer and Exchange...... 6568
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates........ 6669
Section 10.4 Record Holder............................................ 6770
</TABLE>
ARTICLE XI
TRANSFER OF INTERESTS
<TABLE>
<C> <S> <C>
Section 11.1 Transfer................................................. 6770
Section 11.2 Transfer of a General Partner's Partnership Interest..... 6870
Section 11.3 Transfer of Units........................................ 6871
Section 11.4 Restrictions on Transfers................................ 6971
Section 11.5 Citizenship Certificates; Non-citizen Assignees.......... 6972
Section 11.6 Redemption of Interests.................................. 7072
</TABLE>
ARTICLE XII
ADMISSION OF PARTNERS
<TABLE>
<C> <S> <C>
Section 12.1 Admission of Initial Limited Partners................... 7174
Section 12.2 Admission of Substituted Limited Partners............... 7274
Section 12.3 Admission of Successor General Partner.................. 7274
Section 12.4 Admission of Additional Limited Partners................ 7275
Section 12.5 Amendment of Agreement and Certificate of Limited
Partnership............................................. 7375
</TABLE>
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
<TABLE>
<C> <S> <C>
Section 13.1 Withdrawal of the General Partner....................... 7375
Section 13.2 Removal of the General Partner.......................... 7577
Section 13.3 Interest of Departing Partner and Successor General
Partner................................................. 7577
Section 13.4 Withdrawal of Limited Partners.......................... 7778
</TABLE>
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
<TABLE>
<C> <S> <C>
Section 14.1 Dissolution............................................. 7779
Section 14.2 Continuation of the Business of the Partnership After
Dissolution............................................. 7879
Section 14.3 Liquidator.............................................. 7880
Section 14.4 Liquidation............................................. 7980
Section 14.5 Cancellation of Certificate of Limited Partnership...... 8081
Section 14.6 Return of Contributions................................. 8081
Section 14.7 Waiver of Partition..................................... 8081
Section 14.8 Capital Account Restoration............................. 8081
</TABLE>
iii
<PAGE>
ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
<TABLE>
<C> <S> <C>
Section 15.1 Amendment to be Adopted Solely by General Partner....... 8082
Section 15.2 Amendment Procedures.................................... 8283
Section 15.3 Amendment Requirements.................................. 8283
Section 15.4 Meetings................................................ 8384
Section 15.5 Notice of a Meeting..................................... 8484
Section 15.6 Record Date............................................. 8484
Section 15.7 Adjournment............................................. 8485
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes................................................. 8485
Section 15.9 Quorum.................................................. 8585
Section 15.10 Conduct of Meeting...................................... 8586
Section 15.11 Action Without a Meeting................................ 8686
Section 15.12 Voting and Other Rights................................. 8687
</TABLE>
ARTICLE XVIMERGER XVI
MERGER
<TABLE>
<C> <S> <C>
Section 16.1 Authority................................................ 8787
Section 16.2 Procedure for Merger or Consolidation.................... 8787
Section 16.3 Approval by Limited Partners of Merger or Consolidation.. 8888
Section 16.4 Certificate of Merger.................................... 8888
Section 16.5 Effect of Merger......................................... 8989
</TABLE>
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
<TABLE>
<C> <S> <C>
Section 17.1 Right to Acquire Units................................... 8989
</TABLE>
ARTICLE XVIII
GENERAL PROVISIONS
<TABLE>
<C> <S> <C>
Section 18.1 Addresses and Notices..................................... 9191
Section 18.2 References................................................ 9292
Section 18.3 Pronouns and Plurals...................................... 9292
Section 18.4 Further Action............................................ 9292
Section 18.5 Binding Effect............................................ 9292
Section 18.6 Integration............................................... 9292
Section 18.7 Creditors................................................. 9292
Section 18.8 Waiver.................................................... 9292
Section 18.9 Counterparts.............................................. 9392
Section 18.10 Applicable Law............................................ 9392
Section 18.11 Invalidity of Provisions.................................. 9393
Section 18.12 Consent of Partners....................................... 9393
EXHIBIT A................................................................. A-1
EXHIBIT B................................................................. B-1
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF STAR GAS
PARTNERS, L.P., dated as of , 1995 1999, is entered into by and
among Star Gas Corporation; STAR GAS LLC, a Delaware corporation limited
liability company, as the General Partner, and William G. Powers, Jr., as the
Organizational Limited Partner, together with any other Persons who those
Persons who are or become Partners in the Partnership or parties hereto as;
provided, however, herein. In consideration of the covenants, conditions and
agreements contained herein, the parties hereto hereby agree as follows:
RECITALS:
WHEREAS, Star Gas Corporation, a Delaware corporation and the initial general
partner of the Partnership (the "Initial General Partner"), and certain other
parties organized the Partnership as a Delaware limited partnership pursuant to
an Agreement of Limited Partnership dated as of December 20, 1995 (the
"Original Agreement"); and
WHEREAS, the Partnership, the Operating Partnership, Petro and Mergeco have
entered into that Merger Agreement dated as of October 22, 1998 (the "Petro
Merger Agreement") providing for the merger (the "Merger") of Mergeco with and
into Petro; and
WHEREAS, in order to effect the transactions contemplated by the Merger
Agreement, it is necessary to amend this Agreement as provided herein; and
WHEREAS, the Merger Agreement and the transactions contemplated thereby
(including, without limitation, the form of this Agreement and the amendments
effected hereby and the withdrawal of Star Gas as the general partner of the
Partnership and the Operating Partnership and the election of Star Gas LLC as
the successor general partner of the Partnership and the Operating Partnership)
have been submitted to, and approved by the requisite vote of, the Limited
Partners; and
WHEREAS, the General Partner has the authority to adopt certain amendments to
this Agreement without the approval of any Limited Partner or Assignee to
reflect, among other things: (i) subject to the terms of Section 4.4, any
change that is necessary or desirable in connection with the authorization for
issuance of any class or series of Partnership Securities pursuant to Section
4.4 and (ii) a change that, in the sole discretion of the General Partner, does
not adversely affect the Limited Partners in any material respect.
NOW, THEREFORE, the Original Agreement is hereby amended and, as so amended,
is restated in its entirety as follows:
<PAGE>
ARTICLE I
ORGANIZATIONAL MATTERS
Section 1.1 Formation and Continuation.
The Initial General Partner and the Organizational Limited Partner hereby
form previously formed the Partnership as a limited partnership pursuant to the
provisions of the Delaware Act. The General Partner and the Limited Partners
hereby amend and restate this Agreement in its entirety to continue the
Partnership as a limited partnership pursuant to the provisions of the Delaware
Act and to set forth the rights and obligations of the Partners and certain
matters related thereto. This amendment and restatement shall become effective
on the date of this Agreement. Except as expressly provided to the contrary
herein, the rights and obligations of the Partners and the administration,
dissolution and termination of the Partnership shall be governed by the
Delaware Act. All Partnership Interests shall constitute personal property of
the owner thereof for all purposes.
Section 1.2 Name.
The name of the Partnership shall be is "Star Gas Partners, L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner, including the name of the
General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary
for the purpose of complying with the laws of any jurisdiction that so
requires. The General Partner in its sole discretion may change the name of the
Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
Section 1.3 Registered Office; Principal Office.
Unless and until changed by the General Partner, the registered office of the
Partnership in the State of Delaware shall be located at 32 Loockerman Square,
Suite L-100, Dover, Delaware 19904, and the registered agent for service of
process on the Partnership in the State of Delaware at such registered office
shall be The Prentice-Hall Corporation System, Inc. The principal office of the
Partnership shall be located at, and the address of the General Partner shall
be, 2187 Atlantic Street, Stamford, CT Connecticut 06902, or such other place
as the General Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate.
Section 1.4 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
each of the General Partner and, if a Liquidator shall have been selected
pursuant to Section 14.3, the Liquidator, severally (and any successor to
either thereof by merger, transfer, assignment, election or otherwise) and each
of their authorized officers and attorneys-in-fact, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full
power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the
C-2
<PAGE>
Certificate of Limited Partnership and all amendments or restatements
thereof) that the General Partner or the Liquidator deems necessary or
appropriate to form, qualify or continue the existence or qualification of
the Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other instruments that
the General Partner or the Liquidator deems necessary or appropriate to
reflect, in accordance with its terms, any amendment, change, modification
or restatement of this Agreement; (C) all certificates, documents and other
instruments (including conveyances and a certificate of cancellation) that
the General Partner or the Liquidator deems necessary or appropriate to
reflect the dissolution and liquidation of the Partnership pursuant to the
terms of this Agreement; (D) all certificates, documents and other
instruments relating to the admission, withdrawal, removal or substitution
of any Partner pursuant to, or other events described in, Articles XI, XII,
XIII and XIV; (E) all certificates, documents and other instruments
relating to the determination of the rights, preferences and privileges of
any class or series of Partnership Securities issued pursuant to Section
4.4; and (F) all certificates, documents and other instruments (including
agreements and a certificate of merger) relating to a merger or
consolidation of the Partnership pursuant to Article XVI; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the sole discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms hereof or is
necessary or appropriate, in the sole discretion of the General Partner or
the Liquidator, to effectuate the terms or intent hereof; provided that
when required by Section 15.3 or any other provision hereof that
establishes a percentage of the Limited Partners or of the Limited Partners
of any class or series required to take any action, the General Partner or
the Liquidator may exercise the power of attorney made in this Section
1.4(a)(ii) only after the necessary vote, consent or approval of the
Limited Partners or of the Limited Partners of such class or series, as
applicable.
Nothing contained in this Section 1.4(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XV or as may be otherwise expressly provided for herein.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and not be affected by
the subsequent death, incompetency, disability, incapacity, dissolution,
bankruptcy or termination of any Limited Partner or Assignee and the transfer
of all or any portion of such Limited Partner's or Assignee's Partnership
Interest and shall extend to such Limited Partner's or Assignee's heirs,
successors, assigns and personal representatives. Each such Limited Partner or
Assignee hereby agrees to be bound by any representation made by the General
Partner or the Liquidator acting in good faith pursuant to such power of
attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of
the General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the
C-3
<PAGE>
General Partner's or the Liquidator's request therefor, such further
designation, powers of attorney and other instruments as the General Partner or
the Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 1.5 Term.
The Partnership commenced upon the filing of the Certificate of Limited
Partnership in accordance with the Delaware Act and shall continue in existence
until the close of Partnership business on December 31, 2085, or until the
earlier dissolution of the Partnership in accordance with the provisions of
Article XIV.
Section 1.6 Possible Restrictions on Transfer.
The General Partner may impose restrictions on the transfer of Partnership
Interests if a subsequent Opinion of Counsel determines that such restrictions
are necessary to avoid a significant risk that the Partnership or the Operating
Partnership may become taxable as a corporation or otherwise as an entity for
federal income tax purposes. The restrictions may be imposed by making such
amendments to this Agreement as the General Partner in its sole discretion may
determine to be necessary or appropriate to impose such restrictions; provided,
however, that any amendment that the General Partner believes, in the exercise
of its reasonable discretion, could result in the delisting or suspension of
trading of any class of Units on any National Securities Exchange on which such
class of Units is then traded must be approved by the holders of at least a
majority of the Outstanding Units of such class.
ARTICLE II
DEFINITIONS
The following definitions shall be for all purposes, unless otherwise clearly
indicated to the contrary, applied to the terms used herein.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person in order to increase the operating capacity of the
Partnership Group beyond that which existed immediately prior to such
transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent to which Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
C-4
<PAGE>
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property
is increased as a result of such Book-Down Event, an allocable portion of
any such increase in Carrying Value shall be treated as Additional Book
Basis; provided that the amount treated as Additional Book Basis pursuant
hereto as a result of such Book-Down Event shall not exceed the amount by
which the Aggregate Remaining Net Positive Adjustments after such Book-Down
Event exceeds the remaining Additional Book Basis attributable to all of
the Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's
Adjusted Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning of such period
(the "Excess Additional Book Basis"), the Additional Book Basis Derivative
Items for such period shall be reduced by the amount that bears the same ratio
to the amount of Additional Book Basis Derivative Items determined without
regard to this sentence as the Excess Additional Book Basis bears to the
Additional Book Basis as of the beginning of such period.
"Additional Capital Contribution Obligation" has the meaning assigned to such
term in Section 4.2(b).
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 12.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and
Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such fiscal year, are reasonably expected
to be made to such Partner in subsequent years in accordance with the terms
here or otherwise to the extent they exceed offsetting increases to such
Partner's Capital Account that are reasonably expected to occur during (or
prior to) the year in which such distributions are reasonably expected to be
made (other than increases as a result of a minimum gain chargeback pursuant to
Section 5.1(d)(i) or 5.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
The "Adjusted Capital Account" in respect of a Common Unit, a Senior
Subordinated Unit, a Junior Subordinated Unit, a General Partner Unit or any
other specified interest in the Partnership shall be the amount that such
Adjusted Capital Account would be if such Common Unit, a Senior Subordinated
Unit, a Junior Subordinated Unit, a General Partner Unit or other interest in
the Partnership were the only interest in the Partnership held by a Partner.
"Adjusted Distributable Cash" has the meaning assigned to such term in
Section 5.3(b).
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"Adjusted Operating Surplus" for any period means Operating Surplus generated
during such period as adjusted to (a) decrease Operating Surplus by (i) any net
increase in Working Capital Borrowings during such period, and (ii) any net
reduction in cash reserves for Operating Expenditures during such period and
(iii) any capital contribution pursuant to the Additional Capital Contribution
Obligation not relating to an Operating Expenditure made during such period,
and (b) increase Operating Surplus by (i) any net decrease in working capital
borrowings during such period and (ii) any net increase in cash reserves for
Operating Expenditures during such period required by any debt instrument for
the repayment of principal, interest or premium. Solely with respect to the
test of the Reduction Threshold, Operating Surplus will be increased by any net
increases in cash reserves for Operating Expenditures (other than any increase
already taken into account in (b)(ii) above) during such period. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 4.9(d)(i) or 4.9(d)(ii). Once an Adjusted Property
is deemed distributed by, and recontributed to, the Partnership for federal
income tax purposes upon a termination thereof pursuant to Section 708 of the
Code, such property shall thereafter constitute a Contributed Property until
the Carrying Value of such property is subsequently adjusted pursuant to
Section 4.9(d)(i) or 4.9(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that directly
or indirectly through one or more intermediaries controls, is controlled by or
is under common control with, the Person in question. As used herein, the term
"control" means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"Aggregate Remaining Net Positive Adjustments" means as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 5.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. ;provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Section 4.9(c)(i). Subject to Section 4.9(c)(i),
the General Partner shall, in its sole discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of
Contributed Properties contributed to the Partnership in a single or integrated
transaction among each separate property on a basis proportional to the fair
market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of Star Gas Partners, L.P., as it may be amended, supplemented or restated from
time to time.
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"Assignee" means a Non-citizen Assignee or a Person to whom one or more Units
representing a Limited Partner Interest have been transferred in a manner
permitted under this Agreement and who has executed and delivered a Transfer
Application as required by this Agreement, but who has not become a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, with who has the same
residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the General
Partner composed entirely of two or more directors who are neither members,
officers nor employees of the General Partner or members, stockholders (other
than holders of Common Units or Senior Subordinated Units), officers, directors
or employees of any Affiliate of the General Partner.
"Available Cash," as to any Quarter ending before the Liquidation Date, means
(a) the sum of (i) all cash and cash equivalents of the Partnership Group on
hand at the end of such Quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination of
Available Cash with respect to such Quarter resulting from Working Capital
Borrowings subsequent to the end of such Quarter, less
(b) the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the proper
conduct of the business of the Partnership Group (including reserves for future
capital expenditures) subsequent to such Quarter, (ii) provide funds for
distributions under Sections 5.4(a)(i), (ii) and (iii) or 5.4(b)(i) in respect
of any one or more of the next four Quarters, or (iii) comply with applicable
law or any debt instrument or other agreement or obligation to which any member
of the Partnership Group is a party or its assets are subject; provided,
however, that the General Partner may not establish cash reserves for
distributions pursuant to Section 5.4(a)(iii) unless the General Partner has
determined that in its judgment the establishment of reserves will not prevent
the Partnership from distributing the Minimum Quarterly Distribution on all
Common Units and any Common Unit Arrearages thereon with respect to the next
four Quarters; and, provided further, that disbursements made by a Group Member
or cash reserves established, increased or reduced after the end of such
Quarter but on or before the date of determination of Available Cash with
respect to such Quarter shall be deemed to have been made, established,
increased or reduced, for purposes of determining Available Cash, within such
Quarter if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain, or
loss included in the determination of Net Income, Net Loss, Net Termination
Gain or Net Termination Loss that is computed with reference to the Carrying
Value of an Adjusted Property (e.g., depreciation, depletion, or gain or loss
with respect to an Adjusted Property).
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"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 4.9(d).
* 2 moved from here; text not shown
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property
and the adjusted basis thereof for federal income tax purposes as of such date.
A Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to
Section 4.9 and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal
income tax accounting principles.
** 2 "Book-Up Event" means an event which triggers a positive adjustment to
the Capital Accounts of the Partners pursuant to Section 4.9(d).
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States or the states
of New York or Connecticut shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner pursuant
to Section 4.9. The "Capital Account" in respect of a Common Unit, a Senior
Subordinated Unit, a Junior Subordinated Unit, a General Partner Unit or any
other specified interest in the Partnership shall be the amount which such
Capital Account would be if such Common Unit, Senior Subordinated Unit, Junior
Subordinated Unit, General Partner Unit or other interest in the Partnership
were the only interest in the Partnership held by a Limited Partner.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes or has contributed to
the Partnership pursuant to this Agreement and the Conveyance and Contribution
Agreement or Sections 4.1, 4.2, 4.3, 4.4, 4.9(c)(i), 13.3(c) or 14.8.
Agreements.
"Capital Improvements" means (a) additions or improvements to the capital
assets owned by any Group Member or (b) the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities and related assets), made
to increase the operating capacity of the Partnership Group from the operating
capacity of the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
"Capital Surplus" has the following meaning: all Available Cash distributed
by the Partnership from any source will be treated as distributed from
Operating Surplus until the sum of all Available Cash distributed since the
commencement of the Partnership equals the Operating Surplus as of the end of
the Quarter prior to such distribution. Any excess Available Cash will be
deemed to be Capital Surplus.
"Carrying Value" means (a) with respect to a Contributed Property, the Agreed
Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions
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charged to the Partners' and Assignees' Capital Accounts in respect of such
Contributed Property, and (b) with respect to any other Partnership property,
the adjusted basis of such property for federal income tax purposes, all as of
the time of determination. The Carrying Value of any property shall be adjusted
from time to time in accordance with Sections 4.9(d)(i) and 4.9(d)(ii) and to
reflect changes, additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as deemed appropriate
by the General Partner.
"Cause" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
"Certificate" means a certificate, (i) substantially in the form of Exhibit A
to this Agreement hereto with respect to Common Units and Exhibit B hereto with
respect to Senior Subordinated Units or (ii) issued in global form in
accordance with the rules and regulations of the Depositary, or (iii) in such
other form as may be adopted by the General Partner in its sole discretion,
issued by the Partnership evidencing ownership of one or more Common Units or
Senior Subordinated Units, as the case may be, or a certificate, in such form
as may be adopted by the General Partner in its sole discretion, issued by the
Partnership evidencing ownership of one or more other Units.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Delaware as
referenced in Section 6.2, as such Certificate of Limited Partnership may be
amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 6.13(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement. "Class A Common Unit" means a Unit representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Class A Common Units in this
Agreement; no Class A Common Units shall be outstanding until the expiration of
the Subordination Period, at which time all Common Units Outstanding
immediately prior to the expiration of the Subordination Period shall be
redesignated as Class A Common Units.
"Closing Price" has the meaning assigned to such term in Section 17.1(a).
"Class B Common Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Class B Common Units in this
Agreement; no Class B Common Units shall be outstanding until the expiration of
the Subordination Period, at which time each Outstanding Senior Subordinated
Unit and Junior Subordinated Unit shall convert into one Class B Common Unit.
"Closing Price" for any day means the last sale price on such day, regular
way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with
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respect to securities listed or admitted to trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which the Units of
such class are listed or admitted to trading or, if the Units of such class are
not listed or admitted to trading on any National Securities Exchange (other
than the Nasdaq Stock Market), the last quoted price on such day or, if not so
quoted, the average of the high bid and low asked prices on such day in the
over-the-counter market, as reported by the Nasdaq Stock Market or such other
system then in use, or, if on any such day the Units of such class are not
quoted by any such organization, the average of the closing bid and asked
prices on such day as furnished by a professional market maker making a market
in the Units of such class selected by the Board of Directors of the General
Partner, or if on any such day no market maker is making a market in the Units
of such class, the fair value of such Units on such day as determined
reasonably and in good faith by the Board of Directors of the General Partner.
"Code" means the Internal Revenue Code of 1986, as amended and in effect from
time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
future law.
"Combined Interest" has the meaning assigned to such term in Section 13.3(a).
"Commission" means the Securities and Exchange Commission.
* 4 moved from here; text not shown
"Common Unit" means a Unit representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees and having the rights and
obligations specified with respect to Common Units in this Agreement. All
references herein to Common Units after the expiration of the Subordination
Period shall be deemed to be references to both Class A Common Units and Class
B Common Units, unless otherwise indicated.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, and as to any Quarter within the Subordination Period, the excess, if
any, of (a) the Minimum Quarterly Distribution then in effect with respect to
such Common Unit over (b) the sum of all Available Cash distributed with
respect to such Common Unit in respect of such Quarter pursuant to Section
5.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 4.9(d), such
property shall no longer constitute a Contributed Property, but shall be deemed
an Adjusted Property.
"Contribution" means any cash, cash equivalents or the Net Agreed Value of
any other property or asset that a Partner contributes to the Partnership
pursuant to the "Conveyance and Contribution Agreements" means collectively,
(i) that certain Conveyance and Contribution Agreement, dated as of the
Effective Time, among the Partnership, the Operating Partnership, Petro and the
General Partner and (ii) Article IV or Section 13.3(c).
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"Conveyance and Contribution Agreement" means that certain Conveyance and
Contribution Agreement, dated as of the Closing Date, between Star Gas, among
the Partnership, the Operating Partnership and certain other parties, Petro and
Petro Holdings, together with the additional conveyance documents and
instruments contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to a Unit
issued in the Initial Offering for each of the Quarters within the
Subordination Period ending on or before the last day of such Quarter over (b)
the sum of any distributions theretofore made pursuant to Section 5.4(a)(ii)
with respect to such Common Unit (including any distributions to be made in
respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
17.1(a). as of any date of any class of Units listed or admitted to trading on
any National Securities Exchange means the average of the daily Closing Prices
per Unit of such class for the 20 consecutive Trading Days immediately prior to
such date.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. (S)17-(S)17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 13.1 or 13.2.
"Debt Offering" means the offering and sale by Petro of $ million Senior
Subordinated Notes due .
"Depositary" means with respect to any Units issued in global form, the
Depository Trust Company and its successors and permitted assigns.
"EBITDA" means operating income plus depreciation, amortization and non-cash
charges (excluding expenses related to the consummation of the Merger and the
transactions contemplated thereby).
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Effective Time" means the effective time of the Merger, which shall be the
later to occur of (i) the filing in the office of the Secretary of State of the
State of Delaware of a properly executed certificate of merger and (ii) the
filing with the Department of State of Minnesota of properly executed articles
of merger, or such later date and time as may be set forth in such certificate
of merger and articles of merger.
"Eligible Citizen" means a Person qualified to own interests in real property
in jurisdictions in which any Group Member does business or proposes to do
business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Equity Offering" means the offering and sale by the Partnership of Common
Units to the public, as described in the Equity Registration Statement.
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** 3 "Equity Registration Statement" means the Registration Statement on Form
S-3 (Registration No. 33-98490)-333-68329), as it has been or as it may be
amended or supplemented from time to time, filed by the Partnership with the
Commission under the Securities Act to register the offering and sale of the
Common Units in the Initial Equity Offering.
"Event of Withdrawal" has the meaning assigned to such term in Section
13.1(a).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 5.1(c)(i)(5).
"First Target Distribution" means $0.604 per Unit (or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.604 multiplied by a fraction of which the numerator is the number of days
in such period and of which the denominator is 91), subject to adjustment in
accordance with Sections 5.6 and 5.8.
"General Partner" means Star Gas LLC, a Delaware limited liability company,
and its successor as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which is evidenced by
General Partner Units and includes any and all benefits to which the General
Partner is entitled as provided in this Agreement, together with all
obligations of the General Partner to comply with the terms and provisions of
this Agreement.
"General Partner Unit" means a Unit representing a fractional part of the
General Partner Interest and having the rights and obligations specified with
respect to the General Partner Interest.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with any
other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Interests.
"Group Member" means a member of the Partnership Group.
"Holder" has the meaning assigned to such term in Section 6.13(a).
"Incentive Distribution" means any amount of cash distributed to the General
Partner, in its capacity as general partner of the Partnership, pursuant to
Sections 5.4(a)(v), (vi) or (vii) and Sections 5.4(b)(iii), (iv) or (v) which
exceeds an amount equal to 1.0% of the aggregate amount of cash then being
distributed pursuant to such provisions.
"includes" means includes, without limitation, and "including" means
including, without limitation.
"Indemnified Persons" has the meaning assigned to such term in Section
6.13(c).
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"Indemnitee" means (a) the General Partner, any Departing Partner, any Person
who is or was an Affiliate of the General Partner or any Departing Partner, (b)
any Person who is or was an officer, director, employee, partner, agent or
trustee of the General Partner or any Departing Partner or any such Affiliate,
or (c) any Person who is or was serving at the request of the General Partner
or any Departing Partner or any such Affiliate as a director, officer,
employee, partner, agent, fiduciary or trustee of another Person; provided that
a Person shall not be an Indemnitee pursuant to this clause (c) by reason of
providing, on a fee-for-services basis, trustee, fiduciary or custodial
services.
"Initial Closing Date" means December 20, 1995.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial General Partner" means Star Gas Corporation, a Delaware corporation.
"Initial Limited Partners" means Star Gas, Silgas, Inc. and Silgas of
Illinois, Inc. (with respect to the Subordinated Units received by them
pursuant to Section 4.2) and the and the Initial Underwriters, in each case
upon being admitted to the Partnership in accordance with Section 12.1.
"Initial Offering" means the initial offering and sale of Common Units to the
public on December 20, 1995, as described in the Initial Registration
Statement.
"Initial Overallotment Closing Date" means January 18, 1996.
"Initial Registration Statement" means the Registration Statement on Form S-l
(Registration No. 33-98490), as amended or supplemented from time to time,
filed by the Partnership with the Commission under the Securities Act to
register the offering and sale of the Initial Common Units in the Initial
Offering.
"Initial Underwriters" means each person named as an underwriter in the
Initial Offering.
"Initial Unit Price" means (a) the initial public offering price per Common
Unit at which the Underwriters offered the Common Units to the public for sale
as set forth on the cover page of the prospectus first issued at or after the
time the Registration Statement first became effective with respect to each
Common Unit, Senior Subordinated Unit, Junior Subordinated Unit and General
Partner Unit, $22.00 or (b) with respect to any other class or series of Units,
the price per Unit at which such class or series of Units is initially sold by
the Partnership, as determined by the General Partner, in each case adjusted as
the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they occur
prior to the Liquidation Date: (a) borrowings, refinancings or refundings of
indebtedness and sales of debt securities (other than for Working Capital
purposes Working Capital Borrowings and other than for items purchased on open
account in the ordinary course of business) by any Group Member; (b) sales of
equity interests (including Common Units sold to the Underwriters pursuant to
the exercise of the Overallotment Option, but excluding the contributions made
pursuant to the Additional Capital Contribution Obligation) by any Group
Member; and (c) sales or other voluntary or involuntary dispositions of any
assets of any Group Member other than (x) sales or other dispositions of
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inventory in the ordinary course of business, (y) sales or other dispositions
of other current assets, including receivables and accounts in the ordinary
course of business, and (z) sales or other dispositions of assets as part of
normal retirements or replacements.
** 4 "Common Junior Subordinated Unit" means a Unit representing a fractional
part of the Partnership Interests of all Limited Partners and Assignees and
having the rights and obligations specified with respect to Common Junior
Subordinated Units in this Agreement.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership."Limited Partner" means, unless the context
otherwise requires, (a) the Organizational Limited Partner, each Initial
Limited Partner, each Substituted Limited Partner, each Additional Limited
Partner and any Departing Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 13.3; and (b) solely for
purposes of Articles IV, V, VI and IX and Sections 14.3 and 14.4, each
Assignee.
"Limited Partner Interest" means the ownership interest of a Limited Partner
in the Partnership which is evidenced by Common Units, Senior Subordinated
Units and Junior Subordinated Units or other Partnership Securities and
includes any and all benefits to which a Limited Partner is entitled as
provided in this Agreement, together with all obligations of a Limited Partner
to comply with the terms and provisions of this Agreement.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 14.2, the date on which the applicable time
period during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means the General Partner or other Person approved pursuant to
Section 14.3 who performs the functions described therein.
"Maintenance Capital Expenditures" means cash capital expenditures made to
maintain, up to the level thereof that existed at the time of such expenditure,
the operating capacity of the capital assets of the Partnership Group, as such
assets existed at the time of such expenditure and shall, therefore, not
include cash capital expenditures made in respect of Acquisitions and Capital
Improvements. Where cash capital expenditures are made in part to maintain the
operating capacity level referred to in the immediately preceding sentence and
in part for other purposes, the General Partner's good faith allocation thereof
between the portion used to maintain such operating capacity level and the
portion used for other purposes shall be conclusive.
"Mergeco" has the meaning assigned to such term in the introductory paragraph
to this Agreement.
"Merger" has the meaning assigned to such term in the introductory paragraph
to this Agreement.
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"Merger Agreement" has the meaning assigned to such term in Section 16.1.
"Minimum Quarterly Distribution" means $0.55 $0.575 per Unit per Quarter (or
with respect to , subject to adjustment in accordance with Sections 5.6 and
5.8; provided, however, the Minimum Quarterly Distribution with respect to the
Senior Subordinated Units, Junior Subordinated Units and General Partner Units
for the period commencing on the Closing Date Effective Time and ending on
March 31, 1996, June 30, 1999, shall be equal to the product of $0.55 $0.575
multiplied by a fraction of which the numerator is the number of days in such
period and of which the denominator is 91), subject to adjustment in accordance
with Sections 5.6 and 5.8.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 4.9(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable year. The items included in the
calculation of Net Income shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or
Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess, if
any, of the total positive adjustments over the total negative adjustments made
to the Capital Account of such Partner pursuant to Book-Up and Book-Down
Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such
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amounts recognized through the Operating Partnership) after the Liquidation
Date. The items included in the determination of Net Termination Gain shall be
determined in accordance with Section 4.9(b) and shall not include any items of
income, gain or loss specially allocated under Section 5.1(d).
"Net Termination Loss" means, for any taxable period, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through the Operating
Partnership) after the Liquidation Date. The items included in the
determination of Net Termination Loss shall be determined in accordance with
Section 4.9(b) and shall not include any items of income, gain or loss
specially allocated under Section 5.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has determined
in its sole discretion does not constitute an Eligible Citizen and as to whose
Partnership Interest the General Partner has become the Substituted Limited
Partner, pursuant to Section 11.5.
"Non-competition Agreement" means that certain non-competition agreement
between Petroleum Heat and Power Co., Inc. ("Petro") and the Partnership
pursuant to which Petro has agreed with the Partnership that neither Petro nor
any of its Affiliates will acquire a business which derives any revenues from
the sale of propane, if, after giving effect to such acquisition, Petro's Pro
Forma Propane Volumes would equal or exceed the lesser of (i) 15% of the
Partnership's reported propane volumes sold for the most recently completed
four fiscal quarters which ended at least 90 days prior to the date of such
acquisition or (ii) 15 million gallons of propane. Petro's Pro Forma Propane
Volume means the actual propane volumes sold by Petro and any of its Affiliates
(other than the Partnership) for the most recently completed four fiscal
quarters which ended at least 90 days prior to the date of determination plus
the propane volumes sold by the propane business to be acquired for the most
recently completed four fiscal quarters which ended at least 90 days prior to
the date of determination. Petro and the Partnership have further agreed
pursuant to the Non-competition Agreement that in the event that Petro or an
Affiliate owns a propane business, Petro or such Affiliate may not accept as a
customer any person who is a customer of the Partnership. among Irik. P. Sevin,
the Partnership and the Operating Partnership.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated
to the Partners pursuant to Sections 5.2(b)(i)(1), 5.2(b)(ii)(1) and
5.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in
accordance with the principles of Treasury Regulation Section 1.704-2(b), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 17.1(b).
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"Old Subordinated Units" means the Subordinated Units issued to the Initial
General Partner on the Initial Closing Date.
"Operating Expenditures" means all Partnership Group expenditures, including
taxes, reimbursements of the General Partner, debt service payments, and
capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a debt shall
not be an Operating Expenditure if the payment is (i) required in connection
with the sale or other disposition of assets or (ii) made in connection with
the refinancing or refunding of indebtedness with the proceeds from new
indebtedness or from the sale of equity interests. For purposes of the
foregoing, at the election and in the reasonable discretion of the General
Partner, any payment of principal or premium shall be deemed to be refunded or
refinanced by any indebtedness incurred or to be incurred by the Partnership
Group within 180 days before or after such payment to the extent of the
principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures made
for Acquisitions or for Capital Improvements, (ii) payment of transaction
expenses relating to Interim Capital Transactions or (iii), (iii) payment of
transaction expenses related to the Merger and the transactions contemplated
thereby or (iv) distributions to Partners. Where capital expenditures are made
in part for Acquisitions or Capital Improvements and in part for other
purposes, the General Partner's good faith allocation between the amounts paid
for each shall be conclusive.
"Operating Partnership" means Star Gas Propane, L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," as to any period ending before the Liquidation Date,
means
(a) the sum of (i) [16,732,482] million plus all cash of the Partnership
Group on hand as of the close of business on the Initial Closing Date and, (ii)
all the cash receipts of the Partnership Group for the period beginning on the
Initial Closing Date and ending with the last day of such period, other than
cash receipts from Interim Capital Transactions (except to the extent specified
in Section 5.5) and (iii) all cash receipts of the Partnership Group after the
end of such period but on or before the date of determination of Operating
Surplus with respect to such period resulting from Working Capital Borrowings,
less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Initial Closing Date and ending with the last day of such period, and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group Member)
or cash reserves established, increased or reduced after the end of such period
but on or before the date of determination of Available Cash with respect to
such period shall be deemed to have been made, established, increased or
reduced, for purposes of determining Operating Surplus, within such period if
the General Partner so determines.
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Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to Star Gas any Affiliate of Star Gas, the Partnership or the General
Partner) the Partnership, the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Organizational Limited Partner" means William G. Powers, Jr., in his
capacity as the organizational limited partner of the Partnership pursuant to
this Agreement.
.
"Original Agreement" has the meaning assigned to such term in the Recitals to
this Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination.
"Overallotment Option" means the overallotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Star Gas Partners, L.P., a Delaware limited partnership,
and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and any
Subsidiary of either such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include general partner interests, Common Units, Subordinated Units or other
Partnership Securities, or a combination thereof or interest therein, as the
case may be. General Partner Interests and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
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"Partnership Security" means any class or series of Unit, any option, right,
warrant or appreciation rights relating thereto, or any other type of equity
interest that the Partnership may lawfully issue, or any unsecured or secured
debt obligation of the Partnership that is convertible into any class or series
of equity interests of the Partnership.
"Percentage Interest" means as of the date of such determination (a) as to
the General Partner, 1%, (b), as to any Limited Partner or Assignee holding
Units, the product of (i) 99% 100% less the percentage applicable to paragraph
(c) (b) multiplied by (ii) the quotient of the number of Units held by such
Limited Partner or Assignee divided by the total number of all Outstanding
Units, and (c)(b) as to the holders of additional Partnership Securities issued
by the Partnership in accordance with Section 4.3 4.4, the percentage
established as a part of such issuance.
"Permitted Investments" means securities with a maturity of one year or less
that are (x) direct obligations of the United States of America for the payment
of which its full faith and credit is pledged, (y) obligations of a Person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the payment of which is unconditionally guaranteed as
a full faith and credit obligation by the United States of America, which, in
either case, are not callable or redeemable at the option of the issuer thereof
or (z) securities of mutual or similar funds which invest exclusively in
securities of the type permitted under clauses (x) and (y) above, in each case
having assets in excess of $100 million.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association or
other entity.
"Per Unit Capital Amount" means, as of any date of determination, the Capital
Account, stated on a per Unit basis, underlying any Unit held by a Person other
than the General Partner or any Affiliate.
"Petro" means Petroleum Heat and Power Co., Inc., a Minnesota corporation, an
indirect subsidiary of the Operating Partnership.
"Petro Adjusted Operating Surplus" means, with respect to any four-Quarter
period, the Adjusted Operating Surplus generated by Petro (which for purposes
of this definition includes all subsidiaries of the Partnership primarily
engaged in the home heating oil business) during such four-Quarter period, as
determined in good faith by a majority of the members of the Board of Directors
of the General Partner who holds Units. (with the concurrence of the Audit
Committee). In calculating Petro Adjusted Operating Surplus, (i) debt service
(including the payment of principal, interest and premium) on all debt incurred
or assumed by Petro or any of its Affiliates, the proceeds of which are used by
or for the benefit of Petro (including the proceeds from the Debt Offering),
shall be included to the extent such debt service is included in the
calculation of Operating Surplus, and (ii) debt service (including the payment
of principal, interest and premium) on all debt incurred or assumed by Petro or
any of its Affiliates, the proceeds of which are not used by or for the benefit
of Petro, shall be excluded.
"Pro Rata" "Petro Class A Common Stock" means the Class A Common Stock, par
value $.10 per share, of Petro.
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"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
per share, of Petro.
"Petro Holdings" means Petro Holdings, Inc., a Minnesota corporation, a
wholly-owned indirect subsidiary of the Operating Partnership.
"Petro Merger Agreement" has the meaning set forth in the Recitals to this
Agreement.
"Petro Units," with respect to any date, means the sum of (i) the excess of
the number of Units outstanding at the Effective Time over the number of Units
outstanding immediately prior to the Effective Time (assuming the simultaneous
closing of the Equity Offering), (ii) the number of Units issued by the
Partnership thereafter to the extent the net proceeds of which are contributed
to Petro (which for purposes hereof includes all subsidiaries of the
Partnership primarily engaged in the home heating oil business), (iii) the
number of Senior Subordinated Units or Class B Common Units issued pursuant to
Section 4.6, and (iv) the deemed number of Units outstanding based upon a
contribution of capital to Petro by the Partnership or any Affiliate thereof
after the Effective Time (which contribution is not covered by (ii) above or
traceable to debt proceeds), which number of deemed Units is obtained by
dividing (A) the amount of such contribution by (B) the Current Market Price of
a Common Unit. If Petro pays down debt of Petro or debt allocated to Petro from
internally generated funds of Petro and if those internally generated funds
exist at Petro only because Petro has not paid dividends up to the Partnership
in an amount equal to the distributions that would have been paid on the Petro
Units had they been actual outstanding Units of the Partnership, then the
amount used to pay down such debt will be treated as if it were contributed to
Petro by the Partnership. The distribution per Senior Subordinated Unit of the
Partnership shall be the amount that the Partnership would have been deemed to
have distributed per Petro Unit had they been actual outstanding Units of the
Partnership. For purposes of the number of deemed outstanding Units in (iv)
above, such Units shall be deemed to be issued on the date of such Capital
Contribution. For this purpose, Common Unit means Class A Common Units upon
expiration of the Subordination Period.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units, and in accordance with their respective
Percentage Interests, and (b) when modifying Partners means 1% of the General
Partner and 99% to the Unitholders Pro Rata, and Assignees, apportioned among
all Partners and Assignees in accordance with their respective Percentage
Interests.
"Proxy Statement" means the Registration Statement on Form S-4 (Registration
No. 333-66005) as it has been or as it may be amended or supplemented from time
to time, filed jointly by the Partnership and Petro relating to the Merger and
the transactions contemplated thereby.
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XVII.
"Quarter" means, unless the context requires otherwise, a three-month period
of time ending on March 31, June 30, September 30, or December 31.
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"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution.
"Record Holder" means the Person in whose name a Common Unit or a Senior
Subordinated Unit is registered on the books of the Transfer Agent as of the
opening of business on a particular Business Day, or with respect to a holder
of a general partner interest Junior Subordinated Unit or General Partner Unit
or other Partnership Security, the Person in whose name such general partner
interest Junior Subordinated Unit or General Partner Unit or other Partnership
Security is registered on the books of the General Partner as of the opening of
business on such Business Day.
"Redeemable Units" means any Units Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 11.6.
"Reduction Threshold" has the meaning assigned to such term in Section
4.2(b).
*3 moved from here; text not shown
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Limited Partners, as a class, the excess of (a)
the Net Positive Adjustments of the Limited Partners as of the end of such
period over (b) the sum of those Partners' Share of Additional Book Basis
Derivative Items for each prior taxable period, and (ii) with respect to the
General Partner, the excess of (a) the Net Positive Adjustments of the General
Partner as of the end of such period over (b) the sum of the General Partner's
Share of Additional Book Basis Derivative Items for each prior taxable period.
"Required Allocations" means any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a)
Section 5.1(b)(ii) or (b) Sections 5.1(d)(i), 5.1(d)(ii), 5.1(d)(iv),
5.1(d)(v), 5.1(d)(vi), 5.1(d)(vii) and 5.1(d)(ix), such allocations (or
limitations thereon) being directly or indirectly required by the Treasury
Regulations promulgated under Section 704(b) of the Code.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Sections 5.2(b)(i)(1) or 5.2(b)(ii)(1), respectively, to eliminate
Book-Tax Disparities.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 5.1(c)(i)(G).
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"Second Target Distribution" means $0.711 per Unit (or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.711 multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is 91), subject to
adjustment in accordance with Sections 5.6 and 5.8.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
** 5 "Senior Subordinated Unit" means a Unit representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees, and having
the rights and obligations specified with respect to Senior Subordinated Units
in this Agreement.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable
period, (i) with respect to the Limited Partners, as a class, the amount that
bears the same ratio to such Additional Book Basis Derivative Items as the
Limited Partners' Remaining Net Positive Adjustments as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, and (ii) with respect to
the General Partner, the amount that bears the same ratio to such Additional
Book Basis Derivative Items as the General Partner's Remaining Net Positive
Adjustments as of the end of such period bears to the Aggregate Remaining Net
Positive Adjustments as of that time.
"Shelf Registration Statement" has the meaning assigned to such term in
Section 6.13(f).
"Special Approval" means approval by the Audit Committee.
"Star Gas" means Star Gas Corporation, a Delaware corporation and a wholly
owned subsidiary of Petroleum Heat and Power Co., Inc., a Minnesota
corporation.
* 5 moved from here; text not shown
"Subordination Period" means the period commencing that commenced on the
Initial Closing Date and ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning on or after January October 1,
2001 2002 in respect of which (A) (i) distributions of Available Cash from
Operating Surplus on each of the Outstanding Common Units and, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units equaled
or exceeded the Minimum Quarterly Distribution for each of the three non-
overlapping four-Quarter periods immediately preceding such date and (ii) the
Adjusted Operating Surplus generated during each of the three immediately
preceding non-overlapping four-Quarter periods equaled or exceeded the sum of
the Minimum Quarterly Distribution on all of the Common Units and, Senior
Subordinated Units, plus the related distributions on the general partner
interest, Junior Subordinated Units and General Partner Units that were
Outstanding during such periods on a fully diluted basis with respect to
employee options or other employee incentive compensation (i.e., taking into
account for purposes of such determination all Outstanding Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units and all
Common Units issuable upon exercise of employee options that have, as of the
date of determination, already vested or are scheduled to ves t prior to
the end of the Quarter immediately following the Quarter with respect to which
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determination is made, and all Units that have as of the date of determination
been earned by but not yet issued to management of the Partnership in respect
of incentive compensation) and (B) there are no Cumulative Common Unit
Arrearages; and
(b) the date on which the General Partner is removed as general partner of
the Partnership upon the requisite vote by Limited Partners under circumstances
where Cause does not exist; provided, however, that if the General Partner is
removed during the Subordination Period within 12 months after the end of a
six-Quarter period in which the Minimum Quarterly Distribution was not made on
the Common Units with respect to more than one of such Quarters (excluding for
this purpose the payment of any Common Unit Arrearages) and the first quarter
in such six-Quarter period that the Minimum Quarterly Distribution on Common
Units was not made occurs after March 31, 2001, then the Subordination Period
will not end. In the event that the General Partner is removed under the
circumstances set forth in the above proviso, the Junior Subordinated Units
shall convert into Senior Subordinated Units on a one-for-one basis and the
distribution rights on the General Partner Units will rank pari passu with the
Senior Subordinated Units.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, by such
Person, by one or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) in which such Person or a
Subsidiary of such Person is, at the date of determination, a general or
limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned or controlled,
directly or indirectly, by such Person, by one or more Subsidiaries of such
Person, or a combination thereof, or (c) any other Person (other than a
corporation or a partnership) in which such Person, directly or indirectly, at
the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors
or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 12.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
16.2(b).
"Termination Capital Transaction" means a transaction in which Net
Termination Gain or Net Termination Loss is recognized.
"Third Target Distribution" means $0.926 per Unit(or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.926 multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is 91), subject to
adjustment in accordance with Sections 5.6 and 5.8.
"Trading Day" means a day on which the principal National Securities Exchange
on which the Units of any class are listed or admitted to trading is open for
the transaction of business or, if Units of a class are not listed or admitted
to trading on any National Securities Exchange, a day on which banking
institutions in New York City generally are open.
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"Transfer" has the meaning assigned to such term in Section 11.1(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
Units. Common Units and Senior Subordinated Units and as may be appointed from
time to time by the General Partner to act as registrar and transfer agent for
any other Partnership Securities; provided that if no Transfer Agent is
specifically designated for any such other Partnership Securities, the General
Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule 1 to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated December 14,
1995, relating to the Equity Offering, dated , among the
Underwriters, the Partnership and other parties providing for the purchase of
Common Units by such Underwriters.
"Unit" means a Partnership Interest of a Limited Partner or Assignee in the
Partnership representing a fractional part of the Partnership Interests of all
Limited Partners and Assignees and shall include, without limitation, Common
Units and Subordinated Common Units (Class A Common Units and Class B Common
Units after the expiration of the Subordination Period), Senior Subordinated
Units, Junior Subordinated Units and General Partner Units; provided that each
Common Unit at any time Outstanding shall represent the same fractional part of
the Partnership Interests of all Limited Partners and Assignees holding Common
Units as each other Common Unit and each Subordinated Unit at any time
Outstanding shall represent the same fractional part of the Partnership
Interests of all Limited Partners and Assignees holding Subordinated Units as
each other Unit. A Unit shall not include a Petro Unit.
"Unit Majority" means, during the Subordination Period, at least (i) a
majority of the Outstanding Common Units other than Common Units owned by the
General Partner or any Affiliate and, thereafter, at least voting as a class
and (ii) a majority of the Outstanding Senior Subordinated Units and Junior
Subordinated Units voting as a single class, in each case excluding Units owned
by the General Partner or any Affiliate, and, after the Subordination Period,
at least a majority of the Outstanding Common Units.
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 4.9(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 4.9(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 4.9(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 4.9(d)).
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"Unrecovered Initial Unit Price" means, at any time, with respect to a class
or series of Units (other than Subordinated Units), the price per Unit at which
such class or series of Units was initially offered to the public for sale by
the underwriters in respect of such offering, as determined by the General
Partner, Common Units, Senior Subordinated Units, Junior Subordinated Units or
General Partner Units, the Initial Unit Price less the sum of all distributions
constituting Capital Surplus theretofore made in respect of a Unit of such
class or series that was sold in the initial offering of Units of said class or
series constituting Capital Surplus an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any distributions in kind) in
connection with the dissolution and liquidation of the Partnership theretofore
made in respect of a Unit of such class or series that was sold in the initial
offering of Units of such class or series an Initial Common Unit, adjusted as
the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of Units.
"Unrecovered Subordinated Unit Capital" means, at any time, with respect to a
Subordinated Unit, prior to its conversion into a Common Unit pursuant to
Sections 5.7(b) and (c), the excess, if any, of (a) the Net Agreed Value (at
the time of conveyance) of the undivided interest in the Contributed Property
conveyed to the Partnership pursuant to Section 4.2 in exchange for such
Subordinated Unit, over (b) the sum of all distributions in respect of a
Subordinated Unit constituting Capital Surplus and any distributions of cash
(or the Net Agreed Value of any distributions in kind) in connection with the
dissolution and liquidation of the Partnership, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of Subordinated Units.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 13.1(b).
"Working Capital Borrowings" means borrowings pursuant to a facility or other
arrangement requiring all borrowings thereunder to be reduced to a relatively
small amount each year for an economically meaningful period of time. It being
the intent hereof, that borrowings which are not intended exclusively for
working capital purposes shall not be treated as Working Capital Borrowings.
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a limited partner in the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a limited partner in the Operating Partnership pursuant to the
Operating Partnership Agreement or otherwise, (b) engage directly in, or to
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that the Operating Partnership is permitted to engage in by the
Operating Partnership Agreement and, in connection therewith, to exercise all
of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, (c) engage directly in, or to
enter into or form any corporation, partnership, joint venture, limited
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liability company or other arrangement to engage indirectly in, any business
activity that is approved by the General Partner and which lawfully may be
conducted by a limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and powers conferred
upon the Partnership pursuant to the agreements relating to such business
activity, and (d) do anything necessary or appropriate to the foregoing,
including the making of capital contributions or loans to the Operating
Partnership. The General Partner has no obligation or duty to the Partnership,
the Limited Partners, or the Assignees to propose or approve, and in its sole
discretion may decline to propose or approve, the conduct by the Partnership of
any business.
Section 3.2 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 3.1 and for the protection and benefit of the Partnership.
ARTICLE IV
CONTRIBUTIONS AND UNITS
Section 4.1 Organization Contributions and Return.
In connection with the formation of the Partnership under the Delaware Act,
the Initial General Partner made an initial Capital Contribution to the
Partnership in the amount of $10 for an interest in the Partnership and has
been and was admitted as the general partner of the Partnership, and the
Organizational Limited Partner made an initial Capital Contribution to the
Partnership in the amount of $990 for an interest in the Partnership and has
been and was admitted as a limited partner of the Partnership.
As of the Closing Date, after giving effect to the transactions contemplated by
Sections 4.2 and 4.3 Section 4.2 Contributions by Initial Limited Partners.
On the Initial Closing Date, the Initial Underwriters contributed cash to the
Partnership in exchange for 2,600,000 Common Units. On the Initial
Overallotment Closing Date, the Initial Underwriters contributed cash to the
Partnership in exchange for 275,000 Common Units. On the Initial Closing Date,
the Initial General Partner, Silgas, Inc. and Silgas of Illinois, Inc.
contributed their interests in the Operating Partnership to the Partnership in
exchange for 2,396,078 Old Subordinated Units. Immediately after these
contributions, the interest of the Organizational Limited Partner shall be
terminated; the initial Capital Contributions of each partner shall be
refunded; was terminated and the Organizational Limited Partner shall cease
ceased to be a Limited Partner of the Partnership. Ninety-nine percent of any
interest or other profit that may have resulted from the investment or other
use of such initial Capital Contributions shall be allocated and distributed to
the Organizational Limited Partner, and the balance thereof shall be allocated
and distributed to the General Partner..
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Section 4.2 Section 4.3 Contributions at the Effective Time; General Partner
Contributions.
(a) On At the Closing Date Effective Time and pursuant to the Conveyance and
Contribution Agreement Agreements, the General Partner contributed
shares of Petro Class A Common Stock and shares of Petro Class C
Common Stock to the Partnership in exchange for 278,985 General Partner Units
representing a 1.99% General Partner Interest and shares of Petro
Class A Common Stock and shares of Petro Class C Common Stock to the
Operating Partnership in exchange for a 0.01% general partner interest in the
Operating Partnership. At the Effective Time, pursuant to the Merger and
related transactions, Senior Subordinated Units, Junior
Subordinated Units and Common Units were issued to former stockholders of
Petro and the outstanding Old Subordinated Units were cancelled.
(b) Upon the making of any Capital Contribution to the Partnership by any
Person, the General Partner, in its sole discretion, may Silgas, Inc. and
Silgas of Illinois, Inc. shall contribute to the Partnership, as a Capital
Contribution, a limited partner interest in the Operating Partnership in
exchange for 2,220,444, 175,633 and one Subordinated Units, respectively. The
limited partner interest in the Operating Partnership contributed by the
General Partner, Silgas, Inc. and Silgas of Illinois, Inc. will represent a
98.9899% Percentage Interest (as defined in the Operating Partnership
Agreement) in the Operating Partnership.
(b) To enhance the Partnership's ability to pay the Minimum Quarterly
Distribution on the Common Units, the General Partner shall be obligated to
contribute up to $6.0 million in additional capital to the Partnership (the
"Additional Capital Contribution Obligation"), if, and to the extent that, the
amount of Available Cash constituting Operating Surplus (without giving effect
to any such additional contribution) with respect to any quarter is less than
the amount necessary to distribute the Minimum Quarterly Distribution on all
outstanding Common Units for such quarter. If (i) distributions of Available
Cash from Operating Surplus (without giving effect to any such additional
contribution) with respect to any quarter equaled or exceeded the Minimum
Quarterly Distributions on all of the then outstanding Common Units and (ii)
the Adjusted Operating Surplus generated during that quarter equaled or
exceeded 150% of the sum of the Minimum Quarterly Distribution on all of the
then outstanding Common Units (the "Reduction Threshold"), the Additional
Capital Contribution Obligation will be reduced by $1.5 million. To the extent
that the Adjusted Operating Surplus generated during a quarter exceeds (or is
less than) the Reduction Threshold applicable to such quarter, the amount of
such excess (or deficit) shall be carried forward on a cumulative basis and
included in determining the Adjusted Operating Surplus in succeeding quarters.
If the Partnership is liquidated or the General Partner either (i) is removed
as General Partner of the Partnership other than for Cause or (ii) withdraws as
General Partner of the Partnership not in violation of this Partnership
Agreement, the Additional Capital Contribution Obligation will terminate.
(c) Upon the making of any Capital Contribution to the Partnership by any
Person, the General Partner shall be required to make an additional Capital
Contribution in an amount equal to 1.01% of the Net Agreed Value of only to the
extent necessary such that after taking into account the additional Capital
Contribution made by such Person; provided, however, that the General Partner
shall be obligated to make a Capital Contribution pursuant to this Section
4.2(c) only to the extent necessary such that after taking into account the
additional Capital Contribution made by such Person
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and the General Partner pursuant to this Section 4.2(c) and any Capital
Contribution made by the General Partner pursuant to Section 4.2(b), 4.3(b) the
General Partner will have a Capital Account equal to at least 1% 1.99% of the
total of all Capital Accounts.
Section 4.3 Contributions by Initial Limited Partners.
On the Closing Date, subject to completion of the Capital Contributions
referred to in Section 4.2, each Underwriter shall contribute to the
Partnership cash in an amount equal to the Issue Price per Common Unit,
multiplied by the number of Common Units specified in the Underwriting
Agreement to be purchased by such Underwriter at the "First Closing Date," as
such term is defined in the Underwriting Agreement. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall issue Common
Units to each Underwriter on whose behalf such Capital Contribution is made in
an amount equal to the quotient obtained by dividing (i) the cash contribution
to the Partnership by or on behalf of such Underwriter by (ii) the Issue Price
per Common Unit.
Section 4.4 Issuances of Additional Partnership Securities.
(a) Subject to Section 4.5, the General Partner is authorized to cause the
Partnership to issue additional Partnership Securities for any Partnership
purpose at any time and from time to time to such Persons for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole discretion, all without the approval of any Limited
Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 4.4(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series
of Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion and, if so, the terms and
conditions of such conversion; (vi) the terms and conditions upon which each
Partnership Security will be issued, evidenced by certificates and assigned or
transferred; and (vii) the right, if any, of each such Partnership Security to
vote on Partnership matters, including matters relating to the relative rights,
preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all actions
that it deems necessary or appropriate in connection with each issuance of
Partnership Securities pursuant to this Section 4.4 and to amend this Agreement
in any manner that it deems necessary or appropriate to provide for each such
issuance, to admit Additional Limited Partners in connection therewith and to
specify the relative rights, powers and duties of the holders of the Units or
other Partnership Securities being so issued. The General Partner shall do all
things necessary to comply with the Delaware Act and is authorized and directed
to do all things it deems to be necessary or advisable in connection with any
future issuance of Partnership Securities, including compliance with any
statute,
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rule, regulation or guideline of any federal, state or other governmental
agency or any National Securities Exchange on which the Units or other
Partnership Securities are listed for trading.
Section 4.5 Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 4.4 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue an
aggregate of more than 1,300,000 2,500,000 additional Parity Units without the
prior approval of holders of at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and its Affiliates),
except as provided in Sections 4.5(b) and 4.5(c). In applying this limitation,
there shall be excluded Common Units issued (i) in connection with the exercise
of the Overallotment Option the Equity Offering, (ii) in accordance with
Section 4.5(b) and 4.5(c) and (iii) in connection with the conversion issuance
of Senior Subordinated Units or Class B Common Units pursuant to Section 4.6.
(b) The Partnership may also issue an unlimited number of Parity Units prior
to the end of the Subordination Period without the approval of the Unitholders
if such issuance occurs (i) in connection with an Acquisition or a Capital
Improvement or (ii) within 365 days of, and the net proceeds from such issuance
are used to repay debt incurred in connection with, an Acquisition or a Capital
Improvement, in each case where such Acquisition or Capital Improvement
involves assets that, if acquired by the Partnership as of the date that is one
year prior to the first day of the Quarter in which such Acquisition is to be
consummated or such Capital Improvement is to be completed, would have
resulted, on a pro forma basis, in an increase in
(i) the amount of Adjusted Operating Surplus generated by the Partnership
on a per-Unit basis (for all Outstanding Units) with respect to each of the
four most recently completed Quarters (on a pro forma basis) over
(ii) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four Quarters.
The amount in clause (i) shall be determined on a pro forma basis assuming
that (A) all of the Parity Units to be issued in connection with or within 365
days of such Acquisition or Capital Improvement had been issued and
outstanding, (B) all indebtedness for borrowed money to be incurred or assumed
in connection with such Acquisition or Capital Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such offering) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (C) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the
acquired assets, and (D) the non-personnel costs and expenses are computed on
the same basis as those incurred by the Partnership in the operation of the
Partnership's business at similarly situated Partnership facilities.
(c) The Partnership may also issue an unlimited number of Parity Units prior
to the end of the Subordination Period without the approval of the Unitholders
if the use of proceeds from such issuance is exclusively to repay up to $20
million of indebtedness of the Partnership or the Operating Partnership.
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(d) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of a Unit Majority. at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and its Affiliates).
(e)(e)During the Subordination Period, the Partnership shall not issue
additional Partnership Securities that would reduce the percentage of
distributions allocable to all Units under Sections 5.4(a)(vi)(A),
5.4(a)(vii)(A) or 5.4(a)(viii)(A), and Sections 5.4(b)(iii)(A), 5.4(b)(iv)(A)
or 5.4(b)(v)(A), without the prior approval of holders of at least a majority
of the Outstanding Common Units (excluding Common Units held by the General
Partner and its Affiliates).
(f) No fractional Units shall be issued by the Partnership.
Section 4.6 Conversion of Special Issuance of Senior Subordinated Units and
Conversion of Senior Subordinated Units and Junior Subordinated
Units .
(a) For each full non-overlapping four-Quarter period ending on or after the
first anniversary of the Effective Time, but prior to the fifth anniversary of
the Effective Time, in which the dollar amount of Petro Adjusted Operating
Surplus per Petro Unit equals or exceeds $2.90, the Partnership will issue (i)
during the Subordination Period, 303,000 Senior Subordinated Units to the
holders of the Senior Subordinated Units, Junior Subordinated Units and the
General Partner Units on the Record Date in respect of the distribution for the
final Quarter of such non-overlapping four Quarter period, Pro Rata, and (ii)
after the Subordination Period, 303,000 Class B Common Units to the holders of
the Class B Common Units and the General Partner Units on the Record Date in
respect of the distribution for the final Quarter of such non-overlapping four-
Quarter period, Pro Rata; provided that the Partnership may not issue more than
909,000 Senior Subordinated Units and Class B Common Units in the aggregate
pursuant to this Section 4.6; and provided, further that the Partnership may
not issue more than 303,000 Senior Subordinated Units and Class B A total of
599,020 Subordinated Units will convert into Common Units on the first day
after the Record Date for distribution in respect of any Quarter ending on or
after March 31, 1999, and an additional 599,020 Subordinated Units will convert
into Common Units on the first day after the Record Date for distributions in
respect of any Quarter ending on or after March 31, 2000, in respect of which
(i) distributions under Section 5.4 in respect of all Outstanding Common
Units and Subordinated Units equals or exceeds the sum of the Minimum
Quarterly Distribution (as prorated for the actual length of the period
from the Closing Date through March 31, 1996) on all of the Outstanding
Common Units and Subordinated Units with respect to each of the three non-
overlapping four-Quarter periods immediately preceding such date;
(ii) the Adjusted Operating Surplus generated during each of the three
immediately preceding non-overlapping four-Quarter periods equals or
exceeds the sum of the Minimum Quarterly Distribution (as prorated for the
actual length of the period from the Closing Date through March 31, 1996)
on all of the Outstanding Common Units and Subordinated Units, plus related
distributions on the general partner interest, during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.
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In the event less than all of the Outstanding Subordinated Units shall
convert into Common Units pursuant to this Section 4.6 (a) at a time when there
shall be more than one holder of Subordinated Units, then, unless all of the
holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be
allocated among the holders of Subordinated Units pro rata in respect of the
number of Subordinated Units held by each such holder. within any 365-day
period.
(b) The remaining Subordinated Units shall convert into Common Units(b) The
Partnership shall not issue any fractional Senior Subordinated Units or Class B
Common Units. Each holder who would otherwise be entitled to a fractional
Senior Subordinated Unit or Class B Common Unit shall receive an amount in cash
determined by multiplying such fraction by the Current Market Price of a Senior
Subordinated Unit or a Class B Common Unit, as the case may be, as of the date
three days prior to the date on which Senior Subordinated Units or Class B
Common Units, as the case may be, are issued pursuant to this Section 4.6.
(c) Each Senior Subordinated Unit and Junior Subordinated Unit shall convert
into one Class B Common Unit on the first day following the Record Date for
distributions in respect of the final quarter Quarter of the Subordination
Period.
(c) On the date a Subordination Unit is converted, it shall possess all the
rights and obligations of Common Units. Prior to such time, a Subordinated Unit
shall have all of the rights and obligations of a Common Unit, except with
respect to the right to vote on or approve matters requiring the vote or
approval of a percentage of the holders of Outstanding Common Units and the
right to participate in allocations of income, gain, loss and deductions and
distributions made with respect to Common Units.
Section 4.7 Limited Preemptive Rights.
No Person shall have any preemptive, preferential or other similar right with
respect to the issuance of any Partnership Security, whether unissued, held in
the treasury or hereafter created, except that the General Partner shall have
the right, which it may from time to time assign in whole or in part to any of
its Affiliates, to purchase Partnership Securities from the Partnership
whenever, and on the same terms that, the Partnership issues Partnership
Securities to Persons other than the General Partner and its Affiliates, to the
extent necessary to maintain the Percentage Interests of the General Partner
and its Affiliates equal to that which existed immediately prior to the
issuance of such Partnership Securities.
Section 4.8 Splits and Combinations.
(a) Subject to Sections 4.8(d) 4.9(d), 5.6 and 5.8 (dealing with adjustments
of distribution levels), the General Partner may make a pro rata distribution
of Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including the
number of Class B Common Units issuable upon conversion of the Senior
Subordinated Units and Junior Subordinated Units, the number of Senior
Subordinated Units or Class B Common Units issuable pursuant to Section 4.6 and
the number of additional Parity Units that may be issued pursuant to Section
4.5 without a Unitholder vote) are proportionately adjusted retroactive to the
beginning of the Partnership.
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(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of the date not less than 10 days prior to the date of such notice.
The General Partner also may cause a firm of independent public accountants
selected by it to calculate the number of Units to be held by each Record
Holder after giving effect to such distribution, subdivision or combination.
The General Partner shall be entitled to rely on any certificate provided by
such firm as conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or combination, the
General Partner may cause Certificates to be issued to the Record Holders of
Units as of the applicable Record Date representing the new number of Units
held by such Record Holders, or the General Partner may adopt such other
procedures as it may deem appropriate to reflect such changes. If any such
combination results in a smaller total number of Units Outstanding, the General
Partner shall require, as a condition to the delivery to a Record Holder of
such new Certificate, the surrender of any Certificate held by such Record
Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions this Section 4.8(d), each fractional Unit shall be rounded to
the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher
Unit).
Section 4.9 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner of
Units Partnership Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate
Capital Account with respect to such Partnership Interest in accordance with
the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital
Account shall be increased by (i) the amount of all Capital Contributions made
to the Partnership with respect to such Partnership Interest pursuant to this
Agreement and (ii) all items of Partnership income and gain (including, without
limitation, income and gain exempt from tax) computed in accordance with
Section 4.9(b) and allocated with respect to such Partnership Interest pursuant
to Section 5.1, and decreased by (x) the amount of cash or Net Agreed Value of
all actual and deemed distributions of cash or property made with respect to
such Partnership Interest pursuant to this Agreement and (y) all items of
Partnership deduction and loss computed in accordance with Section 4.9(b) and
allocated with respect to such Partnership Interest pursuant to Section 5.1.
(b) For purposes of computing the amount of any item of income, gain, loss or
deduction to be reflected in the Partners' Capital Accounts, the determination,
recognition and classification of any such item shall be the same as its
determination, recognition and classification for federal income tax purposes
(including, without limitation, any method of depreciation, cost recovery or
amortization used for that purpose) provided that:
(i) Solely for purposes of this Section 4.9, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership.
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(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 5.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
4.9(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c)(i) Except as otherwise provided in Section 4.9(c)(ii)-(v), a transferee
of a Partnership Interest shall succeed to a Pro Rata portion of the Capital
Account of the transferor relating to the Partnership Interest so transferred;
provided, however, that, if the transfer causes a termination of the
Partnership under Section 708(b)(1)(B) of the Code, the Partnership's
properties shall be deemed to have been distributed in liquidation of the
Partnership to the Partners (including any transferee of a Partnership Interest
that is a party to the transfer causing such termination).
(ii) If and when a Senior Subordinated Unit is issued pursuant to Section
14.4 and recontributed by such Partners in reconstitution of the Partnership.
Any such deemed distribution shall be treated as
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an actual distribution for purposes of this Section 4.9. In such event, the
Carrying Values of the Partnership properties shall be adjusted immediately
prior to such deemed distribution 4.6 with respect to one or more Senior
Subordinated Units, the Capital Accounts associated with the existing Senior
Subordinated Units shall be reallocated as required to make the Capital Account
associated with each Senior Subordinated Unit be the same.
(iii) If and when a Class B Common Unit is issued pursuant to Section
4.9(d)(ii) and such Carrying Values shall then constitute the Agreed Values of
such properties upon such deemed contribution to the reconstituted Partnership.
The Capital Accounts of such reconstituted Partnership shall be maintained in
accordance with the principles of this Section 4.9. 4.6 with respect to one or
more Class B Common Units, the Capital Accounts associated with the existing
Class B Common Units shall be reallocated as required to make the Capital
Account associated with each Class B Common Unit be the same.
(ii) Immediately prior to the conversion of a Subordinated Unit into a Common
Unit (iv) If and when a Senior Subordinated Unit or a Class B Common Unit is
issued pursuant to Section 4.6 or the sale, exchange or other disposition of a
Subordinated Unit by a holder thereof, the Capital Account maintained for such
Person with respect to its Subordinated Units will (A) first, be allocated to
the Subordinated Units to be converted or transferred, as the case may be, in
an amount equal to the product of (x) the number of such Subordinated Units to
be converted or transferred, as the case may be, and (y) with respect to one or
more Junior Subordinated Units or General Partner Units, the Capital Accounts
associated with the existing Units shall be reallocated to the new Unit until
the Capital Account of the new Unit is the same as all other Units of the same
class or until the Capital Account associated with the existing Units is
reduced to zero.
(v) If at the time of conversion of a Junior Subordinated Unit, the Per Unit
Capital Amount for a Common Unit, and (B) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether it
has retained any Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the retained
attributable to a Junior Subordinated Unit exceeds the existing Per Unit
Capital Amount of Senior Subordinated Units, if any, will have a balance equal
to the amount allocated under clause (B) hereinabove, and the transferee's
Capital Account established with respect to the transferred Subordinated Units
will have a balance equal to the amount allocated under clause (A) hereinabove.
the amount of excess shall be reallocated to the Capital Accounts attributable
to the General Partner Units through contribution of such excess to the General
Partner.
(d) (i) Consistent with the provisions of Treasury Regulation Section 1.704-
1(b)(2)(iv)(f), on an issuance of additional Units for cash or Contributed
Property or the conversion of the General Partner's Partnership Combined
Interest to Common Units pursuant to Section 13.3(b), the Capital Account of
all Partners and the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership property,
as if such Unrealized Gain or Unrealized Loss had been recognized on an actual
sale of each such property immediately prior to such issuance and had been
allocated to the Partners at such time pursuant to Section 5.1(c). In
determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount
and fair market value of all Partnership assets (including, without limitation,
cash or cash equivalents) immediately prior to the issuance of
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additional Units shall be determined by the General Partner using such
reasonable method of valuation as it may adopt; provided, however, the General
Partner, in arriving at such valuation, must take fully into account the fair
market value of the Partnership Interests of all Partners at such time. The
General Partner shall allocate such aggregate value among the assets of the
Partnership (in such manner as it determines in its sole discretion to be
reasonable) to arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section 5.1(c).
Any Unrealized Gain or Unrealized Loss attributable to such property shall be
allocated in the same manner as Net Termination Gain or Net Termination Loss
pursuant to Section 5.1(c); provided, however, that, in making any such
allocation, Net Termination Gain or Net Termination Loss actually realized
shall be allocated first. In determining such Unrealized Gain or Unrealized
Loss the aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
a distribution shall (A) in the case of an actual distribution which is not
made pursuant to Section 13.3 or 13.4 or in the case of a deemed distribution
occurring as a result of a termination of the Partnership pursuant to Section
708 of the Code, be determined and allocated in the same manner as that;
provided, however, in Section 4.9(d)(i) or(B) in the case of a liquidating
distribution pursuant to Section 14.4, be determined and allocated by the
Liquidator using such reasonable method of valuation as it may adopt.
Section 4.10 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions, and no
Partner or Assignee shall be entitled to withdraw any part of its Capital
Contributions or otherwise to receive any distribution from the Partnership,
except as; provided, however, in Section 4.1 and Articles V, VII, XIII and XIV.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 4.9(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
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(a) Net Income. After giving effect to the special allocations set forth in
Section 5.1(d), Net Income for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 5.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
5.1(b)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 5.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
5.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partner and the
Limited Partners in accordance with their respective Percentage Interests.
(b) Net Losses. After giving effect to the special allocations set forth in
Section 5.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the aggregate
Net Losses allocated pursuant to this Section 5.1(b)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Income allocated to such Partners pursuant to Section 5.1(a)(iii) for all
previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners in
accordance with their respective Percentage Interests; provided that Net
Losses shall not be allocated pursuant to this Section 5.1(b)(ii) to the
extent that such allocation would cause any Limited Partner to have a
deficit balance in its Adjusted Capital Account at the end of such taxable
year (or increase any existing deficit balance in its Adjusted Capital
Account); and
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 5.1(d), all items of income gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder.
All allocations under this Section 5.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this
Section 5.1 and after all distributions of Available Cash provided under
Section 5.4 have been made with respect to the taxable period ending on the
date of the Partnership's liquidation pursuant to Section 14.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such Net
Termination Gain shall be allocated among the General Partner and the
Limited Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
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(A)(1) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B)(2) Second, 99% 100% to all Limited Partners holding Common Units,
in accordance with their relative Percentage Interests, and 1% to the
General Partner until the Capital Account in respect of each Common
Unit then Outstanding is equal to the sum of (1) its Unrecovered
Initial Unit Price plus (2) the Minimum Quarterly Distribution for the
Quarter during which such Net Termination Gain is recognized, reduced
by any distribution pursuant to Sections 5.4(a)(i) or (b)(i) with
respect to such Common Unit for such Quarter (the amount determined
pursuant to this clause (2) is hereinafter defined as the "Unpaid MQD")
plus (3) any then existing Cumulative Common Unit Arrearage with
respect to a Common Unit sold by the Underwriters on the Closing Date;;
(C)(3) Third, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the expiration of the Subordination Period,
99% to the Limited Partners holding Subordinated Units, in the
proportion that the total number of Subordinated Units held by each
such Limited Partner bears to the total number of Subordinated Units
then Outstanding, and 1% to the General Partner, in the amount which
will increase 100% to all
Partners holding Senior Subordinated Units, in accordance with their
relative Percentage Interests, until the Capital Account of each such
Limited Partner maintained with respect to such Subordinated Units to
that amount which equals in respect of each Senior Subordinated Unit
then Outstanding is equal to the sum of (1) the Unrecovered
Subordinated Unit Capital attributable to such Subordinated Units,
determined for the taxable year (or portion thereof) to which this
allocation of gain relates Initial Unit Price plus (2) the Minimum
Quarterly Distribution for the Quarter during which such Net
Termination Gain is recognized, reduced by any distribution pursuant to
Section 5.4(a)(iii) with respect to such Senior Subordinated Unit for
such Quarter;
(4) Fourth, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the expiration of the Subordination Period,
100 % to all Partners holding Junior Subordinated Units and General
Partner Units, Pro Rata, in accordance with their relative Percentage
Interests, until the Capital Account in respect of each Junior
Subordinated Unit then Outstanding is equal to the sum of (1) the
Unrecovered Initial Unit Price plus (2) the Minimum Quarterly
Distribution for the Quarter during which such Net Termination Gain is
recognized, reduced by any distribution pursuant to Section 5.4(a)(iv)
with respect to such Junior Subordinated Unit for such Quarter;
(D) Fourth, 99%(5) Fifth, 100% to all Limited Partners, in accordance
with their relative Percentage Interests, and 1% to the General Partner
until the Capital Account in respect of each Common Unit then
Outstanding (if such Termination Capital Transaction occurs, or is
deemed to occur, prior to the expiration of the Subordination Period)
or Class A Common Unit then Outstanding (if such Termination Capital
Transaction occurs, or is deemed to occur, after the expiration of the
Subordination Period) is equal to the sum of (1) its Unrecovered
Initial Unit Price, plus (2) the Unpaid MQD, if any, for such Common
Unit with respect to the Quarter during which such Net Termination Gain
is recognized,
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plus (3) any then existing Cumulative Common Unit Arrearage with
respect to a Common Unit sold by the Underwriters on the Closing Date,
plus (4) the excess of (aa) the First Target Distribution less the
Minimum Quarterly Distribution for each Quarter of the Partnership's
existence over (bb) the amount of any distributions of Operating
Surplus that was distributed pursuant to Sections 5.4(a)(v) or 5.4
(b)(i) (the sum of (1) plus (2) plus (3) plus (4) is hereinafter
defined as the "First Liquidation Target Amount");
(E) Fifth, 85.8673%(6) Sixth, 86.7% to all Limited Partners, in
accordance with their relative Percentage Interests, and 14.1327% to
the General Partner 13.3% to the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, Pro Rata (if such
Termination Capital Transaction occurs, or is deemed to occur, prior to
the expiration of the Subordination Period), or 13.3% to the Class B
Common Units and General Partner Units, Pro Rata (if such Termination
Capital Transaction occurs, or is deemed to occur, after the expiration
of the Subordination Period), until the Capital Account in respect of
each Common Unit then Outstanding (if such Termination Capital
Transaction occurs, or is deemed to occur, prior to the expiration of
the Subordination Period) or Class A Common Unit then Outstanding (if
such Termination Capital Transaction occurs, or is deemed to occur,
after the expiration of the Subordination Period) is equal to the sum
of (1) the First Liquidation Target Amount, plus (2) the excess of (aa)
the Second Target Distribution less the First Target Distribution for
each Quarter of the Partnership's existence over (bb) the amount of any
distributions of Operating Surplus that was distributed pursuant to
Section 5.4(a)(v) or 5.4(b)(iv) 5.4(a)(vi) or 5.4(b)(iii) (the sum of
(1) plus (2) is hereinafter defined as the "Second Liquidation Target
Amount");
(F)Sixth, 75.7653%(7) Seventh, 76.5% to all Limited Partners, in
accordance with their relative Percentage Interests, and 24.2347% to
the General Partner 23.5% to the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, Pro Rata (if such
Termination Capital Transaction occurs, or is deemed to occur, prior to
the expiration of the Subordination Period), or 23.5% to the Class B
Common Units and General Partner Units, Pro Rata (if such Termination
Capital Transaction occurs, or is deemed to occur, after the expiration
of the Subordination Period), until the Capital Account in respect of
each Common Unit then Outstanding (if such Termination Capital
Transaction occurs, or is deemed to occur, prior to the expiration of
the Subordination Period) or Class A Common Unit then Outstanding (if
such Termination Capital Transaction occurs, or is deemed to occur,
after the expiration of the Subordination Period) is equal to the sum
of (1) the Second Liquidation Target Amount, plus (2) the excess of
(aa) the Third Target Distribution less the Second Target Distribution
for each Quarter of the Partnership's existence over (bb) the amount of
any distributions of Operating Surplus that was distributed pursuant to
Section 5.4(a)(vii) or 5.4(b)(v); 5.4(b)(iv); and
(G)(8) Finally, any remaining amount 50.5102% 51% to all Limited
Partners, in accordance with their relative Percentage Interests, and
49.4898% to the 49% to the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, Pro Rata (if such
Termination Capital Transaction occurs, or is deemed to occur, prior to
the expiration of the Subordination Period), or 49% to the Class B
Common Units and General Partner Units, Pro Rata (if such Termination
Capital Transaction occurs, or is deemed to occur, after the expiration
of the Subordination Period).
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(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such Net
Termination Loss shall be allocated to the Partners in the following
manner:
(A) First, 100% to the General Partner to the extent the General
Partner has contributed additional capital to the Partnership pursuant
to its Additional Capital Contribution Obligation reduced by the amount
such Additional Capital Contribution Obligation has reduced the General
Partner's obligation pursuant to Section 4.2(c);
(B) Second,(1) First, if such Termination Capital Transaction occurs
(or is deemed to occur) prior to the conversion of the last outstanding
Junior Subordinated Unit, 99% 100% to the Partners holding Subordinated
Units, in proportion that the total number of Subordinated Units held
by each such Limited Partner bears to the total number of Subordinated
Units then Outstanding, and 1% to the General Partner, Junior
Subordinated Units and General Partner Units, Pro Rata, until the
Capital Account in respect of each Junior Subordinated Unit then
Outstanding has been reduced to zero;
(2) Second, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the conversion of the last outstanding Senior
Subordinated Unit, 100% to the Partners holding Senior Subordinated
Units, in accordance with their relative Percentage Interests, until
the Capital Account in respect of each Senior Subordinated Unit then
Outstanding has been reduced to zero;
(3) Third, 100% to all Partners holding Common Units, the Capital
Account balances attributable to which are in excess of the Capital
Account balances attributable to the remainder of the Common Units then
Outstanding, in accordance with their relative Percentage Interests,
until the Capital Accounts in respect of each Common Unit then
Outstanding are equal;
(4) Fourth, 100% to all (C) Third, 99% to all Limited Partners
holding Common Units, in accordance with their relative Percentage
Interests, and 1% to the General Partner, until the Capital Account in
respect of each Common Unit then Outstanding has been reduced to zero;
and
(D)(5) Fifth, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this Section
5.1, the following special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 5.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-
2(j)(2)(i), or any successor provision. For purposes of this Section
5.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 5.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 5.1(d)(vi) and 5.1(d)(vii)). This Section
5.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
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(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding
the other provisions of this Section 5.1 (other than Section 5.1(d)(i)),
except as provided in Treasury Regulation Section 1.704-2(i)(4), if there
is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Partnership taxable period, any Partner with a share of Partner Nonrecourse
Debt Minimum Gain at the beginning of such taxable period shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any
successor provisions. For purposes of this Section 5.1(d), each Partner's
Adjusted Capital Account balance shall be determined, and the allocation of
income or gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this Section 5.1(d), other
than Section 5.1(d)(i) and other than an allocation pursuant to Sections
5.1(d)(vi) and 5.1(d)(vii), with respect to such taxable period. This
Section 5.1(d)(ii) is intended to comply with the chargeback of items of
income and gain requirement in Treasury Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations. If the amount of cash or the Net Agreed Value
of any property distributed (except cash or property distributed pursuant
to Section 14.4) to any Limited Partner with respect to a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Limited Partners (on a per Unit
basis), then (1) each Limited Partner receiving such greater cash or
property distribution shall be allocated gross income in an amount equal to
the product of (aa) the amount by which the distribution (on a per Unit
basis) to such Limited Partner exceeds the distribution (on a per Unit
basis) to the Limited Partners receiving the smallest distribution and (bb)
the number of Units owned by the Limited Partner receiving the greater
distribution; and (2) the General Partner shall be allocated gross income
in an aggregate amount equal to 1/99 of the sum of the amounts allocated in
clause (1) above. All or any portion of the remaining items of Partnership
gross income or gain for the taxable period, if any, shall be allocated
100% to the General Partner until the aggregate amount of such items
allocated to the General Partner pursuant to this paragraph (iii) for the
current taxable period and all previous taxable periods is equal to the
cumulative amount of all Incentive Distributions made to the General
Partner from the Closing Date through the end of such taxable period.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income
and gain shall be specifically allocated to such Partner in an amount and
manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 5.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an
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allocation pursuant to this Section 5.1(d)(v) shall be made only if and to
the extent that such Partner would have a deficit balance in its Capital
Account as adjusted after all other allocations provided for in this
Section 5.1 have been tentatively made as if this Section 5.1(d)(v) were
not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the Limited Partners, to
revise the prescribed ratio to the numerically closest ratio that satisfies
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that bears the
Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation Section 1.704-2(i). If more than one Partner bears the
Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(b) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, if any, shall be
allocated 100% to each Partner holding Subordinated Units in the proportion
of the number of Subordinated Units held by such Partner to the total
number of Subordinated Units then Outstanding, until each such Partner has
been allocated an amount of gross income or gain which increases the
Capital Account maintained with respect to such Subordinated Units to an
amount equal to the product of (A) the number of Subordinated Units held by
such Partner and (B) the Per Unit Capital Amount for a Common Unit. The
purpose of this allocation is to establish uniformity between the Capital
Accounts underlying Subordinated Units and the Capital Accounts underlying
Common Units held by Persons other than the General Partner and its
Affiliates immediately prior to the conversion of such Subordinated Units
into Common
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Units. This allocation method for establishing such economic uniformity
will only be available to the General Partner if the method for allocating
Upon the issuance of any Unit pursuant to Section 4.6 or upon the
conversion of any Unit into another class after application of Section
4.9(c)(iii), gross income shall be allocated to the holder of such Unit
until the Capital Account of such Unit is the same as the Capital Account
maintained with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to Section 4.9(c)(ii) does not
otherwise provide such economic uniformity to the Subordinated Units. per
Unit of all other Units of the same class.
(xi) Curative Allocation.
(A)(1) Notwithstanding any other provision of this Section 5.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related
Curative Allocation not otherwise been provided in this Section 5.1.
Notwithstanding the preceding sentence, Required Allocations relating
to (1) Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partnership Minimum Gain
and (2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
5.1(d)(xi)(A)(1) shall only be made with respect to Required
Allocations to the extent the General Partner reasonably determines
that such allocations will otherwise be inconsistent with the economic
agreement among the Partners. Further, allocations pursuant to this
Section 5.1(d)(xi)(A)(1) shall be deferred with respect to allocations
pursuant to clauses (1) and (2) hereof to the extent the General
Partner reasonably determines that such allocations are likely to be
offset by subsequent Required Allocations.
(B)(2) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
5.1(d)(xi)(A)(1) in whatever order is most likely to minimize the
economic distortions that might otherwise result from the Required
Allocations, and (2) divide all allocations pursuant to Section
5.1(d)(xi)(A)(1) among the Partners in a manner that is likely to
minimize such economic distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event, the
following rules shall apply:
(A)(1) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 4.9(d) hereof), the General Partner shall
allocate additional items of gross income and gain to the Limited
Partners or additional items of deduction and loss to the General
Partner to the extent that the Additional Book Basis Derivative Items
allocated to the Limited Partners exceeds their Share of those
Additional Book Basis Derivative Items. For this purpose, the Limited
Partners shall be treated as being allocated Additional Book Basis
Derivative Items to the extent that such Additional Book Basis
Derivative Items have reduced the amount of income that would otherwise
have been allocated to the Limited Partners under the
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Partnership Agreement (e.g., Additional Book Basis Derivative Items
taken into account in computing cost of goods sold would reduce the
amount of book income otherwise available for allocation among the
Partners). Any allocation made pursuant to this Section
5.1(d)(xii)(A)(1) shall be made after all of the other Agreed
Allocations have been made as if this Section 5.1(d)(xii) were not in
the Partnership Agreement and, to the extent necessary, shall require
the reallocation of items that have been allocated pursuant to such
other Agreed Allocations.
(B)(2) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event, such
negative adjustment (1) shall first be allocated between the General
Partner and the Limited Partners in proportion to and to the extent of
their Remaining Net Positive Adjustments and (2) any remaining negative
adjustment shall be allocated pursuant to Section 5.1(c) hereof. The
aggregate amount so allocated to the Limited Partners in respect of
each class or series of Units shall be allocated among them ratably on
a per Unit basis.
(C)(3) In making the allocations required under this Section
5.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to
satisfy the purpose of this Section 5.1(d)(xii).
(xiii) First Year Allocation. Net Income or Net Loss Depreciation.
Depreciation deductions of the Partnership for the period beginning on the
Closing Date and ending on the last day of the taxable year of the
Partnership that includes the Closing Date shall be allocated 100% to the
General Partner. For the immediately succeeding taxable year of the
Partnership, items of income or gain (if the allocation in the prior year
was an allocation of Net Income) or items of loss and deduction (if the
allocation in the prior year was an allocation of Net Loss) shall be
allocated 100% to the Limited Partners, each period shall be allocated
among the Partners in accordance with their Percentage Interests, in an
amount equal to 99% of the Net Income or Net Loss allocated to the General
Partner in the prior taxable year. relative Capital Account balances as
they existed immediately after the most recent book adjustments pursuant to
Section 4.9(d) of this Agreement that occurred prior to such period and
without regard to allocations made after such adjustment.
Section 5.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 5.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A)(1) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B)(2) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 5.1.
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(ii) (A)(1) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 4.9(d)(i) or (ii), and (2) second,
in the event such property was originally a Contributed Property, be
allocated among the Partners in a manner consistent with Section
5.2(b)(i)(A)(1); and (B)(2) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 5.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the preservation
of uniformity of the Units (or any class or classes thereof), the General
Partner shall have sole discretion to (i) adopt such conventions as it deems
appropriate in determining the amount of depreciation, amortization and cost
recovery deductions; (ii) make special allocations for federal income tax
purposes of income (including, without limitation, gross income) or deductions;
and (iii) amend the provisions of this Agreement as appropriate (x) to reflect
the proposal or promulgation of Treasury Regulations under Section 704(b) or
Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity
of the Units (or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments to this
Agreement as provided in this Section 5.2(c) only if such conventions,
allocations or amendments would not have a material adverse effect on the
Partners, the holders of any class or classes of Units issued and Outstanding
or the Partnership, and if such allocations are consistent with the principles
of Section 704 of the Code.
(d) The General Partner in its sole discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite the inconsistency of such
approach with Treasury Regulation Section 1.167(c)-1(a)(6) and proposed
Treasury Regulation Section 1.197-2(g)(3) or any successor regulations thereto.
If the General Partner determines that such reporting position cannot
reasonably be taken, the General Partner may adopt depreciation and
amortization conventions under which all purchasers acquiring Units in the same
month would receive depreciation and amortization deductions, based upon the
same applicable rate as if they had purchased a direct interest in the
Partnership's property. If the General Partner chooses not to utilize such
aggregate method, the General Partner may use any other reasonable depreciation
and amortization conventions to preserve the uniformity of the intrinsic tax
characteristics of any Units that would not have a material adverse effect on
the Limited Partners or the Record Holders of any class or classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this Section
5.2, be characterized as Recapture Income in the same proportions and to the
same extent as such Partners (or their predecessors in interest) have been
allocated any deductions directly or indirectly giving rise to the treatment of
such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof
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shall be determined without regard to any election under Section 754 of the
Code which may be made by the Partnership; provided, however, that such
allocations, once made, shall be adjusted as necessary or appropriate to take
into account those adjustments permitted or required by Sections 734 and 743 of
the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable to
a transferred Partnership Interest of the General Partner or to transferred
Units shall, for federal income tax purposes, be determined on an annual basis
and prorated on a monthly basis and shall be allocated to the Partners as of
the opening of the New York Stock Exchange on the first Business Day of each
month; provided, however, that (i) if the Underwriter's Overallotment Option is
not exercised, such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Closing Date Effective Time
occurs shall be allocated to Partners as of the opening of the New York Stock
Exchange on the first Business Day of the next succeeding month or (ii) if the
Underwriters' Overallotment Option is exercised, such items for the period
beginning on the Closing Date and ending on the last day of the month in which
the Second Delivery Date (as defined in the Underwriting Agreement) closing of
the Overallotment Option occurs shall be allocated to the Partners as of the
opening of the New York Stock Exchange on the first Business Day of the next
succeeding month; and; provided, further, that gain or loss on a sale or other
disposition of any assets of the Partnership other than in the ordinary course
of business shall be allocated to the Partners as of the opening of the New
York Stock Exchange on the first Business Day of the month in which such gain
or loss is recognized for federal income tax purposes. The General Partner may
revise, alter or otherwise modify such methods of allocation as it determines
necessary, to the extent permitted or required by Section 706 of the Code and
the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article V shall instead be made to the beneficial owner of
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c) of
the Code or any other method acceptable to the General Partner in its sole
discretion.
Section 5.3 Requirement and Characterization of Distributions.
(a) Within Subject to (b), (c) and (d) below, within 45 days following the
end of (i) the period beginning on the Initial Closing Date and ending on March
31, 1996 and (ii) each Quarter commencing with the Quarter beginning on April
1, 1996, an amount equal to 100% of Available Cash with respect to such period
or Quarter shall be distributed in accordance with this Article V by the
Partnership to the Partners, as of the Record Date selected by the General
Partner in its reasonable discretion; provided, however, that the distribution
of Available Cash to the holders of Senior Subordinated Units, Junior
Subordinated Units and General Partner Units shall commence with respect to the
Quarter beginning on April 1, 1999 (and shall include the time period beginning
on the Effective Time and ending on March 31, 1999). All amounts of Available
Cash distributed by the Partnership on any date from any source shall be deemed
to be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to Partners pursuant to Section 5.4
equals the Operating Surplus from the Initial Closing Date through the close of
the immediately preceding Quarter. Any remaining amounts of Available Cash
distributed by the Partnership on such date shall, except as otherwise provided
in Section 5.5, be deemed to be from Capital Surplus.
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(b) A distribution of Available Cash may be made on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units with respect to the
time period beginning on the Effective Time and ending on June 30, 1999 in an
amount up to the Minimum Quarterly Distribution for such period to the extent
the sum of EBITDA, less interest, less taxes, and less Maintenance Capital
Expenditures consolidated (combined actual from October 1, 1998 until the
Effective Time) for Petro and the Partnership ("Adjusted Distributable Cash")
for the period beginning October 1, 1998 and ending on June 30, 1999 exceeds
the sum of
(i) $57,172,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending December 31, 1998 exceeds
or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending June 30, 1999 exceeds or
is less than 10,544,000.
(c) A distribution of Available Cash may be made on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, with respect to the
time period beginning on July 1, 1999 and ending on September 30, 1999 in an
amount up to the Minimum Quarterly Distribution for such period to the extent
the Adjusted Distributable Cash for the period beginning on October 1, 1998 and
ending on September 30, 1999 exceeds the sum of
(i) $25,307,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending December 31, 1998 exceeds
or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending June 30, 1999 exceeds or
is less than 10,544,000, plus or minus
(v) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending September 30, 1999
exceeds or is less than 10,544,000.
(d) Beginning with the distribution for the Quarter ending on December 31,
1999, no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, unless the aggregate amount of
distributions on all Units with respect to all Quarters, beginning with the
Quarter ending on December 31, 1999 shall be equal to or less than the total
Operating Surplus generated by the Partnership since October 1, 1999 (which
does not include that portion of Operating Surplus included in clause (a)(i) of
the definition of Operating Surplus).
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(e) Notwithstanding the definitions of Available Cash and Operating Surplus
contained herein, (i) cash receipts of the Partnership from the capital
contributions pursuant to the Additional Capital Contribution Obligation shall
be deemed to be received, for purposes of determining Available Cash from
Operating Surplus, during the quarter in respect of which such capital
contributions are made, even if such capital contributions are received by the
Partnership after the last day of such quarter; and (ii) disbursements
(including, without limitation, contributions to the Operating Partnership or
disbursements on behalf of the Operating Partnership) made or cash reserves
established, increased or reduced (including, without limitation, cash reserves
established, increased or reduced by the Operating Partnership) after the end
of any Quarter but on or before the date on which the Partnership makes its
distribution of Available Cash in respect of such Quarter pursuant to Section
5.3(a) shall be deemed to have been made, established, increased or reduced for
purposes of determining Available Cash and Operating Surplus, within such
Quarter if the General Partner so determines. Notwithstanding the foregoing, in
the event of the dissolution and liquidation of the Partnership, all proceeds
of such liquidation shall be applied and distributed in accordance with, and
subject to the terms and conditions of, Section 14.4.
(f) Nothing in this Section 5.3 prohibits the holders of the Senior
Subordinated Units, Junior Subordinated Units or General Partner Units from
receiving distributions from Capital Surplus in a partial liquidation during
the Subordination Period.
Section 5.4 Distributions of Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 5.3 or 5.5 shall, subject to Section 5.3 and
subject to Section 17-607 of the Delaware Act, be distributed as follows,
except as otherwise required by Section 4.4(b) in respect of additional
Partnership Securities issued pursuant thereto:
(i) First, 99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner 100% to the Common Units, Pro Rata, until there has been
distributed in respect of each Common Unit then Outstanding an amount equal
to the Minimum Quarterly Distribution;
(ii) Second, 99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner 100% to the Common Units, Pro Rata, until there has been
distributed in respect of each Common Unit then Outstanding an amount equal
to the Cumulative Common Unit Arrearage, if any, existing with respect to
such any prior Quarter;
(iii) Third, 99% 100% to the Limited Partners holding Senior Subordinated
Units, in accordance with their relative Percentage Interests, and 1% to
the General Partner Pro Rata, until there has been distributed in respect
of each Senior Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution;
(iv) Fourth, 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner 100% to the
Junior Subordinated Units and General Partner Units, Pro Rata, until there
has been distributed in respect of each Junior Subordinated Unit and
General Partner Unit then Outstanding an amount equal to the excess of the
First Target Distribution over the Minimum Quarterly Distribution;
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(v) Fifth, 85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner 100% to
all Units, Pro Rata, until there has been distributed in respect of each
Unit then Outstanding an amount equal to the excess of the Second First
Target Distribution over the First Target Minimum Quarterly Distribution;
(vi) Sixth, 75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner (A)
86.7% to all Units, Pro Rata, and (B) 13.3% to all Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, Pro Rata, until
there has been distributed in respect of each Common Unit then Outstanding
an amount equal to the excess of the Second Target Distribution over the
First Target Distribution;
(vii) Seventh, (A) 76.5% to all Units, Pro Rata, and (B) 23.5% to all
Senior Subordinated Units, Junior Subordinated Units and General Partner
Units, Pro Rata, until there has been distributed in respect of each Common
Unit then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution; and
(vii) Thereafter, 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, and 49.4898% to the General Partner;
(viii) Thereafter, (A) 51% to all Units, Pro Rata, and (B) 49% to all
Senior Subordinated, Junior Subordinated and General Partner Units, Pro
Rata;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6(a),
the distributions of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made in accordance with Section 5.4(a)(vii)
5.4(a)(viii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 5.3 or 5.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by
Section 4.4(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 99% to all Limited Partners, in accordance with their relative
Percentage Interests, and 1% to the General Partner 100% to all Units, Pro
Rata, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution;
(ii) Second, 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner 100% to all
Units, Pro Rata, until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution;
(iii) Third, 85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner (A)
86.7% to all Units, Pro Rata, and (B) 13.3% to all Class B Common Units and
General Partner Units, Pro Rata, until there has been distributed in
respect of each Class A Common Unit then Outstanding an amount equal to the
excess of the Second Target Distribution over the First Target
Distribution;
(iv) Fourth, 75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner (A)
76.5% to all Units, Pro Rata, and (B) 23.5%
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to all Class B Common Units and General Partner Units, Pro Rata, until
there has been distributed in respect of each Class A Common Unit then
Outstanding an amount equal to the excess of the Third Target Distribution
over the Second Target Distribution; and
(v) Thereafter, 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, and 49.4898% to the General Partner;
(A) 51% to all Units, Pro Rata, and (B) 49% to all Class B Common Units and
General Partner Units, Pro Rata;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6(a),
the distributions of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made in accordance with Section 5.4(b)(v).
Section 5.5 Distributions of Cash from Capital Surplus.
Available Cash that constitutes Capital Surplus shall, subject to Section 17-
607 of the Delaware Act, be distributed, unless the provisions of Section 5.3
require otherwise, 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner 100% to all Units,
Pro Rata, until a hypothetical holder of a Common Unit acquired on the Initial
Closing Date has received with respect to such Common Unit, during the period
since the Initial Closing Date through such date, distributions of Available
Cash that are deemed to be Capital Surplus in an aggregate amount equal to the
Initial Unit Price. Thereafter, all Available Cash shall be distributed as if
it were Operating Surplus and shall be distributed in accordance with Section
5.4.
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall be proportionately
adjusted in the event of any distribution, combination or subdivision (whether
effected by a distribution payable in Units or otherwise) of Units or other
Partnership Securities in accordance with Section 4.8. In the event of a
distribution of Available Cash that is deemed to be from Capital Surplus, the
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction
of which the numerator is the Unrecovered Initial Unit Price of the Common
Units immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Initial Unit Price of the Common Units
immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 5.8.
Section 5.7 Special Provisions Relating to the Senior Subordinated Units and
Junior Subordinated Units.
Except with respect to the right to vote on or approve matters requiring the
vote or approval of a percentage of the holders of Outstanding Common Units and
the right to participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units
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pursuant to this Article V, the holder of a and except as provided in Section
6.12 and Section 17.1, the holder of a Senior Subordinated Unit or a Junior
Subordinated Unit shall have all of the rights and obligations of a Limited
Partner holding Common Units hereunder; provided, however, that immediately
upon the end of the Subordination Period or upon the conversion of Subordinated
Units as; provided, however, in Section 4.6, the holder of a Senior
Subordinated Unit or Junior Subordinated Unit shall possess all of the rights
and obligations of a Limited Partner holding Class B Common Units hereunder,
including, without limitation, the right to vote as a Common Unitholder and the
right to participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units pursuant to this
Article V (but such Senior Subordinated Units and Junior Subordinated Units
shall remain subject to the provisions of Sections 4.9(c)(ii) and 5.1(d)(x)).
Section 5.8 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution or Third
Target Distribution, as the case may be, shall be equal to the product obtained
by multiplying (a) the amount thereof by (b) one minus the sum of (i) the
highest marginal federal corporate (or other entity, as applicable) income tax
rate of the Partnership for the taxable year of the Partnership in which such
Quarter occurs (expressed as a percentage) plus (ii) the effective overall
state and local income tax rate (expressed as a percentage) applicable to the
Partnership for the calendar year next preceding the calendar year in which
such Quarter occurs (after taking into account the benefit of any deduction
allowable for federal income tax purposes with respect to the payment of state
and local income taxes), but only to the extent of the increase in such rates
resulting from such legislation or interpretation. Such effective overall state
and local income tax rate shall be determined for the taxable year next
preceding the first taxable year during which the Partnership or the Operating
Partnership is taxable for federal income tax purposes as an association
taxable as a corporation or is otherwise subject to entity-level taxation by
determining such rate as if the Partnership or the Operating Partnership had
been subject to such state and local taxes during such preceding taxable year.
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS MANAGEMENT AND
OPERATION OF BUSINESS
Section 6.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other
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provision of this Agreement, the General Partner, subject to Section 6.3, shall
have full power and authority to do all things and on such terms as it, in its
sole discretion, may deem necessary or appropriate to conduct the business of
the Partnership, to exercise all powers set forth in Section 3.2 and to
effectuate the purposes set forth in Section 3.1, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 6.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership or the
Operating Partnership, the lending of funds to other Persons (including the
Operating Partnership, the General Partner and its Affiliates) Group
Members), the repayment of obligations of the Partnership and the Operating
Partnership and the making of capital contributions to the Operating
Partnership;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees, including those of the
Operating Partnership (including employees having titles such as
"president," "vice president," "secretary" and "treasurer") and agents,
outside attorneys, accountants, consultants and contractors and the
determination of their compensation and other terms of employment or
hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests
in, and the contributions of property to, the Operating Partnership from
time to time);
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
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(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Units from, or
requesting that trading be suspended on, any such exchange (subject to any
prior approval that may be required under Section 1.6);
(xiii) the purchase, sale or other acquisition or disposition of Units
(subject to Section 6.12 and Section 17.1); and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of the Operating
Partnership Agreement, the Underwriting Agreement, the Conveyance and
Contribution Agreements, the agreements and other documents filed as exhibits
to the Proxy Statement and the Equity Offering Registration Statement, and the
other agreements described in or filed as a part of the Proxy Statement and the
Equity Registration Statement; (ii) agrees that the General Partner (on its own
or through any officer of the Partnership) is authorized to execute, deliver
and perform the agreements referred to in clause (i) of this sentence and the
other agreements, acts, transactions and matters described in or contemplated
by the Proxy Statement and the Equity Registration Statement on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Units; and (iii)
agrees that the execution, delivery or performance by the General Partner, any
Group Member or any Affiliate of any of them, of this Agreement or any
agreement authorized or permitted under this Agreement (including the exercise
by the General Partner or any Affiliate of the General Partner of the rights
accorded pursuant to Article XVII), shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the Partnership or
the Limited Partners or the Assignees or any other Persons under this Agreement
(or any other agreements) or of any duty stated or implied by law or equity.
Section 6.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership in which the limited
partners have limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to do business or own
property. Subject to the terms of Section 7.5(a), the General Partner shall not
be required, before or after filing,
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to deliver or mail a copy of the Certificate of Limited Partnership, any
qualification document or any amendment thereto to any Limited Partner or
Assignee.
Section 6.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific act
by all of the Outstanding Units or by other written instrument executed and
delivered by all of the Outstanding Units subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the Partnership;
(ii) possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XIV and XVI, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership, without the approval of holders of at least a Unit Majority;
provided, however that this provision shall not preclude or limit the General
Partner's ability to mortgage, pledge, hypothecate or grant a security interest
in all or substantially all of the assets of the Partnership or Operating
Partnership and shall not apply to any forced sale of any or all of the assets
of the Partnership or Operating Partnership pursuant to the foreclosure of, or
other realization upon, any such encumbrance. Without the approval of holders
of at least a Unit Majority, the General Partner shall not, on behalf of the
Partnership, (i) consent to any amendment to the Operating Partnership
Agreement or, except as expressly permitted by Section 6.9(d), take any action
permitted to be taken by a partner of the Operating Partnership, in either
case, that would have a material adverse effect on the Partnership as a partner
of the Operating Partnership or (ii) except as permitted under Sections 11.2,
13.1 and 13.2, elect or cause the Partnership to elect a successor general
partner of the Operating Partnership.
(c) At all times while serving as the general partner of the Partnership, the
General Partner shall not make any dividend or distribution on, or repurchase
any shares of, its stock or take any other action within its control if the
effect of such action would cause its net worth, independent of its interest in
the Partnership Group, to be less than $6.0 million.
Section 6.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 6.4 and elsewhere in this Agreement or
in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such other
basis as the General Partner may determine in its sole discretion, for (i) all
direct and indirect expenses it incurs or payments it makes on behalf of the
Partnership (including salary, bonus, incentive compensation and other amounts
paid to any Person to perform services for the Partnership, the Operating
Partnership or for the General Partner in the discharge of its duties to the
Partnership), and (ii) all
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other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with
operating the Partnership's business (including expenses allocated to the
General Partner by its Affiliates). The General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion. Reimbursements
pursuant to this Section 6.4 shall be in addition to any reimbursement to the
General Partner as a result of indemnification pursuant to Section 6.7.
(c) Subject to Section 4.5, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose, adopt and amend on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Units), or issue
Partnership Securities pursuant to any employee benefit plan, employee program
or employee practice maintained or sponsored by the General Partner or any of
its Affiliates, in each case for the benefit of employees of the General
Partner, any Group Member or any Affiliate, or any of them, in respect of
services performed, directly or indirectly, for the benefit of the Partnership
Group. The Partnership agrees to issue and sell to the General Partner or any
of its Affiliates any Units or other Partnership Securities that the General
Partner or such Affiliate is obligated to provide to any employees pursuant to
any such employee benefit plans, employee programs or employee practices.
Expenses incurred by the General Partner in connection with any such plans,
programs and practices (including the net cost to the General Partner or such
Affiliate of Units or other Partnership Securities purchased by the General
Partner or such Affiliate from the Partnership to fulfill options or awards
under such plans, programs and practices) shall be reimbursed in accordance
with Section 6.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by the
General Partner as permitted by this Section 6.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all of the General Partner's Partnership Interest
(which is represented by the General Partner Units) as a general partner in the
Partnership pursuant to Section 11.2.
Section 6.5 Outside Activities.
(a) After the Closing Date Effective Time, the General Partner, for so long
as it is the general partner of the Partnership, shall not engage in any
business or activity or incur any debts or liabilities except in connection
with or incidental to (i) its performance as general partner of one or more
Group Members or as described in or contemplated by the Registration Proxy
Statement or (ii) the acquiring, owning or disposing of debt or equity
securities in any Group Member.
(b) Petroleum Heat and Power Co., Inc. ("Petro") or an Affiliate may engage
in the propane business provided it complies with the Non-competition Agreement
Certain Affiliates of the General Partner have entered into the Non-competition
Agreement with the Partnership and the Operating Partnership, which agreement
sets forth certain restrictions on the ability of such Affiliates to compete
with the Partnership and the Operating Partnership. Any amendments or waivers
to the Non-competition Agreement must be approved by the Audit Committee.
(c) Except as restricted by Sections 6.5(a) or (b) and the Non-competition
Agreement, each Indemnitee (other than the General Partner) shall have the
right to engage in businesses of every type
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and description and other activities for profit and to engage in and possess an
interest in other business ventures of any and every type or description,
whether in businesses engaged in or anticipated to be engaged in by any Group
Member, independently or with others, including business interests and
activities in direct competition with the business and activities of any Group
Member, and none of the same shall constitute a breach of this Agreement or any
duty to any Group Member or any Partner or Assignee. Neither any Group Member,
any Limited Partner nor any other Person shall have any rights by virtue of
this Agreement, the Operating Partnership Agreement or the partnership
relationship established hereby or thereby in any business ventures of any
Indemnitee.
(d) Notwithstanding Subject to Sections 6.5(a), (b) and (c) and the terms of
the Non-competition Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
of this Section 6.5 is hereby approved by the Partnership and all Partners and
(ii) it shall be deemed not to be a breach of the General Partner's fiduciary
duty or any other obligation of any type whatsoever of the General Partner for
the Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the
Partnership (including, without limitation, the General Partner and the
Indemnitees shall have no obligation to present business opportunities to the
Partnership).
(e) The General Partner and any of its Affiliates may acquire Units or other
Partnership Securities in addition to those acquired on at the Closing Date
Effective Time and, except as otherwise provided in this Agreement, shall be
entitled to exercise all rights of an Assignee or Limited Partner, as
applicable, relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 6.5(b) with respect to the
General Partner shall not include any Group Member or any Subsidiary of the
Group Member.
Section 6.6 Loans from the General Partner; Contracts with Affiliates; Certain
Restrictions on the General Partner.
(a) The General Partner or any Affiliate thereof may lend to any Group
Member, and any Group Member may borrow, funds needed or desired by the Group
Member for such periods of time and in such amounts as the General Partner may
determine; provided, however, that in any such case the lending party may not
charge the borrowing party interest at a rate greater than the rate that would
be charged the borrowing party or impose terms less favorable to the borrowing
party than would be charged or imposed on the borrowing party by unrelated
lenders on comparable loans made on an arms'-length basis (without reference to
the lending party's financial abilities or guarantees). The borrowing party
shall reimburse the lending party for any costs (other than any additional
interest costs) incurred by the lending party in connection with the borrowing
of such funds. For purposes of this Section 6.6(a) and Section 6.6(b), the term
"Group Member" shall include any Affiliate of the Group Member that is
controlled by the Group Member. The Partnership and the Operating Partnership
may not No Group Member may lend funds to the General Partner or any of its
Affiliates.
(b) The Partnership may lend or contribute to any Group Member, and any Group
Member may borrow, funds on terms and conditions established in the sole
discretion of the General Partner;
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provided, however, that the Partnership may not charge the Group Member
interest at a rate greater than the rate that would be charged to the Group
Member (without reference to the General Partner's financial abilities or
guarantees), by unrelated lenders on comparable loans. The foregoing authority
shall be exercised by the General Partner in its sole discretion and shall not
create any right or benefit in favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to the Partnership or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to the Partnership by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 6.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. The provisions of Section 6.4 shall apply to the rendering
of services described in this Section 6.6(c).
(d) The Partnership may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 6.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 4.1, 4.2 and 4.3, the Conveyance
and Contribution Agreements and any other transactions described in or
contemplated by the Registration Proxy Statement, (ii) any transaction approved
by Special Approval, (iii) any transaction, the terms of which are no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties, or (iv) any transaction that, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership), is equitable to the Partnership. With respect
to any contribution of assets to the Partnership in exchange for Units, the
Audit Committee, in determining whether the appropriate number of Units are
being issued, should take into account, among other things, the fair market
value of the assets, the liquidated and contingent liabilities assumed, the tax
basis in the assets, the extent to which tax-only allocations to the transferor
will protect the existing partners of the Partnership against a low tax basis,
and such other factors as the Audit Committee deems relevant under the
circumstances.
(f) The General Partner and its Affiliates will have no obligation to permit
any Group Member to use any facilities or assets of the General Partner and its
Affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation on
the part of the General Partner or its Affiliates to enter into such contracts.
(g) Notwithstanding any provision of this Agreement to the contrary, prior to
the termination of the Additional Capital Contribution Obligation, the General
Partner may not, (i) make any dividends
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or distributions of any cash or other assets to its stockholders, other than
(v) the proceeds of the First Mortgage Notes (other than the $6.0 million used
to fund the Additional Capital Contribution Obligation), (w) the Subordinated
Units, (x) distributions from the Partnership or the Operating Partnership, (y)
interest and profits earned on Permitted Investments and (z) interest on any
loan to Petro, (ii) incur any indebtedness for borrowed money (other than its
obligations with respect to indebtedness of the Partnership, Operating
Partnership or any other subsidiary entity of the Partnership) or (iii) merge
with or into any other Person or permit any Person to merge with or into the
General Partner or to sell all or substantially all of its assets in one or a
series of transactions. In addition, prior to the termination of the Additional
Capital Contribution Obligation the General Partner shall maintain $6.0 million
in Permitted Investments; provided, however, that such $6.0 million shall be
reduced from time to time to the extent and in the amount the Additional
Capital Contribution Obligation is reduced in accordance with Section 4.2(b).
(h) Without limitation of Sections 6.6(a) through 6.6(f), and notwithstanding
anything to the contrary in this Agreement, the existence of the conflicts of
interest described in the Registration Proxy Statement are hereby approved by
all Partners.
Section 6.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee; provided, however, that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in, or not opposed to, the best interests
of the Partnership and, with respect to any criminal proceeding, had no
reasonable cause to believe its conduct was unlawful; provided, further, no
indemnification pursuant to this Section 6.7 shall be available to the General
Partner or Petro with respect to their respective obligations incurred pursuant
to the Underwriting Agreement or the Conveyance and Contribution Agreements
(other than obligations incurred by the General Partner on behalf of the
Partnership or the Operating Partnership). The termination of any action, suit
or proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that the
Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 6.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partner shall not
be personally liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
6.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of an undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 6.7.
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(c) The indemnification provided by this Section 6.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee and
as to actions in any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee who has ceased
to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner and such other Persons as the General Partner shall determine, against
any liability that may be asserted against or expense that may be incurred by
such Person in connection with the Partnership's activities, regardless of
whether the Partnership would have the power to indemnify such Person against
such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.7, the Partnership shall be deemed to have
requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 6.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or any provision
hereof shall in any manner terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 6.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
Section 6.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other
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Persons who have acquired interests in the Units, for losses sustained or
liabilities incurred as a result of any act or omission if such Indemnitee
acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 6.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 6.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership and the Limited Partners of the
General Partner, its directors, officers and employees and any other
Indemnitees under this Section 6.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be
asserted.
Section 6.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee, on
the other hand, any resolution or course of action in respect of such conflict
of interest shall be permitted and deemed approved by all Partners, and shall
not constitute a breach of this Agreement, of the Operating Partnership
Agreement, of any agreement contemplated herein or therein, or of any duty
stated or implied by law or equity, if the resolution or course of action is,
or by operation of this Agreement is deemed to be, fair and reasonable to the
Partnership. The General Partner shall be authorized but not required in
connection with its resolution of such conflict of interest to seek Special
Approval of a resolution of such conflict or course of action. Any conflict of
interest and any resolution of such conflict of interest shall be conclusively
deemed fair and reasonable to the Partnership if such conflict of interest or
resolution is (i) approved by Special Approval, (ii) on terms no less favorable
to the Partnership than those generally being provided to or available from
unrelated third parties or (iii) fair to the Partnership, taking into account
the totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership). The General Partner may also adopt a resolution or course of
action that has not received Special Approval. The General Partner (including
the Audit Committee in connection with Special Approval) shall be authorized in
connection with its determination of what is "fair and reasonable" to the
Partnership and in connection with its resolution of any conflict of interest
to consider (A) the relative interests of any party to such conflict,
agreement, transaction or situation and the benefits and burdens relating to
such interest; (B) any customary or accepted industry practices and any
customary or historical dealings with a particular Person; (C) any applicable
generally accepted accounting practices or principles; and (D) such additional
factors as the General Partner (including the Audit Committee) determines in
its sole discretion to be relevant, reasonable or appropriate under the
circumstances. Nothing contained in this Agreement, however, is intended to nor
shall it be construed to require the General Partner (including the Audit
Committee) to consider the interests of any Person other than
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the Partnership. In the absence of bad faith by the General Partner, the
resolution, action or terms so made, taken or provided by the General Partner
with respect to such matter shall not constitute a breach of this Agreement or
any other agreement contemplated herein or a breach of any standard of care or
duty imposed herein or therein or, to the extent permitted by law, under the
Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
the General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, the Operating Partnership, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) in "good faith" or under another
express standard, the General Partner or such Affiliate shall act under such
express standard and shall not be subject to any other or different standards
imposed by this Agreement, the Operating Partnership Agreement, any other
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth in
the definitions of Available Cash or Operating Surplus shall not constitute a
breach of any duty of the General Partner to the Partnership or the Limited
Partners. The General Partner shall have no duty, express or implied, to sell
or otherwise dispose of any asset of the Partnership Group. No borrowing by any
Group Member or the approval thereof by the General Partner shall be deemed to
constitute a breach of any duty of the General Partner to the Partnership or
the Limited Partners by reason of the fact that the purpose or effect of such
borrowing is directly or indirectly to (A) enable distributions in respect of
the general partner interest to exceed 1% on the General Partner Units to
exceed the General Partner's Percentage Interest of the total amount
distributed, or (B) hasten the expiration of the Subordination Period or the
conversion of any Senior Subordinated Units or Junior Subordinated Units into
Common Units or (C) enable the General Partner to avoid or reduce its
Additional Capital Contribution Obligation. Class B Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Limited Partners hereby authorize the General Partner, on behalf of
the Partnership as a partner of a Group Member, to approve of actions by the
general partner of such Group Member similar to those actions permitted to be
taken by the General Partner pursuant to this Section 6.9.
Section 6.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
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(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its powers
or obligations hereunder, to act through any of its duly authorized officers, a
duly appointed attorney or attorneys-in-fact or the duly authorized officers of
the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority prescribed
in this Agreement, so long as such action is reasonably believed by the General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
Section 6.11 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have
any ownership interest in such Partnership assets or any portion thereof. Title
to any or all of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates or one or more
nominees, as the General Partner may determine. The General Partner hereby
declares and warrants that any Partnership assets for which record title is
held in the name of the General Partner or one or more of its Affiliates or one
or more nominees shall be held by the General Partner or such Affiliate or
nominee for the use and benefit of the Partnership in accordance with the
provisions of this Agreement; provided, however, that the General Partner shall
use its reasonable efforts to cause record title to such assets (other than
those assets in respect of which the General Partner determines that the
expense and difficulty of conveyancing makes transfer of record title to the
Partnership impracticable) to be vested in the Partnership as soon as
reasonably practicable; provided, however, that, prior to the withdrawal or
removal of the General Partner or as soon thereafter as practicable, the
General Partner shall use reasonable efforts to effect the transfer of record
title to the Partnership and, prior to any such transfer, will provide for the
use of such assets in a manner satisfactory to the Partnership. All Partnership
assets shall be recorded as the property of the Partnership in its books and
records, irrespective of the name in which record title to such Partnership
assets is held. The General Partner covenants and agrees that at the Closing
Date Effective Time, the Partnership Group shall have all licenses, permits,
certificates, franchises, or other governmental authorizations or permits
necessary for the ownership of their properties or for the conduct of their
businesses, except for such licenses, permits, certificates, franchises, or
other governmental authorizations or permits, failure to have obtained which
will not, individually or in the aggregate, have a material adverse effect on
the Partnership Group.
Section 6.12 Purchase or Sale of Units.
The General Partner may cause the Partnership to purchase or otherwise
acquire Units; provided, however, that, except as permitted pursuant to Section
11.6 and Section 17.1(a), the
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General Partner may not cause the Partnership to purchase Subordinated Units
other than Common Units during the Subordination Period. As long as Units are
held by any Group Member, such Units shall not be considered Outstanding for
any purpose, except as otherwise provided herein. The General Partner or any
Affiliate of the General Partner (other than a Group Member) may also purchase
or otherwise acquire and sell or otherwise dispose of Units for its own
account, subject to the provisions of Articles XI and XII.
Section 6.13 Registration Rights.
6.13 Registration Rights of Star Gas and its Affiliates.(a) If (i) Star Gas
the General Partner or any Affiliate of Star Gas the General Partner (including
for purposes of this Section 6.13, any Person that is an Affiliate of Star Gas
the General Partner at the date hereof notwithstanding that it may later cease
to be an Affiliate of Star Gas the General Partner) holds Units or other
Partnership Securities that it desires to sell and (ii) Rule 144 of the
Securities Act (or any successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such holder of Units
(the "Holder") to dispose of the number of Units or other securities
Partnership Securities it desires to sell at the time it desires to do so
without registration under the Securities Act, then upon the request of Star
Gas the General Partner or any of its Affiliates, the Partnership shall file
with the Commission as promptly as practicable after receiving such request,
and use all reasonable efforts to cause to become effective and remain
effective for a period of not less than six months following its effective date
or such shorter period as shall terminate when all Units or other Partnership
Securities covered by such registration statement have been sold, a
registration statement under the Securities Act registering the offering and
sale of the number of Units or other securities Partnership Securities
specified by the Holder; provided, however, that the Partnership shall not be
required to effect more than three registrations pursuant to this Section
6.13(a); and; provided, further, however, that if the Audit Committee
determines in its good faith judgment that a postponement of the requested
registration for up to six months would be in the best interests of the
Partnership and its Partners due to a pending transaction, investigation or
other event, the filing of such registration statement or the effectiveness
thereof may be deferred for up to six months, but not thereafter. In connection
with any registration pursuant to the immediately preceding sentence, the
Partnership shall promptly prepare and file (x) such documents as may be
necessary to register or qualify the securities Partnership Securities subject
to such registration under the securities laws of such states as the Holder
shall reasonably request; provided, however, that no such qualification shall
be required in any jurisdiction where, as a result thereof, the Partnership
would become subject to general service of process or to taxation or
qualification to do business as a foreign corporation or partnership doing
business in such jurisdiction, and (y) such documents as may be necessary to
apply for listing or to list the securities Partnership Securities subject to
such registration on such National Securities Exchange as the Holder shall
reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a
public sale of such Units in such states. Except as set forth in Section
6.13(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include
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such number or amount of securities Partnership Securities held by the Holder
in such registration statement as the Holder shall request. If the proposed
offering pursuant to this Section 6.13(b) shall be an underwritten offering,
then, in the event that the managing underwriter of such offering advises the
Partnership and the Holder in writing that in its opinion the inclusion of all
or some of the Holder's Partnership Securities would adversely and materially
affect the success of the offering, the Partnership shall include in such
offering only that number or amount, if any, of Partnership Securities held by
the Holder which, in the opinion of the managing underwriter, will not so
adversely and materially affect the offering. Except as set forth in Section
6.13(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 6.13(a) or (f), the Partnership shall provide
indemnification, representations, covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory to such
underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 6.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder, its
officers, directors and each Person who controls the Holder (within the meaning
of the Securities Act) and any agent thereof (collectively, "Indemnified
Persons") against any losses, claims, demands, actions, causes of action,
assessments, damages, liabilities (joint or several), costs and expenses
(including interest, penalties and reasonable attorneys' fees and
disbursements), resulting to, imposed upon, or incurred by the Indemnified
Persons, directly or indirectly, under the Securities Act or otherwise
(hereinafter referred to in this Section 6.13(c) as a "claim" and in the plural
as "claims") based upon, arising out of or resulting from any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which any Units were registered under the Securities Act or any
state securities or Blue Sky laws, in any preliminary prospectus (if used prior
to the effective date of such registration statement), or in any summary or
final prospectus or in any amendment or supplement thereto (if used during the
period the Partnership is required to keep the registration statement current),
or arising out of, based upon or resulting from the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading; provided,
however, that the Partnership shall not be liable to any Indemnified Person to
the extent that any such claim arises out of, is based upon or results from an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, such preliminary, summary or final
prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Partnership by or on behalf of such
Indemnified Person specifically for use in the preparation thereof. For
purposes of this Section 6.13(c), the term "Holder" shall also include
Affiliates or former Affiliates of Petro holding Common Units and Senior
Subordinated Units.
(d) The provisions of Section 6.13(a) and 6.13(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a Partner of the Partnership,
during a period of two years subsequent to the effective date of such cessation
and for so long thereafter as is required for the Holder to sell all of the
Units or other securities of the Partnership Securities with respect to which
it has requested during such two-year period that a registration statement be
filed; provided, however, that the Partnership shall not be required to file
successive registration statements covering the same securities Partnership
Securities for which
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registration was demanded during such two-year period. The provisions of
Section 6.13(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
6.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such shares Partnership Securities for distribution, (iii)
describe the nature or method of the proposed offer and sale of Partnership
Securities, and (iv) contain the undertaking of such Person to provide all such
information and materials and take all action as may be required in order to
permit the Partnership to comply with all applicable requirements in connection
with the registration of such Partnership Securities.
(f) Prior to the Effective Time, the Partnership shall have filed with the
Commission a registration statement (the "Shelf Registration Statement") on an
appropriate form under the Securities Act relating to the resale of Common
Units and Senior Subordinated Units issued to Affiliates or former Affiliates
of Petro. The Partnership shall use all reasonable efforts to cause the Shelf
Registration Statement to become effective and remain effective for a period of
not less than one year from the Effective Time or such shorter period as shall
terminate when all Common Units and Senior Subordinated Units covered by the
Shelf Registration Statement have been sold pursuant to such registration
statement; provided, however, that if the Audit Committee determines in its
good faith judgment that the sale or distribution of Common Units or Senior
Subordinated Units pursuant to the Shelf Registration Statement would not be in
the best interests of the Partnership and its Partners due to a pending
transaction, investigation or other event, the Audit Committee may elect that
the Shelf Registration Statement may not be used for a reasonable period of
time, not to exceed 120 days in any 365-day period.
Section 6.14 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the Partnership authorized by the General Partner to
act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest,
both legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to
contest, negate or disaffirm any action of the General Partner or any such
officer in connection with any such dealing. In no event shall any Person
dealing with the General Partner or any such officer or its representatives be
obligated to ascertain that the terms of this Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or any such officer or its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or
claiming thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
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ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 7.1 Limitation of Liability.
The Limited Partners, the Organizational Limited Partner and the Assignees
shall have no liability under this Agreement except as expressly provided in
this Agreement or the Delaware Act.
Section 7.2 Management of Business.
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates or any officer, director, employee, partner, agent or trustee of the
General Partner or any of its Affiliates, in its capacity as such, if such
Person shall also be a Limited Partner or Assignee) shall participate in the
operation, management or control (within the meaning of the Delaware Act) of
the Partnership's business, transact any business in the Partnership's name or
have the power to sign documents for or otherwise bind the Partnership. The
transaction of any such business by the General Partner, any of its Affiliates
or any member, officer, director, employee, partner, agent or trustee of the
General Partner or any of its Affiliates, in its capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
Section 7.3 Outside Activities.
Subject to the provisions of Section 6.5 and the Non-competition Agreement,
which shall continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited Partners or Assignees,
any Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to
the Partnership, including business interests and activities in direct
competition with the Partnership Group. Neither the Partnership nor any of the
other Partners or Assignees shall have any rights by virtue of this Agreement
in any business ventures of any Limited Partner or Assignee.
Section 7.4 Return of Capital.
No Limited Partner or Assignee shall be entitled to the withdrawal or return
of its Capital Contribution, except to the extent, if any, that distributions
made pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent provided by Article V or as otherwise expressly
provided in this Agreement, no Limited Partner or Assignee shall have priority
over any other Limited Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
(S) Section 17-502(b) of the Delaware Act.
Section 7.5 Rights of Limited Partners to the Partnership.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 7.5(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable demand and at such
Limited Partner's own expense:
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(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him, upon notification to the General Partner,
a current list of the name and last known business, residence or mailing
address of each Partner;
(iv) to have furnished to him, upon notification to the General Partner,
a copy of this Agreement and the Certificate of Limited Partnership and all
amendments thereto, together with a copy of the executed copies of all
powers of attorney pursuant to which this Agreement, the Certificate of
Limited Partnership and all amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the
nature of trade secrets or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreements with third parties to keep
confidential (other than agreements with Affiliates the primary purpose of
which is to circumvent the obligations set forth in this Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office of
the Partnership appropriate books and records with respect to the Partnership's
business, including all books and records necessary to provide to the Limited
Partners any information required to be provided pursuant to Section 7.5(a).
Any books and records maintained by or on behalf of the Partnership in the
regular course of its business, including the record of the Record Holders and
Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with generally accepted accounting principles.
Section 8.2 Fiscal Year.
The fiscal year of the Partnership shall be October 1 to September 30.
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Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed to each Record Holder of a Unit as of a date selected by the
General Partner in its sole discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with generally accepted accounting principles,
including a balance sheet and statements of operations, Partners' equity and
cash flows, such statements to be audited by a firm of independent public
accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed to each Record Holder of a Unit, as of a date
selected by the General Partner in its sole discretion, a report containing
unaudited financial statements of the Partnership and such other information as
may be required by applicable law, regulation or rule of any National
Securities Exchange on which the Units are listed for trading, or as the
General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information.
The General Partner shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be furnished to them
within 90 days of the close of the calendar year in which the Partnership's
taxable year ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the accrual method of
accounting for federal income tax purposes.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. For the purposes of computing the adjustments under Section 743(b) of
the Code, the General Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of Units will be deemed to be
the lowest quoted closing price of the Units on any National Securities
Exchange on which such Units are traded during the calendar month in which such
transfer is deemed to occur pursuant to Section 5.2(g) without regard to the
actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing the
Partnership ratably over a sixty-month period as provided in Section 709 of the
Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
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Section 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in Section 6231 of the Code) and is authorized
and required to represent the Partnership (at the Partnership's expense) in
connection with all examinations of the Partnership's affairs by tax
authorities, including resulting administrative and judicial proceedings, and
to expend Partnership funds for professional services and costs associated
therewith. Each Partner agrees to cooperate with the General Partner and to do
or refrain from doing any or all things reasonably required by the General
Partner to conduct such proceedings.
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner is
authorized to take any action that it determines in its sole discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income to any Partner
or Assignee (including, without limitation, by reason of Section 1446 of the
Code), the amount withheld shall be treated as a distribution of cash pursuant
to Section 5.3 in the amount of such withholding from such Partner.
ARTICLE X
CERTIFICATES
Section 10.1 Certificates.
Upon the Partnership's issuance of Common Units or Senior Subordinated Units
to any Person, the Partnership shall issue one or more Certificates in the name
of such Person evidencing the number of such Units being so issued.
Certificates shall be executed on behalf of the Partnership by the General
Partner. No Common Unit or Senior Subordinated Unit Certificate shall be valid
for any purpose until it has been countersigned by the Transfer Agent;
provided, however, that if the General Partner elects to issue Units in global
form, the Certificates shall be valid upon receipt of a certificate from the
Transfer Agent certifying that such Units have been duly registered in
accordance with the directions of the Partnership and the Underwriters. The
Partners holding Certificates evidencing Senior Subordinated Units or Junior
Subordinated Units may exchange such Certificates for Certificates evidencing
Class B Common Units on or after the date on which such Subordinated Units are
converted into Common Units pursuant to the terms of Section 4.6. expiration of
the Subordination Period.
Section 10.2 Registration, Registration of Transfer and Exchange.
(a) The General Partner shall cause to be kept on behalf of the Partnership a
register in which, subject to such reasonable regulations as it may prescribe
and subject to the provisions of Section 10.2(b), the General Partner will
provide for the registration and transfer of Units and Senior Subordinated
Units. The Transfer Agent is appointed registrar and transfer agent for the
purpose of registering Units and transfers of such Units as provided. The
Partnership shall not recognize
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transfers of Certificates representing Units unless such transfers are effected
in the manner described in this Section 10.2. Upon surrender for registration
of transfer of any Units evidenced by a Certificate, and subject to the
provisions of Section 10.2(b), the General Partner on behalf of the Partnership
shall execute, and the Transfer Agent shall countersign and deliver (or, in the
case of Units issued in global form, register in accordance with the rules and
regulations of the Depositary), in the name of the holder or the designated
transferee or transferees, as required pursuant to the holder's instructions,
one or more new Certificates evidencing the same aggregate number of Units as
was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 11.5, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units
are surrendered for registration of transfer and such Certificates are
accompanied by a Transfer Application duly executed by the transferee (or the
transferee's attorney-in-fact duly authorized in writing). No charge shall be
imposed by the Partnership for such transfer; provided, however, that as a
condition to the issuance of any new Certificate under this Section 10.2, the
General Partner may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed with respect thereto.
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
General Partner on behalf of the Partnership shall execute, and upon its
request the Transfer Agent shall countersign and deliver in exchange therefor,
a new Certificate evidencing the same number of Units as the Certificate so
surrendered.
(b) The General Partner on behalf of the Partnership shall execute, and upon
its request the Transfer Agent shall countersign and deliver a new Certificate
in place of any Certificate previously issued if the Record Holder of the
Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the Partnership a
bond, in form and substance satisfactory to the General Partner, with
surety or sureties and with fixed or open penalty as the General Partner
may reasonably direct, in its sole discretion, to indemnify the
Partnership, the General Partner and the Transfer Agent against any claim
that may be made on account of the alleged loss, destruction or theft of
the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the General
Partner.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units represented by the Certificate is
registered before the Partnership, the General Partner or the Transfer Agent
receives such notification, the Limited Partner or Assignee shall be precluded
from making any claim against the Partnership, the General Partner or the
Transfer Agent for such transfer or for a new Certificate.
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(c) As a condition to the issuance of any new Certificate under this Section
10.3, the General Partner may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto
and any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
Section 10.4 Record Holder.
In accordance with Section 10.2(b), the Partnership shall be entitled to
recognize the Record Holder as the Limited Partner or Assignee with respect to
any Units and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such Units on the part of any other Person,
regardless of whether the Partnership shall have actual or other notice
thereof, except as otherwise provided by law or any applicable rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are listed for trading. Without limiting the foregoing, when a
Person (such as a broker, dealer, bank, trust company or clearing corporation
or an agent of any of the foregoing) is acting as nominee, agent or in some
other representative capacity for another Person in acquiring and/or holding
Units, as between the Partnership on the one hand, and such other Persons, on
the other, such representative Person (a) shall be the Limited Partner or
Assignee (as the case may be) of record and beneficially, (b) must execute and
deliver a Transfer Application and (c) shall be bound by this Agreement and
shall have the rights and obligations of a Limited Partner or Assignee (as the
case may be) hereunder and as provided for herein.
ARTICLE XI
TRANSFER OF INTERESTS
Section 11.1 Transfer.
(a) The term "transfer," when used in this Article XI with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its Partnership General Partner Interest (which is
represented by the General Partner Units) as a general partner in the
Partnership to another Person or by which the holder of a Unit Limited Partner
Interest assigns such Unit Limited Partner Interest to another Person who is or
becomes an Assignee, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part, except
in accordance with the terms and conditions set forth in this Article XI. Any
transfer or purported transfer of a Partnership Interest not made in accordance
with this Article XI shall be null and void.
(c) Nothing contained in this Article XI shall be construed to prevent a
disposition by the parent entity members of the General Partner of any or all
of the issued and outstanding capital stock of member interests in the General
Partner.
(d) Nothing contained in this Article XI, or elsewhere in this Partnership
Agreement, shall preclude the settlement of any transactions involving Common
Units entered into through the facilities of any National Securities Exchange
on which the Units are listed for trading.
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Section 11.2 Transfer of a General Partner's Partnership Interest.
Except for a transfer by the General Partner of all, but not less than all,
of its Partnership General Partner Interest as a general partner in the
Partnership to (a) an Affiliate of the General Partner or (b) another Person in
connection with the merger or consolidation of the General Partner with or into
another Person, which in either case, shall only be limited by the provisions
of this Section 11.2, the transfer by the General Partner of all or any part of
its Partnership General Partner Interest as a general partner in the
Partnership to a Person prior to December 31, 2005 shall be subject to the
prior approval of holders of at least a Unit Majority. Notwithstanding anything
herein to the contrary, no transfer by the General Partner of all or any part
of its Partnership General Partner Interest as a general partner in the
Partnership to another Person shall be permitted unless (i) the transferee
agrees to assume the rights and duties of the General Partner under this
Agreement and the Operating Partnership Agreement and to be bound by the
provisions of this Agreement and the Operating Partnership Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer would not result
in the loss of limited liability of any Limited Partner or of any limited
partner of any Group Member or cause any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes and (iii) such transferee also agrees to purchase
all (or the appropriate portion thereof, if applicable) of the partnership
interest of the General Partner as the general partner of each Group Member. In
the case of a transfer pursuant to and in compliance with this Section 11.2,
the transferee or successor (as the case may be) shall, subject to compliance
with the terms of Section 12.3, be admitted to the Partnership as a General
Partner immediately prior to the transfer of the Partnership General Partner
Interest, and the business of the Partnership shall continue without
dissolution.
Section 11.3 Transfer of Units.
(a) Units may be transferred only in the manner described in Section 10
Article X. The transfer of any Units and the admission of any new Partner shall
not constitute an amendment to this Agreement.
(b) Until admitted as a Substituted Limited Partner pursuant to Article XII,
the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees, or any other individual or
entity in its own or any representative capacity.
(c) Each distribution in respect of Units shall be paid by the Partnership,
directly or through the Transfer Agent or through any other Person or agent,
only to the Record Holders thereof as of the Record Date set for the
distribution. Such payment shall constitute full payment and satisfaction of
the Partnership's liability in respect of such payment, regardless of any claim
of any Person who may have an interest in such payment by reason of an
assignment or otherwise.
(d) A transferee who has completed and delivered a Transfer Application shall
be deemed to have (i) requested admission as a Substituted Limited Partner,
(ii) agreed to comply with and be bound by and to have executed this Agreement,
(iii) represented and warranted that such transferee has the right, power and
authority and, if an individual, the capacity to enter into this Agreement,
(iv) granted the powers of attorney set forth in this Agreement and (v) given
the consents and approvals and made the waivers contained in this Agreement.
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Section 11.4 Restrictions on Transfers.
Notwithstanding the other provisions of this Article XI, no transfer of any
Unit or interest therein of any Limited Partner or Assignee shall be made if
such transfer would (a) violate the then applicable federal or state securities
laws or rules and regulations of the Commission, any state securities
commission or any other governmental authorities with jurisdiction over such
transfer, (b) affect any Group Member's existence or qualification as a limited
partnership under the laws of the jurisdiction of its formation, or (c) result
in entity-level taxation for federal income tax purposes of the Partnership or
the Operating Partnership.
Section 11.5 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General Partner,
creates a substantial risk of cancellation or forfeiture of any property in
which the Group Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner or Assignee, the General Partner may
request any Limited Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality, citizenship
or other related status (or, if the Limited Partner or Assignee is a nominee
holding for the account of another Person, the nationality, citizenship or
other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Units owned by such Limited Partner or Assignee shall be subject to redemption
in accordance with the provisions of Section 11.6. In addition, the General
Partner may require that the status of any such Limited Partner or Assignee be
changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Units.
(b) The General Partner shall, in exercising voting rights in respect of
Units held by it on behalf of Non-citizen Assignees, distribute the votes in
the same ratios as the votes of Limited Partners in respect of Units other than
those of Non-citizen Assignees are cast, either for, against or abstaining as
to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no
right to receive a distribution in kind pursuant to Section 14.4 but shall be
entitled to the cash equivalent thereof, and the General Partner shall provide
cash in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the General Partner from the Non-citizen
Assignee of his Partnership Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Units of
such Non-citizen Assignee not redeemed pursuant to Section 11.6, and upon his
admission pursuant to Section 12.2, the General Partner shall cease to be
deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Units.
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Section 11.6 Redemption of Interests.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 11.5(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his Units to a
Person who furnishes a Citizenship Certification to the General Partner prior
to the date fixed for redemption as provided below, redeem the Partnership
Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Units, the date fixed for redemption,
the place of payment, that payment of the redemption price will be made
upon surrender of the Certificate evidencing the Redeemable Units and that
on and after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Units will accrue or be made.
(ii) The aggregate redemption price for Redeemable Units shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Units of the class to be
so redeemed multiplied by the number of Units of each such class included
among the Redeemable Units. The redemption price shall be paid, in the sole
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest, commencing
one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Units, duly endorsed in blank or accompanied by
an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Units shall no longer
constitute issued and Outstanding Units.
(b) The provisions of this Section 11.6 shall also be applicable to Units
held by a Limited Partner or Assignee as nominee of a Person determined to
be other than an Eligible Citizen.
(c) Nothing in this Section 11.6 shall prevent the recipient of a notice
of redemption from transferring his Units before the redemption date if
such transfer is otherwise permitted under this Agreement. Upon receipt of
notice of such a transfer, the General Partner shall withdraw the notice of
redemption provided the transferee of such Units certifies in the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make
such certification, such redemption shall be effected from the transferee
on the original redemption date.
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ARTICLE XII
ADMISSION OF PARTNERS
Section 12.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of the Old Subordinated Units to the
Initial General Partner as described in Section 4.2, the in connection with the
Initial Offering, the Initial General Partner shall be deemed to have been was
admitted to the Partnership as a Limited Partner in respect of the Subordinated
Units issued to it. Upon the issuance by the Partnership of Common Units to the
Initial Underwriters as described in Section 4.3 in connection with the Initial
Offering and the execution by each Underwriter the Initial Underwriters of a
Transfer Application, the General Partner shall admit the Initial Underwriters
were admitted to the Partnership as Initial Limited Partners in respect of the
Common Units purchased by them.
Section 12.2 Admission of Substituted Limited Partners.
By transfer of a Unit representing a Limited Partner Interest in accordance
with Article XI, the transferor shall be deemed to have given the transferee
the right to seek admission as a Substituted Limited Partner subject to the
conditions of, and in the manner permitted under, this Agreement. A transferor
of a Certificate representing a Limited Partner Interest shall, however, only
have the authority to convey to a purchaser or other transferee who does not
execute and deliver a Transfer Application (a) the right to negotiate such
Certificate to a purchaser or other transferee and (b) the right to transfer
the right to request admission as a Substituted Limited Partner to such
purchaser or other transferee in respect of the transferred Units. Each
transferee of a Unit representing a Limited Partner Interest (including any
nominee holder or an agent acquiring such Unit for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Units so transferred
to such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given
or withheld in the General Partner's sole discretion, and (y) when any such
admission is shown on the books and records of the Partnership. If such consent
is withheld, such transferee shall be an Assignee. An Assignee shall have an
interest in the Partnership equivalent to that of a Limited Partner with
respect to allocations and distributions, including liquidating distributions,
of the Partnership. With respect to voting rights attributable to Units that
are held by Assignees, the General Partner shall be deemed to be the Limited
Partner with respect thereto and shall, in exercising the voting rights in
respect of such Units on any matter, vote such Units at the written direction
of the Assignee who is the Record Holder of such Units. If no such written
direction is received, such Units will not be voted. An Assignee shall have no
other rights of a Limited Partner.
Section 12.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all of the General Partner's Partnership Interest
as a general partner in the Partnership the General Partner Interest pursuant
to Section 11.2 who is proposed to be admitted as a successor General Partner
shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the General Partner pursuant
to Section 13.1 or 13.2 or the transfer of the General Partner's Partnership
Interest as a general partner in the Partnership Partner
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Interest pursuant to Section 11.2; provided, however, that no such successor
shall be admitted to the Partnership until compliance with the terms of Section
11.2 has occurred and such successor has executed and delivered such other
documents or instruments as may be required to effect such admission. Any such
successor shall, subject to the terms hereof, carry on the business of the
Partnership and Operating Partnership without dissolution.
Section 12.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or a
Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement (other than by virtue of a
capital contribution pursuant to the Additional Capital Contribution
Obligation) shall be admitted to the Partnership as an Additional Limited
Partner only upon furnishing to the General Partner (i) evidence of acceptance
in form satisfactory to the General Partner of all of the terms and conditions
of this Agreement, including the power of attorney granted in Section 1.4, and
(ii) such other documents or instruments as may be required in the discretion
of the General Partner to effect such Person's admission as an Additional
Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 12.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's sole discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person
is recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
Section 12.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act
to amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practical an amendment of this Agreement and,
if required by law, to prepare and file an amendment to the Certificate of
Limited Partnership, and the General Partner may for this purpose, among
others, exercise the power of attorney granted pursuant to Section 1.4.
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 13.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 13.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its rights as General Partner
pursuant to Section 11.2;
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(iii) the General Partner is removed pursuant to Section 13.2;
(iv) the General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the General Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 13.1(a)(iv); or (E) seeks, consents to or
acquiesces in the appointment of a trustee (but not a debtor in
possession), receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) a final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) a certificate of dissolution or its equivalent is filed for the
General Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation or formation.
If an Event of Withdrawal specified in Section 13.1(a)(iv), (v) or (vi) occurs,
the withdrawing General Partner shall give notice to the Limited Partners
within 30 days after such occurrence. The Partners hereby agree that only the
Events of Withdrawal described in this Section 13.1 shall result in the
withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2005, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided, however, that prior to the effective date of such
withdrawal, the withdrawal is approved by Limited Partners holding at least a
Unit Majority and the General Partner delivers to the Partnership an Opinion of
Counsel ("Withdrawal Opinion of Counsel") that such withdrawal (following the
selection of the successor General Partner) would not result in the loss of the
limited liability of any Limited Partner or of the limited partner of any Group
Member or cause any Group Member to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes; (ii) at any time after 12:00 midnight, Eastern Standard Time, on
December 31, 2005, the General Partner voluntarily withdraws by giving at least
90 days' advance notice to the Limited Partners, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the General
Partner ceases to be a General Partner pursuant to Section 13.1(a)(ii) or is
removed pursuant to Section 13.2; or (iv) notwithstanding clause (i) of this
sentence, at any time that the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners, such withdrawal to take effect on the date specified in the notice,
if at the time such notice is given one Person and its Affiliates (other than
the General Partner and its Affiliates) own beneficially or of record or
control at least 50% of the Outstanding Units. The withdrawal of the General
Partner from the Partnership upon the occurrence of an Event of Withdrawal
shall also constitute the withdrawal of the General Partner as general partner
of the other Group Members. If the General Partner gives a notice of withdrawal
pursuant to Section 13.1(a)(i), holders of at least a Unit Majority may, prior
to the effective date of such withdrawal, elect a
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successor General Partner. The Person so elected as successor General Partner
shall automatically become the successor general partner of the other Group
Members. If, prior to the effective date of the General Partner's withdrawal, a
successor is not selected by the Limited Partners as provided herein or the
Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership
shall be dissolved in accordance with Section 14.1. Any successor General
Partner elected in accordance with the terms of this Section 13.1 shall be
subject to the provisions of Section 12.3.
Section 13.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by Limited
Partners holding at least two-thirds of the Outstanding Units, voting together
as a single class (excluding those Units held by the General Partner and its
Affiliates). Any such action by such Limited Partners for removal of the
General Partner must also provide for the election of a successor General
Partner by Limited Partners holding at least a majority of the Outstanding
Units (excluding for purposes of such determination Units owned by the General
Partner and its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant to Article XII.
The removal of the General Partner shall also automatically constitute the
removal of the General Partner as general partner of the other Group Members.
If a person is elected as a successor General Partner in accordance with the
terms of this Section 13.2, such person shall, upon admission pursuant to
Article XII, automatically become the successor general partner of the other
Group Members. The right of the Limited Partners holding Outstanding Units to
remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 13.2 shall be subject to the
provisions of Section 12.3.
Section 13.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under circumstances
where such withdrawal does not violate this Agreement or (ii) removal of the
General Partner by the Limited Partners under circumstances where Cause does
not exist, if a successor General Partner is elected in accordance with the
terms of Section 13.1 or 13.2, the Departing Partner shall have the option
exercisable prior to the effective date of the departure of such Departing
Partner to require its successor to purchase its Partnership Interest as a
general partner in the Partnership (which is represented by the General Partner
Units) and its partnership interest as the general partner in the other Group
Members (collectively, the "Combined Interest") in exchange for an amount in
cash equal to the fair market value of such Combined Interest, such amount to
be determined and payable as of the effective date of its departure. If the
General Partner is removed by the Limited Partners under circumstances where
Cause exists or if the General Partner withdraws under circumstances where such
withdrawal violates this agreement, and if a successor General Partner is
elected in accordance with the terms of Section 13.1 or 13.2, such successor
shall have the option, exercisable prior to the effective date of the departure
of such Departing Partner, to purchase the Combined Interest of the Departing
Partner for such fair market value of such Combined Interest. In either event,
the Departing Partner shall be entitled to receive all reimbursements due such
Departing Partner pursuant to Section 6.4, including any employee-related
liabilities (including severance liabilities), incurred in connection with the
termination of any employees employed by the General Partner for the benefit of
the Partnership or the other Group Members.
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For purposes of this Section 13.3(a), the fair market value of the Departing
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing agreement within 30 days after
the effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such firms
or experts shall mutually select a third independent investment banking firm or
independent expert, which shall determine the fair market value of the Combined
Interest. In making its determination, such independent investment banking firm
or other independent expert shall consider the then current trading price of
Units on any National Securities Exchange on which Units are then listed, the
value of the Partnership's assets, the rights and obligations of the General
Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 13.3(a), the Departing Partner shall become a Limited Partner and the
Combined Interest shall be converted into Common Units pursuant to a valuation
made by an investment banking firm or other independent expert selected
pursuant to Section 13.3(a), without reduction in such Partnership Interest
(but subject to proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the Departing Partner
as to all debts and liabilities of the Partnership arising on or after the date
on which the Departing Partner becomes a Limited Partner. For purposes of this
Agreement, conversion of the General Partner's Combined Interest to Common
Units will be characterized as if the General Partner contributed its Combined
Interest to the Partnership in exchange for the newly issued Common Units. For
purposes of this Section 13.3(b), in the event that the Subordination Period
has expired, the Combined Interest shall be converted into Class A Common
Units.
(c) If a successor General Partner is elected in accordance with the terms of
Section 13.1 or 13.2 and the option described in Section 13.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in an amount equal to 1.01% of the Net Agreed Value of the
Partnership's assets the fair market value of the General Partner Units on such
date. In such event, such successor General Partner shall, subject to the
following sentence, be entitled to such Percentage Interest of all Partnership
allocations and distributions and any other allocations and distributions to
which the Departing Partner was entitled. In addition, such successor General
Partner shall cause this Agreement to be amended to reflect that, from and
after the date of such successor General Partner's admission, the successor
General Partner's interest in all Partnership distributions and allocations
shall be 1%, and that of the holders of Outstanding Unit shall be 99%.
Section 13.4 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Units becomes
a Record Holder, such transferring Limited Partner shall cease to be a Limited
Partner with respect to the Units so transferred.
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ARTICLE XIV
DISSOLUTION AND LIQUIDATION
Section 14.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 13.1 or 13.2, the Partnership shall not
be dissolved and such successor General Partner shall continue the business of
the Partnership. The Partnership shall dissolve, and (subject to Section 14.2)
its affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 1.5;
(b) an Event of Withdrawal of the General Partner as provided in Section
13.1(a) (other than Section 13.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 13.1(b) or 13.2
and such successor is admitted to the Partnership pursuant to Section 12.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by holders of at least a Unit Majority;
(d) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 14.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 13.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 13.1 or 13.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or
(vi), then within 180 days thereafter, holders of at least a majority of the
Outstanding Units (excluding for purposes of such determination any Units held
by the General Partner or its Affiliates) may elect to reconstitute the
Partnership and continue its business on the same terms and conditions set
forth in this Agreement by forming a new limited partnership on terms identical
to those set forth in this Agreement and having as the successor general
partner a Person approved by holders of at least a majority of the Outstanding
Units (excluding for purposes of such determination any Units held by the
General Partner or its Affiliates). Unless such an election is made within the
applicable time period as set forth above, the Partnership shall conduct only
activities necessary to wind up its affairs. If such an election is so made,
then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 1.5 unless earlier dissolved in accordance with
this Article XIV;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be dealt with in the
manner provided in Section 13.3(b); and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and
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certificate of limited partnership, and the successor general partner may
for this purpose exercise the powers of attorney granted the General
Partner pursuant to Section 1.4; provided, however, that the right of
holders of at least a majority of Outstanding Units to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor any
other Group Member would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
Section 14.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 14.2, the General Partner, or in the event the dissolution is the
result of an Event of Withdrawal, a liquidator or liquidating committee
approved by holders of at least a majority of the Outstanding Units
representing Limited Partner Interests, shall be the Liquidator. The Liquidator
(if other than the General Partner) shall be entitled to receive such
compensation for its services as may be approved by holders of at least a
majority of the Outstanding Units representing Limited Partner Interests. The
Liquidator shall agree not to resign at any time without 15 days' prior notice
and (if other than the General Partner) may be removed at any time, with or
without cause, by notice of removal approved by holders of at least a majority
of the Outstanding Units representing Limited Partner Interests. Upon
dissolution, removal or resignation of the Liquidator, a successor and
substitute Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days thereafter be approved
by holders of at least a majority of the Outstanding Units representing Limited
Partner Interests. The right to approve a successor or substitute Liquidator in
the manner provided herein shall be deemed to refer also to any such successor
or substitute Liquidator approved in the manner herein provided. Except as
expressly provided in this Article XIV, the Liquidator approved in the manner
provided herein shall have and may exercise, without further authorization or
consent of any of the parties hereto, all of the powers conferred upon the
General Partner under the terms of this Agreement (but subject to all of the
applicable limitations, contractual and otherwise, upon the exercise of such
powers, other than the limitation on sale set forth in Section 6.3(b)) to the
extent necessary or desirable in the good faith judgment of the Liquidator to
carry out the duties and functions of the Liquidator hereunder for and during
such period of time as shall be reasonably required in the good faith judgment
of the Liquidator to complete the winding up and liquidation of the Partnership
as provided for herein.
Section 14.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property
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shall be deemed for purposes of Section 14.4(c) to have received cash equal
to its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. For purposes of computing
Net Liquidation Termination Gain, gain or loss on distributed property
shall be recognized as if such property had been sold for its fair market
value.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise in respect of their distribution rights
under Article V. With respect to any liability that is contingent or is
otherwise not yet due and payable, the Liquidator shall either settle such
claim for such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any unused
portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 14.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of this clause) for the taxable year of the Partnership
during which the liquidation of the Partnership occurs (with such date of
occurrence being determined pursuant to Treasury Regulation, Section 1.704-
1(b)(2)(ii)(g)), and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such
occurrence).
Section 14.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in
Sections 14.3 and 14.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
Section 14.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners, or any portion thereof, it being expressly understood that any such
return shall be made solely from Partnership assets.
Section 14.7 Waiver of Partition.
Each To the maximum extent permitted by law, each Partner hereby waives any
right to partition of the Partnership property.
Section 14.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable year
of the Partnership during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
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ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 15.1 Amendment to be Adopted Solely by General Partner.
Each Limited Partner agrees that the General Partner (pursuant to its powers
of attorney from the Limited Partners and Assignees), without the approval of
any Limited Partner or Assignee, may amend any provision of this Agreement and
execute, swear to, acknowledge, deliver, file and record whatever documents may
be required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or to ensure
that the Partnership and the Operating Partnership will not be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
(d) a change that, in the sole discretion of the General Partner, (i)
does not adversely affect the Limited Partners in any material respect,
(ii) is necessary or advisable to (A) satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute (including the Delaware Act) or
(B) facilitate the trading of the Units (including the division of
Outstanding Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are or will be listed for trading, compliance with any of
which the General Partner determines in its sole discretion to be in the
best interests of the Partnership and the Limited Partners, (iii) is
necessary or advisable in connection with action taken by the General
Partner pursuant to Section 4.8, or (iv) is required to effect the intent
of the provisions of this Agreement or is otherwise contemplated by this
Agreement;
(e) a change in the fiscal year and or taxable year of the Partnership
and any changes that, in the sole discretion of the General Partner, are
necessary or advisable as a result of a change in the fiscal year and or
taxable year of the Partnership including, if the General Partner shall so
determine, a change in the definition of "Quarter" and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership or the General Partner or its directors or officers from in
any manner being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, as amended, regardless of whether such are
substantially similar to plan asset regulations currently applied or
proposed by the United States Department of Labor;
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(g) subject to the terms of Section 4.4, an amendment that, in the sole
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 4.4;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 16.3;
(j) an amendment that, in the sole discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Partnership, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
3.1; or
(k) any other amendments substantially similar to the foregoing.
Section 15.2 Amendment Procedures.
Except as provided in Sections 15.1 and 15.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner. A proposed amendment shall be effective upon its approval by
the holders of at least a Unit Majority, unless a greater or different
percentage is required under this Agreement or by Delaware law. Each proposed
amendment that requires the approval of the holders of a specified percentage
of Outstanding Units shall be set forth in a writing that contains the text of
the proposed amendment. If such an amendment is proposed, the General Partner
shall seek the written approval of the requisite percentage of Outstanding
Units or call a meeting of the Limited Partners to consider and vote on such
proposed amendment. The General Partner shall notify all Record Holders upon
final adoption of any such proposed amendments.
Section 15.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 15.1 and 15.2, no provision of
this Agreement that establishes a percentage of Outstanding Units required to
take any action shall be amended, altered, changed, repealed or rescinded in
any respect that would have either (i) the effect of reducing such voting
percentage or (ii) more than an immaterial effect on a Unitholder unless such
amendment is approved by the written consent or the affirmative vote of holders
of Outstanding Units whose aggregate Outstanding Units constitute not less than
the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment to
this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 15.3(c), (ii) enlarge the obligations
of, restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable to, the General
Partner without its consent, which may be given or withheld in its sole
discretion, (iii) change Section 14.1(a) or (c), or (iv) change the term of the
Partnership or, except as set forth in Section 14.1(c), give any Person the
right to dissolve the Partnership.
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(c) Except as otherwise provided and without limitation of the General
Partner's authority to adopt amendments to this Agreement as contemplated in
Section 15.1, any amendment that would have a material adverse effect on the
rights or preferences of any class of Outstanding Units in relation to other
classes of Units must be approved by the holders of not less than a majority of
the Outstanding Units of the classes affected (excluding, during the
Subordination Period, Common Units owned by the General Partner and its
Affiliates).
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 6.3 or 15.1 and except as otherwise provided by
Section 16.3(b), no amendments shall become effective without the approval of
the holders of at least 90% of the Outstanding Units unless the Partnership
obtains an Opinion of Counsel to the effect that such amendment will not affect
the limited liability of any Limited Partner or any limited partner of the
other Group Members under applicable law.
(e) This Section 15.3 shall only be amended with the approval of the holders
of at least 90% of the Outstanding Units.
Section 15.4 Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XV. Meetings of the Limited
Partners may be called by the General Partner or by Limited Partners owning 20%
or more of the Outstanding Units of the class or classes for which a meeting is
proposed. Limited Partners shall call a meeting by delivering to the General
Partner one or more requests in writing stating that the signing Limited
Partners wish to call a meeting and indicating the general or specific purposes
for which the meeting is to be called. Within 60 days after receipt of such a
call from Limited Partners or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes, rules, regulations,
listing agreements or similar requirements governing the holding of a meeting
or the solicitation of proxies for use at such a meeting, the General Partner
shall send a notice of the meeting to the Limited Partners either directly or
indirectly through the Transfer Agent. A meeting shall be held at a time and
place determined by the General Partner on a date not less than 10 days nor
more than 60 days after the mailing of notice of the meeting. Limited Partners
shall not vote on matters that would cause the Limited Partners to be deemed to
be taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability under
the Delaware Act or the law of any other state in which the Partnership is
qualified to do business.
Section 15.5 Notice of a Meeting.
Notice of a meeting called pursuant to Section 15.4 shall be given to the
Record Holders in writing by mail or other means of written communication in
accordance with Section 18.1. The notice shall be deemed to have been given at
the time when deposited in the mail or sent by other means of written
communication.
Section 15.6 Record Date.
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 15.11, the General Partner may set a Record
Date, which shall not be less than 10 nor more than 60 days
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before (a) the date of the meeting (unless such requirement conflicts with any
rule, regulation, guideline or requirement of any National Securities Exchange
on which the Units are listed for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern) or (b) in the event
that approvals are sought without a meeting, the date by which Limited Partners
are requested in writing by the General Partner to give such approvals.
Section 15.7 Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XV.
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if occurred at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 15.9 Quorum.
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called represented in person or by proxy shall
constitute a quorum at a meeting of Limited Partners of such class or classes
unless any such action by the Limited Partners requires approval by holders of
a greater percentage of such Units, in which case the quorum shall be such
greater percentage (excluding, in either case, if such are to be excluded from
the vote, Outstanding Units owned by the General Partner and its Affiliates).
At any meeting of the Limited Partners duly called and held in accordance with
this Agreement at which a quorum is present, the act of Limited Partners
holding Outstanding Units that in the aggregate represent a majority of the
Outstanding Units entitled to vote and be present in person or by proxy at such
meeting shall be deemed to constitute the act of all Limited Partners, unless a
greater or different percentage is required with respect to such action under
the provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at least such greater
or different percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present
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may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the required percentage of
Outstanding Units specified in this Agreement. In the absence of a quorum any
meeting of Limited Partners may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the Outstanding Units
represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 15.7.
Section 15.10 Conduct of Meeting.
The General Partner shall have full power and authority concerning the manner
of conducting any meeting of the Limited Partners or solicitation of approvals
in writing, including the determination of Persons entitled to vote, the
existence of a quorum, the satisfaction of the requirements of Section 15.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with the applicable law and this
Agreement as it may deem advisable concerning the conduct of any meeting of the
Limited Partners or solicitation of approvals in writing, including regulations
in regard to the appointment of proxies, the appointment and duties of
inspectors of votes and approvals, the submission and examination of proxies
and other evidence of the right to vote, and the revocation of approvals in
writing.
Section 15.11 Action Without a Meeting.
Any action that may be taken at a meeting of the Limited Partners may be
taken without a meeting if an approval in writing setting forth the action so
taken is signed by Limited Partners owning not less than the minimum percentage
of the Outstanding Units that would be necessary to authorize or take such
action at a meeting at which all the Limited Partners were present and voted.
Prompt notice of the taking of action without a meeting shall be given to the
Limited Partners who have not approved in writing. The General Partner may
specify that any written ballot submitted to Limited Partners for the purpose
of taking any action without a meeting shall be returned to the Partnership
within the time period, which shall be not less than 20 days, specified by the
General Partner. If a ballot returned to the Partnership does not vote all of
the Units held by the Limited Partner, the Partnership shall be deemed to have
failed to receive a ballot for the Units that were not voted. If approval of
the taking of any action by the Limited Partners is solicited by any Person
other than by or on behalf of the General Partner, the written approvals shall
have no force and effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals sufficient to take
the action proposed are dated as of a date not more than 90 days prior to the
date sufficient approvals are deposited with the Partnership and (c) an Opinion
of Counsel is delivered to the General Partner to the effect that the exercise
of such right and the action proposed to be taken with respect to any
particular matter (i) will not cause the Limited Partners to be deemed to be
taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability, and
(ii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
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Section 15.12 Voting and Other Rights.
(a) Only those Record Holders of the Units on the Record Date set pursuant to
Section 15.6 (and also subject to the limitations contained in the definition
of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which the holders of
the Outstanding Units have the right to vote or to act. All references in this
Agreement to votes of, or other acts that may be taken by, the Outstanding
Units shall be deemed to be references to the votes or acts of the Record
Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such other Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 15.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions
of Section 10.4.
ARTICLE XVI
MERGER MERGER
Section 16.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
business trusts or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a general partnership or,
limited partnership or limited liability company, formed under the laws of the
State of Delaware or any other state of the United States of America, pursuant
to a written agreement of merger or consolidation ("Merger Agreement") in
accordance with this Article XVI.
Section 16.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XVI
requires the prior approval of the General Partner. If the General Partner
shall determine, in the exercise of its sole discretion, to consent to the
merger or consolidation, the General Partner shall approve the Merger
Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged
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or converted solely for, or into, cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving
Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership, certificate of limited liability company
or other similar charter or governing document) of the Surviving Business
Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 16.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, however, that if the effective time of the merger is to be later
than the date of the filing of the certificate of merger, the effective
time shall be fixed no later than the time of the filing of the certificate
of merger and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
Section 16.3 Approval by Limited Partners of Merger or Consolidation.
(a) The General Partner, upon its approval of the Merger Agreement, shall
direct that the Merger Agreement be submitted to a vote of Limited Partners,
whether at a meeting or by written consent, in either case in accordance with
the requirements of Article XV. A copy or a summary of the Merger Agreement
shall be included in or enclosed with the notice of a meeting or the written
consent.
(b) The Merger Agreement shall be approved upon receiving the affirmative
vote or consent of the holders of at least a Unit Majority unless the Merger
Agreement contains any provision that, if contained in an amendment to this
Agreement, the provisions of this Agreement or the Delaware Act would require
the vote or consent of a greater percentage of the Outstanding Units or of any
class of Limited Partners, in which case such greater percentage vote or
consent shall be required for approval of the Merger Agreement.
(c) After such approval by vote or consent of the Limited Partners, and at
any time prior to the filing of the certificate of merger pursuant to Section
16.4, the merger or consolidation may be abandoned pursuant to provisions
therefor, if any, set forth in the Merger Agreement.
Section 16.4 Certificate of Merger.
Upon the required approval by the General Partner and the Limited Partners of
a Merger Agreement, a certificate of merger shall be executed and filed with
the Secretary of State of the State of Delaware in conformity with the
requirements of the Delaware Act.
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Section 16.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another having occurred.
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
Section 17.1 Right to Acquire Units.
(a) Notwithstanding any other provision of this Agreement, if at any time not
more than 20% of the total Units of any class then Outstanding are held by
Persons other than the General Partner and its Affiliates, the General Partner
shall then have the right, which right it may assign and transfer to the
Partnership or any Affiliate of the General Partner, exercisable in its sole
discretion, to purchase all, but not less than all, of the Units of such class
then Outstanding held by Persons other than the General Partner and its
Affiliates, at the greater of (x) the Current Market Price as of the date three
days prior to the date that the notice described in Section 17.1(b) 17.1(c) is
mailed, and (y) the highest cash price paid by the General Partner or any of
its Affiliates for any such Unit purchased during the 90-day period preceding
the date that the notice described in Section 17.1(b) is mailed. As used in
this Agreement, (i) "Current Market Price" as of any date of any class of Units
listed or admitted to trading on any National Securities Exchange means the
average of the daily Closing Prices (as hereinafter defined) per Unit of such
class for the 20 consecutive Trading Days (as hereinafter defined) immediately
prior to such date; (ii) "Closing Price" for any day means the last sale price
on such day, regular way, or in case no such sale takes place on such day, the
average of the closing bid and asked prices on such day, regular way, in either
case as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the principal
National Securities Exchange (other than the Nasdaq Stock Market) on which the
Units of such class are listed or admitted to trading or, if the Units of such
class are not listed or admitted
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to trading on any National Securities Exchange (other than the Nasdaq Stock
Market), the last quoted price on such day or, if not so quoted, the average of
the high bid and low asked prices on such day in the over-the-counter market,
as reported by the Nasdaq Stock Market or such other system then in use, or, if
on any such day the Units of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in the Units of such
class selected by the Board of Directors of the General Partner, or if on any
such day no market maker is making a market in the Units of such class, the
fair value of such Units on such day as determined reasonably and in good faith
by the Board of Directors of the General Partner; and (iii) "Trading Day" means
a day on which the principal National Securities Exchange on which the Units of
any class are listed or admitted to trading is open for the transaction of
business or, if Units of a class are not listed or admitted to trading on any
National Securities Exchange, a day on which banking institutions in New York
City generally are open. 17.1(c) is mailed.
(b)(b) Notwithstanding any other provision of this Agreement, if at any time
after the expiration of the Subordination Period and the earlier to occur of
(A) the fifth anniversary of the Effective Time or (B) the issuance of 909,000
Senior Subordinated Units and Class B Common Units in the aggregate pursuant to
Section 4.6, the Partnership acquires, through purchase or exchange, in a
twelve-month period, 66 2/3% or more of the total Class B Common Units, the
Partnership shall then have the right, which it may not assign or transfer,
exercisable in its sole discretion, to purchase all, but not less than all, of
the remaining Class B Common Units then Outstanding during the following
twelve-month period, at the greater of (x) the Current Market Price as of the
date three days prior to the date that the notice described in Section 17(c) is
mailed, and (y) the highest cash price paid by the Partnership for any such
Unit purchased during the 90-day period preceding the date that the notice
described in Section 17(c) is mailed.
(c) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Units granted pursuant to
Section 17.1(a) or the Partnership elects to exercise the right granted
pursuant to Section 17(b) to purchase Class B Common Units, the General Partner
or the Partnership, as the case may be, shall deliver to the Transfer Agent
notice of such election to purchase (the "Notice of Election to Purchase") and
shall cause the Transfer Agent to mail a copy of such Notice of Election to
Purchase to the Record Holders of such Units (as of a Record Date selected by
the General Partner) at least 10, but not more than 60, days prior to the
Purchase Date. Such Notice of Election to Purchase shall also be published for
a period of at least three consecutive days in at least two daily newspapers of
general circulation printed in the English language and published in the
Borough of Manhattan, New York. The Notice of Election to Purchase shall
specify the Purchase Date and the price (determined in accordance with Section
17. l(a)) at which Units will be purchased and state that the General Partner,
its Affiliate or the Partnership, as the case may be, elects to purchase such
Units, upon surrender of Certificates representing such Units in exchange for
payment, at such office or offices of the Transfer Agent as the Transfer Agent
may specify, or as may be required by any National Securities Exchange on which
the Units are listed or admitted to trading. Any such Notice of Election to
Purchase mailed to a Record Holder of Units at his address as reflected in the
records of the Transfer Agent shall be conclusively presumed to have been given
regardless of whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the
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Transfer Agent cash in an amount sufficient to pay the aggregate purchase price
of all of the Units to be purchased in accordance with this Section 17.1. If
the Notice of Election to Purchase shall have been duly given as aforesaid at
least 10 days prior to the Purchase Date, and if on or prior to the Purchase
Date the deposit described in the preceding sentence has been made for the
benefit of the holders of Units subject to purchase as provided herein, then
from and after the Purchase Date, notwithstanding that any Certificate shall
not have been surrendered for purchase, all rights of the holders of such Units
(including any rights pursuant to Articles IV, V and XIV) shall thereupon
cease, except the right to receive the purchase price (determined in accordance
with Section 17.1(a)) for Units therefor, without interest, upon surrender to
the Transfer Agent of the Certificates representing such Units, and such Units
shall thereupon be deemed to be transferred to the General Partner, its
Affiliate or the Partnership, as the case may be, on the record books of the
Transfer Agent and the Partnership, and the General Partner or any Affiliate of
the General Partner, or the Partnership, as the case may be, shall be deemed to
be the owner of all such Units from and after the Purchase Date and shall have
all rights as the owner of such Units (including all rights as owner of such
Units pursuant to Articles IV, V and XIV).
(c)(d) At any time from and after the Purchase Date, a holder of an
Outstanding Unit subject to purchase as provided in this Section 17.1 may
surrender his Certificate evidencing such Unit to the Transfer Agent in
exchange for payment of the amount described in Section 17.1(a), therefor,
without interest thereon.
ARTICLE XVIII
GENERAL PROVISIONS
Section 18.1 Addresses and Notices.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Unit at his address as shown on the records of the Transfer
Agent or as otherwise shown on the records of the Partnership, regardless of
any claim of any Person who may have an interest in such Unit or the
Partnership Interest of a General Partner by reason of any assignment or
otherwise. An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this Section 18.1 executed by the
General Partner, the Transfer Agent or the mailing organization shall be prima
facie evidence of the giving or making of such notice, payment or report. If
any notice, payment or report addressed to a Record Holder at the address of
such Record Holder appearing on the books and records of the Transfer Agent or
the Partnership is returned by the United States Post Office Postal Service
marked to indicate that the United States Postal Service is unable to deliver
it, such notice, payment or report and any subsequent notices, payments and
reports shall be deemed to have been duly given or made without further mailing
(until such time as such Record Holder or another Person notifies the Transfer
Agent or the Partnership of a change in his address) if they are available for
the Partner or Assignee at the
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principal office of the Partnership for a period of one year from the date of
the giving or making of such notice, payment or report to the other Partners
and Assignees. Any notice to the Partnership shall be deemed given if received
by the General Partner at the principal office of the Partnership designated
pursuant to Section 1.3. The General Partner may rely and shall be protected in
relying on any notice or other document from a Partner, Assignee or other
Person if believed by it to be genuine.
Section 18.2 References.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 18.3 Pronouns and Plurals.
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 18.4 Further Action.
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
Section 18.5 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 18.6 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 18.7 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 18.8 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 18.9 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
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Section 18.10 Applicable Law.
This Agreement shall be construed in accordance with and governed by the laws
of the State of Delaware, without regard to the principles of conflicts of law.
Section 18.11 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 18.12 Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be
bound by the results of such action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
General Partner:
Star Gas Corporation
By:
William G. Powers, Jr., President
ORGANIZATIONAL LIMITED PARTNER:
By:
William G. Powers, Jr.
APPENDIX B Star Gas LLC
By:
Name:
Title:
Limited Partners:
All Limited Partners now and
hereafter admitted as limited
partners of the Partnership,
pursuant to the Powers of Attorney
now and hereafter executed in favor
of, and granted and delivered to,
the General Partner.
By: Star Gas LLC
General Partner, as attorney-in-fact
for all Limited Partners pursuant to
the Powers of Attorney granted
pursuant to Section 1.4
By:
Name:
Title:
C-93
<PAGE>
EXHIBIT A
TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
STAR GAS PARTNERS, L.P.
No. Common Units
STAR GAS, LLC., a Delaware limited liability company, as the General Partner
of STAR GAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the registered owner of
Common Units representing limited partner interests in the Partnership (the
"Common Units") transferable on the books of the Partnership, in person or by
duly authorized attorney, upon surrender of this Certificate properly endorsed
and accompanied by a properly executed application for transfer of the Common
Units represented by this Certificate. The rights, preferences and limitations
of the Common Units are set forth in, and this Certificate and the Common Units
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Agreement of Limited Partnership of
STAR GAS PARTNERS, L.P., as amended, supplemented or restated from time to time
(the "Partnership Agreement"). Copies of the Partnership Agreement are on file
at, and will be furnished without charge on delivery of written request to the
Partnership at, the principal office of the Partnership located at 2187
Atlantic Street, Stamford, Connecticut 06912-0011. Capitalized terms used
herein but not defined shall have the meaning given them in the Partnership
Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Star Gas, LLC.,
as General Partner
Countersigned and Registered by: By: _________________________________
President
By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
C-A-1
<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants in
under Uniform Gifts to Minors
common Act
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
STAR GAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF STAR GAS PARTNERS, L.P.
You have acquired an interest in Star Gas Partners, L.P., 2187 Atlantic
Street, Stamford, Connecticut 06912-0011, whose taxpayer identification number
is 06-1437793. The Internal Revenue Service has issued Star Gas Partners, L.P.
the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Star Gas Partners, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS
PARTNERS, L.P.
If you transfer your interest in Star Gas Partners, L.P. to another person,
you are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date on
which you transferred the interest and (c) the name, address and tax shelter
registration number of Star Gas Partners, L.P. If you do not want to keep such
a list, you must (1) send the information specified above to the Partnership,
which will keep the list for this tax shelter, and (2) give a copy of this
notice to the person to whom you transfer your interest. Your failure to comply
with any of the above-described responsibilities could result in the imposition
of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of
1986, as amended, unless such failure is shown to be due to reasonable cause.
C-A-2
<PAGE>
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and
transfers unto
- ------------------------------------- -------------------------------------
(Please print or typewrite name (Please insert Social Security or
and address of Assignee) other identifying number of
Assignee)
Common Units representing limited partner interests evidenced by this
Certificate, subject to the Partnership Agreement, and does hereby irrevocably
constitute and appoint as its attorney-in-fact with full power of substitution
to transfer the same on the books of Star Gas Partners, L.P.
Date: NOTE: The signature to any
endorsement hereon must correspond
with the name as written upon the
face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY
-------------------------------------
(Signature)
-------------------------------------
(Signature)
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form set forth below or (b) on a separate application that the Partnership
will furnish on request without charge. A transferor of the Common Units shall
have no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the transfer
of the Common Units.
C-A-3
<PAGE>
APPENDIX A
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form set forth below or (b) on a separate application that the Partnership
will furnish on request without charge. A transferor of the Common Units shall
have no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the transfer
of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Star Gas Partners, L.P. the
"Partnership", as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner and, if
a Liquidator shall be appointed, the Liquidator of the Partnership as the
Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's
admission as a Substituted Limited Partner and as a party to the Partnership
Agreement, (d) gives the powers of attorney provided for in the Partnership
Agreement and (e) makes the waivers and gives the consents and approvals
contained in the Partnership Agreement. Capitalized terms not defined herein
have the meanings assigned to such terms in the Partnership Agreement.
Date: _______________________________
- -------------------------------------
Signature of Assignee
- -------------------------------------
Social Security or other identifying
number of Assignee
C-A-4
<PAGE>
- -------------------------------------
Name and Address of Assignee
- -------------------------------------
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify) _______
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity [_] Non-Foreign Corporation--
Non-resident Alien
[_] Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is
3.My home address is
B. Partnership, Corporation or Other Interestholder
1. is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as those
terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is
3.The interestholder's office address and place of incorporation (if
applicable) is
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person. The person. The
interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
C-A-5
<PAGE>
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
-------------------------------------
(Name of Interestholder)
-------------------------------------
Signature and Date
-------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
C-A-6
<PAGE>
EXHIBIT B
TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
CERTIFICATE EVIDENCING SENIOR SUBORDINATED UNITS
REPRESENTING LIMITED PARTNER INTERESTS
STAR GAS PARTNERS, L.P.
No. Senior Subordinated Units
STAR GAS, LLC., a Delaware limited liability company, as the General Partner
of STAR GAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the
registered owner of Senior Subordinated Units representing limited
partner interests in the Partnership (the "Senior Subordinated Units")
transferable on the books of the Partnership, in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed and accompanied
by a properly executed application for transfer of the Senior Subordinated
Units represented by this Certificate. The rights, preferences and limitations
of the Senior Subordinated Units are set forth in, and this Certificate and the
Senior Subordinated Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Amended and Restated
Agreement of Limited Partnership of STAR GAS PARTNERS, L.P., as amended,
supplemented or restated from time to time (the "Partnership Agreement").
Copies of the Partnership Agreement are on file at, and will be furnished
without charge on delivery of written request to the Partnership at, the
principal office of the Partnership located at 2187 Atlantic Street, Stamford,
Connecticut 06912-0011. Capitalized terms used herein but not defined shall
have the meaning given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Star Gas, LLC.,
as General Partner
Countersigned and Registered by:
By: _________________________________
President
_____________________________________ By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
C-B-1
<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as under Uniform Gifts to Minors
tenants in common Act
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF SENIOR SUBORDINATED UNITS
IN
STAR GAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF STAR GAS PARTNERS, L.P.
You have acquired an interest in Star Gas Partners, L.P. 2187 Atlantic
Street, Stamford, Connecticut 06912-0011, whose taxpayer identification number
is 06-1437793. The Internal Revenue Service has issued Star Gas Partners, L.P.
the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN Star Gas PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Star Gas Partners, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS
PARTNERS, L.P.
If you transfer your interest in Star Gas Partners, L.P. to another person,
you are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date on
which you transferred the interest and (c) the name, address and tax shelter
registration number of Star Gas Partners, L.P. If you do not want to keep such
a list you must (1) send the information specified above to the Partnership,
which will keep the list for this tax shelter, and (2) give a copy of this
notice to the person to whom you transfer your interest. Your failure to comply
with any of the above-described responsibilities could result in the imposition
of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of
1986, as amended unless such failure is shown to be due to reasonable cause.
C-B-2
<PAGE>
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and
transfers unto
_____________________________________ _____________________________________
(Please print or typewrite nameand (Please insert Social Security or
address of Assignee) other identifying number of
Assignee)
Senior Subordinated Units representing limited partner interests
evidenced by this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint as its attorney-in-fact
with full power of substitution to transfer the same on the books of Star Gas
Partners, L.P.
Date: _______________________________ NOTE: The signature to any
endorsement hereon must correspond
with the name as written upon the
face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY.
SIGNATURE(S) GUARANTEED _____________________________________
(Signature)
_____________________________________
(Signature)
No transfer of the Senior Subordinated Units evidenced hereby will be
registered on the books of the Partnership, unless the Certificate evidencing
the Senior Subordinated Units to be transferred is surrendered for registration
or transfer and an Application for Transfer of Senior Subordinated Units has
been executed by a transferee either (a) on the form set forth below or (b) on
a separate application that the Partnership will furnish on request without
charge. A transferor of the Senior Subordinated Units shall have no duty to the
transferee with respect to execution of the transfer application in order for
such transferee to obtain registration of the transfer of the Senior
Subordinate Units.
C-B-3
<PAGE>
APPENDIX A
No transfer of the Senior Subordinated Units evidenced hereby will be
registered on the Books of the Partnership, unless the Certificate evidencing
the Senior Subordinated Units to be transferred is surrendered for registration
or transfer and an Application for Transfer of Senior Subordinated Units has
been executed by a transferee either (a) on the form set forth below or (b) on
a separate application that the Partnership will furnish on request without
charge. A transferor of the Senior Subordinated Units shall have no duty to the
transferee with respect to execution of the transfer application in order for
such transferee to obtain registration of the transfer of the Senior
Subordinated Units.
APPLICATION FOR TRANSFER OF SENIOR SUBORDINATED UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Senior Subordinated Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Star Gas Partners, L.P., as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right, power
and authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (c) appoints the General Partner and, if a Liquidator
shall be appointed, the Liquidator of the Partnership as the Assignee's
attorney-in-fact to execute, swear to, acknowledge and file any document,
including, without limitation, the Partnership Agreement and any amendment
thereto and the Certificate of limited Partnership and any amendment thereto,
necessary or appropriate for the Assignee's admission as a Substituted Limited
Partner and as a party to the Partnership Agreement, (d) gives the powers of
attorney provided for in the Partnership Agreement and (e) makes the waivers
and gives the consents and approvals contained in the Partnership Agreement.
Capitalized terms not defined herein have the meanings assigned to such terms
in the Partnership Agreement.
Date: _______________________________
_____________________________________
Signature of Assignee
_____________________________________
Social Security or other identifying
number of Assignee
_____________________________________
Name and Address of Assignee
C-B-4
<PAGE>
_____________________________________
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify) _______
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity [_] Non-resident Alien
[_] Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
3. My home address is
B. Partnership, Corporation or Other Interestholder
1. is not a foreign corporation, foreign
(Name of Interestholder)
partnership, foreign
trust or foreign estate (as those terms are defined in the Code and
Treasury Regulations).
2. The interestholder's U.S. employer identification number is
3. The interestholder's office address and place of incorporation (if
applicable) is
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person. The interestholder
understands that this certificate may be disclosed to the Internal Revenue
Service by the Partnership and that any false statement contained herein could
be punishable by fine, imprisonment or both.
C-B-5
<PAGE>
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
_____________________________________
(Name of Interestholder)
_____________________________________
Signature and Date
_____________________________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
C-B-6
<PAGE>
ANNEX D
October 16, 1998
The Special Committee of the Board of Directors
Star Gas Corporation
2187 Atlantic Street
Stamford, CT 06912-0011
Members of the Special Committee of the Board of Directors:
You (the "Special Committee") have requested the opinion of A.G. Edwards &
Sons, Inc. ("A.G. Edwards"), the financial advisor to the Special Committee, as
to the fairness, from a financial point of view, of the Transaction (as
hereinafter defined) to the public common unitholders (the "Public Common
Unitholders"), of Star Gas Partners, L.P., (the "Partnership").
As more fully described in the Partnership's Registration Statement on Form
S-4, the "Transaction" consists of the following four interrelated principal
parts:
(1) the acquisition of Petroleum Heat and Power Co., Inc. ("Petro") by
the Partnership;
(2) the public offerings of debt and equity by the Partnership or its
subsidiary (in accordance with the terms set forth in the Agreement and
Plan of Merger) and the redemption of certain debt and preferred stock of
Petro;
(3) the withdrawal of Star Gas Corporation, the current general partner
of the Partnership (the "General Partner") from the Partnership (as well as
from the operating partnership), and the admission of Star Gas L.L.C. as
the new general partner; and
(4) the adoption of certain amendments to the Agreement of Limited
Partnership (and the operating partnership's agreement of limited
partnership) in order to consummate the Transaction.
For purposes of our opinion with respect to the Transaction, we have assumed
that the Partnership will be able to complete the requisite financings in (2)
and understand that the Transaction will not be consummated if the Partnership
is unable to complete the requisite financings in accordance with the specified
terms and conditions. We have also assumed that the General Partner's
withdrawal and the related admission of a successor general partner in (3) will
have no financial impact on the Public Common Unitholders.
A.G. Edwards, as part of its investment banking business, is regularly
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, initial public
offerings, secondary distribution of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. We are
familiar with the Partnership through acting as exclusive financial advisor and
placement agent in the Partnership's private placement of 7.17% First Mortgage
Notes due 2010 and through our securities research coverage of the
<PAGE>
Partnership. In connection with this engagement, we will receive fees (a
portion of which is contingent upon the consummation of the Transaction) as
well as our standard indemnification. We are not aware of any relationship
between A.G. Edwards and the Partnership, the General Partner or Petro, which
in our opinion would affect our ability to render a fair and independent
opinion in this matter.
In connection with the opinion, A.G. Edwards' activities included, among
other things:
(i) A review of the most recently available drafts of the Partnership's
Registration Statement on Form S-4 and exhibits thereto, including the
Agreement and Plan of Merger, the Exchange Agreement, the Amended and
Restated Agreement of Limited Partnership and the Conveyance and
Contribution Agreements.
(ii) A review of certain publicly-available Partnership and Petro
historical audited financial statements and certain unaudited interim
financial statements;
(iii) A review of certain financial analyses and forecasts of the
Partnership prepared by and reviewed with management of the General Partner
and the views of management of the General Partner regarding the
Partnership's past and current business operations, results thereof,
financial condition and future prospects, including the impact of the
Transaction, as well as information relating to the retail propane
distribution industry and the potential strategic, financial and
operational benefits and challenges anticipated from the Transaction;
(iv) A review of certain financial analyses and forecasts of Petro
prepared by and reviewed with management of Petro and the views of
management of Petro regarding Petro's past and current business operations,
results thereof, financial condition and future prospects, including the
impact of the Transaction, as well as information relating to the retail
home heating oil distribution industry and the potential strategic,
financial and operational benefits and challenges anticipated from the
Transaction;
(v) A review of the pro forma impact of the Transaction on the
Partnership and Petro;
(vi) A review of the publicly reported historical price and trading
activity for the Partnership's Common Units and Petro's Class A Common
Stock, including a comparison of certain financial and stock market
information for the Partnership with similar publicly available information
for certain other companies, the securities of which are publicly traded;
(vii) A review of the current market environment generally, and the
retail propane distribution environment and the retail home heating oil
distribution environment in particular;
(viii) A review of information relating to the financial terms of certain
transactions, including selected mergers and acquisition transactions; and
(ix) A review of such other information, financial studies, analyses and
investigations, and financial, economic and market criteria that A.G.
Edwards considered relevant.
In rendering our opinion, A.G. Edwards has relied upon and assumed, without
independent verification, the accuracy and completeness of all financial and
other information, publicly available, furnished to, or otherwise discussed
with A.G. Edwards for the purposes of the opinion. With respect to financial
projections and other information provided to or otherwise discussed with
D-2
<PAGE>
A.G. Edwards, A.G. Edwards assumed and was advised by the management of the
General Partner and Petro, respectively, that such projections and other
information were reasonably prepared on a basis that reflects the best
currently available estimates and judgments of the management of the General
Partner and Petro, respectively. A.G. Edwards did, however, review numerous
sets of projections for Petro and analyzed what it believed were certain of the
major assumptions embedded within Petro's projections. A.G. Edwards used two
sets of projections for Petro to perform A.G. Edwards' analyses. A.G. Edwards
used a set of projections based on 30-year weather and a set of projections
based on 15-year weather. The Special Committee did not, however, engage A.G.
Edwards to, and therefore A.G. Edwards did not, verify the accuracy or
completeness of any information. A.G. Edwards has relied upon the assurances of
the management of the General Partner and Petro that the respective managements
are not aware of any facts that would make such information inaccurate or
misleading. A.G. Edwards did not conduct a physical inspection of the
properties or facilities of the Partnership or Petro nor did it make or obtain
any independent evaluation or appraisals of any such properties or facilities
or assets and liabilities. A.G. Edwards also assumed that the final form of the
Partnership's Registration Statement on Form S-4, the Agreement and Plan of
Merger, the Exchange Agreement, the Amended and Restated Agreement of Limited
Partnership and the Conveyance and Contribution Agreements would be
substantially similar to the last draft reviewed by A.G. Edwards.
A.G. Edwards did not express an opinion as to what the value of the
Partnership's Senior Subordinated Units, Junior Subordinated Units or General
Partner Units will be when issued to the holders of Petro's Common Stock
pursuant to the Transaction, or the price at which the Partnership's Common
Units or Senior Subordinated Units will trade subsequent to the Transaction.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Our opinion as expressed herein is limited to the fairness, from a financial
point of view, to the Public Common Unitholders, of the Transaction and does
not constitute tax advice, or a recommendation to any Public Common Unitholder
as to how such unitholder should vote with respect to the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Transaction is fair, from a financial point of view, to the
Public Common Unitholders.
Very truly yours,
A.G. Edwards & Sons, Inc.
D-3
<PAGE>
ANNEX E
October 6, 1998
The Board of Directors
Petroleum Heat & Power Co., Inc.
Clearwater House
2187 Atlantic Street
Stamford, CT 06904-1457
Lady and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the non-affiliate, public holders ("Public Common Stockholders") of
Class A common stock and Class C common stock (collectively, "Petro Common
Stock"), of Petroleum Heat & Power Co., Inc., a Minnesota corporation
("Petro"), of the terms of the proposed merger as set forth in the Agreement
and Plan of Merger, anticipated to be executed in October 1998 (the "Merger
Agreement"), by and among Petro; Star Gas Propane, L.P. (the "Operating
Partnership"), a Delaware limited partnership and wholly-owned subsidiary of
Star Gas Partners, L.P., a Delaware limited partnership (the "Partnership");
and a wholly-owned indirect subsidiary of the Operating Partnership
("Mergeco"). Pursuant to the Merger Agreement, Mergeco will be merged with and
into Petro (the "Merger"), with Petro surviving the Merger as a wholly-owned
indirect subsidiary of the Operating Partnership, and each share of Petro
Common Stock held by the Public Common Stockholders shall be converted into the
right to receive 0.13064 of a Senior Subordinated Unit ("Senior Subordinated
Unit") of the Partnership. Cash will be paid in lieu of fractional Senior
Subordinated Units based upon the market price of the Senior Subordinated Units
following the Merger. The Merger will be treated as a taxable transaction for
the Public Common Stockholders, and will be accounted for as a purchase
transaction under generally accepted accounting principles. The terms and
conditions of the Merger and the rights and preferences of the Senior
Subordinated Units are set forth more fully in the Merger Agreement and the
Amended and Restated Partnership Agreement ("Partnership Agreement").
In arriving at our opinion, we have reviewed the most recently available
drafts of the Merger Agreement, the Partnership Agreement, the Joint Proxy
Statement / Prospectus of Petro and the Partnership (the "Proxy Statement")
anticipated to be filed as a part of the Registration Statement on Form S-4
(the "Registration Statement") of the Partnership, and certain publicly
available financial information concerning Petro and the Partnership. In
addition, we have reviewed certain internal analyses, forecasts and other
internal information concerning the businesses and operations of Petro and the
Partnership prepared by the respective senior managements of Petro and the
Partnership. We have also met with the senior managements of Petro and the
Partnership to discuss the businesses, operations and prospects of Petro and
the Partnership. In addition, we have considered certain long-term strategic
benefits of the Merger, both operational and financial, that were described to
us by the senior managements of Petro and the Partnership.
We have reviewed the terms of the Merger in relation to, among other things,
current and historical market prices and trading volume for the Petro Class A
Common Stock and the Partnership
<PAGE>
Common Units ("Common Units"); the respective companies' cash flow, net income
and book value per share/unit; the capitalization and financial condition of
Petro and the Partnership; the pro forma financial impact of the Merger on
Petro and the Partnership, including the potential relative ownership of
various classes of units of the Partnership after the Merger by the current
holders of Petro Common Stock and the current unitholders of the Partnership;
and, to the extent publicly available, the terms of recent merger and
acquisition transactions involving comparable companies. In addition, we have
reviewed the merger premiums paid in recent stock-for-stock acquisitions of
public companies generally, and energy industry companies in particular. We
have also analyzed certain financial, stock market and other publicly available
information relating to the business of other companies and partnerships whose
operations we consider comparable to the respective operations of Petro and the
Partnership. In addition to the foregoing, we have considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as we deemed relevant in arriving at our opinion.
In connection with our review, we have not independently verified any of the
foregoing information, and we have relied upon such information being complete
and accurate in all material respects. We have assumed, with your consent, that
the financial forecasts provided to us and discussed with us have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the senior managements of Petro and the Partnership
as to the respective expected future performance of Petro and the Partnership,
and of the combined companies subsequent to the proposed Merger. In addition,
we have not conducted a physical inspection or made an independent evaluation
or appraisal of the assets of Petro or the Partnership, nor have we been
furnished with any such evaluation or appraisal. In rendering our opinion, we
have assumed that in the course of obtaining the necessary regulatory and
governmental approvals for the proposed Merger, no restriction will be imposed
that will have a material adverse effect on the contemplated benefits of the
proposed Merger. Our opinion is based on circumstances as they exist and can be
evaluated on, and the information made available to us at, the date hereof.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. We will receive a fee for our
services in connection with rendering our opinion. In the ordinary course of
our business, we may actively trade the securities of Petro and the Partnership
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Petro in connection with its consideration of the Merger and is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without Dain Rauscher Wessels' prior written
consent. We understand that this letter will be reprinted in its entirety in
the Proxy Statement sent to the holders of Petro Common Stock and unitholders
of the Partnership in connection with the Merger and that we will have the
opportunity to review and comment on all descriptions thereof in the Proxy
Statement prior to the filing of the
E-2
<PAGE>
Proxy Statement, the Registration Statement and any supplements and amendments
thereto, with the Securities and Exchange Commission and prior to its
dissemination to holders of Petro Common Stock and the unitholders of the
Partnership.
Our opinion does not address the merits of the underlying decision by Petro
to engage in the Merger, and does not constitute a recommendation to any holder
of Petro Common Stock as to how such holder should vote on the approval and
adoption of the Merger Agreement or any matter related thereto. We are not
expressing any opinion herein as to the prices at which Common Units or Senior
Subordinated Units of the Partnership will trade following the consummation of
the Merger.
Based upon our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that as of the date hereof the consideration to be received by the
Public Common Stockholders in the proposed Merger is fair, from a financial
point of view, to the Public Common Stockholders.
Very truly yours,
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
E-3
<PAGE>
ANNEX F
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
SUBD. 1. Actions creating rights. A shareholder of a corporation may dissent
from, and obtain payment for the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares
or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise
to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially all
of the property and assets of the corporation, but not including a transaction
permitted without shareholder approval in section 3024A.66, subdivision 1, or a
disposition in dissolution described in section 302A.725, subdivision 2, or a
disposition pursuant to an order of a court, or a disposition for cash on terms
requiring that all or substantially all of the net proceeds of disposition be
distributed to the shareholders in accordance with their respective interests
within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on
whose behalf the
F-1
<PAGE>
shareholder dissents. In that event, the rights of the dissenter shall be
determined as if the shares as to which the shareholder has dissented and the
other shares were registered in the names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the
corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
SUBD. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at
law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
SUBD. 1. Definitions. (a) For purposes of this section, the terms defined in
this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a corporation
immediately before the effective date of the corporate action referred to in
section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1 up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. Notice of dissent. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
SUBD. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all
F-2
<PAGE>
shareholders who have complied with subdivision 3 and to all shareholders
entitled to dissent if no shareholder vote was required, a notice that
contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
SUBD. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person
who was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and
F-3
<PAGE>
cancel all transfer restrictions. However, the corporation may again give
notice under subdivision 4 and require deposit or restrict transfer at a later
time.
SUBD. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
SUBD. 7. Petition; determination. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable.
F-4
<PAGE>
These fees and expenses may also be assessed against a person who has acted
arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and
may be awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
F-5
<PAGE>
ANNEX G
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of pro forma Available Cash from
Operating Surplus and should be read only in conjunction with "Cash Available
for Distribution," the Partnership's unaudited pro forma condensed consolidated
financial information.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998
-------------
(IN
THOUSANDS)
<S> <C>
Pro forma net loss................................................ $(14,968)
Add (deduct):
Loss (gain) on sale of assets................................... 48
Depreciation and amortization................................... 37,434
Provision for supplemental benefits............................. 409
Amortization of debt issuance costs............................. 636
Corporate identity expenses(a).................................. 1,100
Restructuring charges(a)........................................ 2,085
Transaction expenses(b)......................................... 1,029
Maintenance capital expenditures................................ (4,874)
--------
$ 22,899
========
</TABLE>
- --------
(a) Represents infrequent charges associated with Petro's branding, corporate
identity and restructuring programs.
(b) Represents expenses associated with the Transaction.
G-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Registrant
The Section of the Registrant's Joint Proxy Statement/Prospectus which forms
a part of this Registration Statement, entitled "The Amended and Restated
Partnership Agreement--Indemnification" is incorporated herein by this
reference.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreements, Section 17-108 of the Delaware Revised Limited
Partnership Act empowers a Delaware limited partnership to indemnify and hold
harmless any partner or other person from and against any and all claims and
demands whatsoever.
(b) Petro
Section 302A.521 of the Minnesota Business Corporation Act (the "MBCA")
provides mandatory and exclusive standards for indemnification, although the
Articles of Incorporation or by-laws of a corporation can specifically limit
the statutory indemnification. Minnesota law generally provides that a
corporation shall indemnify a person made or threatened to be made a party to
a proceeding by reason of such person's official capacity as an officer,
director or employee of the corporation, against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by that person in
connection with the proceeding, if such person (a) has not been indemnified by
another entity for the same proceedings and in connection with the same acts
or omission; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of a criminal proceeding, had no reason to believe
such person's conduct was unlawful; and (e) in connection with the acts or
omissions in question, the person reasonably believed that such person's
conduct was in the best interests of the corporation (or, in the case of a
question of improper personal benefit, believed that the conduct was not
opposed to the best interests of the corporation; or in the case of an
employee benefit plan, believed that the conduct was in the best interests of
the participants or beneficiaries of the employee benefit plan).
Section 302A.521 of the MBCA further provides that if an officer, director
or employee is made or threatened to be made a party to a proceeding in such
person's official capacity, such person is entitled, upon written request to
the corporation, to payment or reimbursement by the corporation of reasonable
expenses incurred by such person in advance of the final disposition of the
proceeding (a) upon receipt by the corporation of a written confirmation by
such person of such person's good faith belief that the criteria for
indemnification set forth under Minnesota law have been satisfied, an
undertaking by such person to repay all amounts paid or reimbursed by the
corporation if it is ultimately determined that the criteria for
indemnification have not been satisfied, and (b) after a determination that
the facts then known to those making the determination would not preclude
indemnification under Minnesota law.
Finally, Section 302A.521 of the MBCA provides that a corporation's articles
of incorporation or by-laws may prohibit indemnification or advances or may
impose conditions on such indemnification or advance, as long as those
conditions apply equally to all persons or to all persons within a given
class.
Petro's restated articles of incorporation, as amended, contain the
limitation of liability provision set forth below:
"ARTICLE VIII--A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under
II-1
<PAGE>
Section 302A.559 of the Minnesota Business Corporation Act or Section
80A.23 of the Minnesota Securities Law, or (iv) for any transaction from
which the director derived an improper personal benefit. If the Minnesota
Business Corporation Act is hereafter amended to authorize any further
limitation of the liability of a director, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Minnesota Business Corporation Act, as amended. No
amendment or repeal of this Article VIII shall apply to or have any effect
on the liability or alleged liability of any director of the corporation
for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal."
Petro's by-laws, as amended, contain the indemnification provision set forth
below:
"Section 8.01. The corporation shall indemnify all officers and directors
of the corporation, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent as permitted by Minnesota
Statutes Section 302A.521, as now enacted or hereafter amended. Unless
otherwise approved by the Board of Directors, the corporation shall not
indemnify or advance expenses to any employee of the corporation who is not
otherwise entitled to indemnification pursuant to the prior sentence of
this Section 8.01."
Indemnification Agreements with Directors
In March 1996 Petro entered into Indemnification Agreements with each of its
directors. The Agreements generally provide that Petro will indemnify the
directors against certain liabilities arising out of legal actions brought or
threatened against them for their conduct on behalf of Petro to the fullest
extent permitted by applicable law. The agreements contain provisions
implementing the director's rights thereunder with respect to, among other
things: (i) indemnification of expenses to a party who is wholly or partly
successful; (ii) indemnification of expenses of a witness; (iii) advancement
of expenses; (iv) procedure for determination of entitlement to
indemnification; (v) certain presumptions; (vi) remedies of an indemnitee;
(vii) subrogation; (viii) establishment of a trust and the funding thereof by
Petro, upon the indemnitee's request, in the event of change in Control or
potential Change in Control (as defined therein); and (ix) contribution in the
event indemnification may be unavailable.
ITEM 21. EXHIBITS
<TABLE>
<C> <S>
2.1 Merger Agreement dated as of September 25, 1998 by and among Petroleum
Heat and Power Co., Inc., the Registrant and Star Gas Propane, L.P.
(included as Annex A to the Joint Proxy Statement/ Prospectus which
forms a part of this Registration Statement).
3.1 Form of Agreement of Limited Partnership of the Registrant(1)
3.2 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(1)
3.3 Form of Amended and Restated Limited Partnership Agreement of the
Registrant (included as Annex C to the Joint Proxy Statement/Prospectus
which forms a part of this Registration Statement).
3.4 Form of Amended and Restated Limited Partnership Agreement of Star Gas
Propane, L.P.**
3.5 Restated and Amended Articles of Incorporation of Petro, as amended, and
Articles of Amendment thereto.(2)
3.6 Restated By-Laws of Petro.(2)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the legality
of the securities being registered*
8.1 Opinion of Andrews & Kurth L.L.P. relating to tax matters**
10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain
banks(3)
10.2 Form of Conveyance and Contribution Agreement among Star Gas Corporation,
the Partnership and the Operating Partnership.(3)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.3 Form of First Mortgage Note Agreement among certain insurance companies,
Star Gas Corporation and Star Gas Propane L.P.(3)
10.4 Intercompany Debt(3)
10.5 Form of Non-competition Agreement between Petro and the Partnership(3)
10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)
10.7 Amoco Supply Contract(3)
10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the
Pearl Gas Acquisition(4)
10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas
Acquisition(4)
10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement
dated as of December 13, 1995 among the Operating Partnership, Bank
Boston, N.A. and NationsBank, N.A.(4)
10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas
and The Northwestern Mutual Life Insurance Company(5)
10.12 Exchange Agreement (included as Annex B to the Joint Proxy
Statement/Prospectus which forms a part of this Registration Statement)
10.13 Projections**
10.14 Form of Proxy Card for the Registrant**
10.15 Form of Proxy Card for Petro**
21 Subsidiaries of the Registrant(5)
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in
Exhibit 5.1)*
23.3 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)**
23.4 Consent of A.G. Edwards & Sons, Inc.**
23.5 Consent of Dain Rauscher Wessels**
24.1 Powers of Attorney**
</TABLE>
- --------
* Filed herewith.
** Previously filed.
+ To be filed by amendment.
(1) Incorporated by reference to Appendix A to the Prospectus filed as part of
Registrant's Registration Statement on Form S-l, File No. 33-90496.
(2) Filed as exhibits to Petro's Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-98496, filed with the Commission on
December 13,1995.
(4) Incorporated by reference to the same Exhibit to Registrant's Periodic
Report on Form 8-K, as amended, as filed with the Commission on October 23
and 29, 1997.
(5) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-3, File No. 333-47295, as filed with the Commission on
March 4, 1998.
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
(2) The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(b) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
Provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by reference
into this Prospectus within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Stamford, Connecticut, on December
22, 1998.
STAR GAS PARTNERS, L.P.
By: STAR GAS CORPORATION,
as General Partner
/s/ Joseph P. Cavanaugh
By: _________________________________
Joseph P. Cavanaugh
President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph P. Cavanaugh President (Principal December 22, 1998
____________________________________ Executive Officer)
Joseph P. Cavanaugh
/s/ Richard F. Ambury Vice President--Finance December 22, 1998
____________________________________ (Principal Financial and
Richard F. Ambury Accounting Officer)
/s/ Irik P. Sevin Director December 22, 1998
____________________________________
Irik P. Sevin
* Director December 22, 1998
____________________________________
Audrey L. Sevin
* Director December 22, 1998
____________________________________
William Nicoletti
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
* Director December 22, 1998
____________________________________
Elizabeth K. Lanier
* Director December 22, 1998
____________________________________
Paul Biddelman
* Director December 22, 1998
____________________________________
Thomas J. Edelman
* Director December 22, 1998
____________________________________
Wolfgang Traber
* Director December 22, 1998
____________________________________
William G. Powers, Jr.
</TABLE>
/s/ Irik P. Sevin
*By_______________________
Irik P. Sevin Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
EXHIBIT DESCRIPTION
------- -----------
2.1 Merger Agreement dated as of September 25, 1998 by and among Petroleum
Heat and Power Co., Inc., the Registrant and Star Gas Propane, L.P.
(included as Annex A to the Joint Proxy Statement/ Prospectus which
forms a part of this Registration Statement).
3.1 Form of Agreement of Limited Partnership of the Registrant(1)
3.2 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(1)
3.3 Form of Amended and Restated Limited Partnership Agreement of the
Registrant (included as Annex C to the Joint Proxy
Statement/Prospectus which forms a part of this Registration
Statement).
3.4 Form of Amended and Restated Limited Partnership Agreement of Star Gas
Propane, L.P.**
3.5 Restated and Amended Articles of Incorporation of Petro, as amended,
and Articles of Amendment thereto.(2)
3.6 Restated By-Laws of Petro.(2)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the
legality of the securities being registered*
8.1 Opinion of Andrews & Kurth L.L.P. relating to tax matters**
10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain
banks(3)
10.2 Form of Conveyance and Contribution Agreement among Star Gas
Corporation, the Partnership and the Operating Partnership.(3)
10.3 Form of First Mortgage Note Agreement among certain insurance
companies, Star Gas Corporation and Star Gas Propane L.P.(3)
10.4 Intercompany Debt(3)
10.5 Form of Non-competition Agreement between Petro and the Partnership(3)
10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)
10.7 Amoco Supply Contract(3)
10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the
Pearl Gas Acquisition(4)
10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas
Acquisition(4)
10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement
dated as of December 13, 1995 among the Operating Partnership, Bank
Boston, N.A. and NationsBank, N.A.(4)
10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas
and The Northwestern Mutual Life Insurance Company(5)
10.12 Exchange Agreement (included as Annex B to the Joint Proxy
Statement/Prospectus which forms a part of this Registration
Statement)
10.13 Projections**
10.14 Form of Proxy Card for the Registrant**
10.15 Form of Proxy Card for Petro**
21 Subsidiaries of the Registrant(5)
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in
Exhibit 5.1)*
23.3 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)**
23.4 Consent of A.G. Edwards & Sons, Inc.**
23.5 Consent of Dain Rauscher Wessels**
24.1 Powers of Attorney**
</TABLE>
<PAGE>
- --------
* Filed herewith.
** Previously filed.
+ To be filed by amendment.
(1) Incorporated by reference to Appendix A to the Prospectus filed as part of
Registrant's Registration Statement on Form S-l, File No. 33-90496.
(2) Filed as exhibits to Petro's Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-98496, filed with the Commission on
December 13,1995.
(4) Incorporated by reference to the same Exhibit to Registrant's Periodic
Report on Form 8-K, as amended, as filed with the Commission on October 23
and 29, 1997.
(5) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-3, File No. 333-47295, as filed with the Commission on
March 4, 1998.
<PAGE>
Exhibit 5.1
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
December 22, 1998
Star Gas Partners, L.P.
2187 Atlantic Street
Stamford, CT 06912-0011
Re: Registration Statement on Form S-4
File No. 333-66005
----------------------------------
Ladies and Gentlemen:
We refer to the above-captioned registration statement (the "Registration
Statement") under the Securities Act of 1933, as amended, filed by Star Gas
Partners, L.P., a Delaware limited partnership (the "Partnership"), with the
Securities and Exchange Commission, relating to:
(i) 3,676,058 senior subordinated units (the "Senior Subordinated Units")
of limited partner interests in the Partnership which the Partnership
proposes to issue in connection with the acquisition (the
"Acquisition") of Petroleum Heat and Power Co., Inc.; and
(ii) 102,773 common units (the "Common Units" and together with the Senior
Subordinated Units, the "Partnership Units") of limited partner
interests in the Partnership, which the Partnership proposes to issue
in connection with the Acquisition.
Unless otherwise defined herein, capitalized terms used herein shall have
the meanings ascribed to them in the Registration Statement.
We have made such examination of law and have examined originals or copies,
certified or otherwise authenticated to our satisfaction, of all such records,
agreements and other instruments, certificates and orders of public officials,
certificates of the General Partner and representatives of the
<PAGE>
Star Gas Partners, L.P. -2- December 22, 1998
partnership, and other documents that we have deemed necessary to render the
opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the original thereof of all documents submitted to us as certified or
photostatic copies, and the authenticity of the originals of such latter
documents.
Based on the foregoing, we are of the opinion that:
1. The Partnership has been duly formed and is validly existing as a
limited partnership in good standing under the laws of the State of Delaware.
2. The Partnership Units have been duly authorized, and when issued in the
manner set forth in the Registration Statement, will be validly issued, fully
paid and non-assessable.
We are attorneys admitted to practice in the State of New York. Our opinion
relates only to the laws of the State of New York, applicable federal law of the
Untied States of America and the corporate and limited partnership laws of
Delaware. We express no opinion on the law of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Validity of Common Units" in the related Prospectus.
Very truly yours,
/s/
PHILLIPS NIZER BENJAMIN
KRIM & BALLON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Star Gas Partners, L.P.
We consent to incorporation by reference in the registration statement to be
filed on Form S-4 of Star Gas Partners, L.P. of our report dated November 13,
1998, relating to the consolidated balance sheets of Star Gas Partners, L.P.
and subsidiary as of September 30, 1998 and 1997, and the related consolidated
statements of operations, partners' capital and predecessor equity and cash
flows for each of the years in the three-year period ended September 30, 1998
and related schedule, which report appears in the September 30, 1998 annual
report on Form 10-K of Star Gas Partners, L.P.
Additionally, we consent to the incorporation by reference in the registration
statement to be filed on Form S-4 of Star Gas Partners, L.P. of our report
dated October 22, 1997 relating to the balance sheets of Pearl Gas Co. as of
December 31, 1996 and 1995, and the related statements of income, shareholders'
equity, and cash flows for the years then ended, which report appears in the
November 24, 1997 current report on Form 8-K/A of Star Gas Partners, L.P.
Additionally, we consent to incorporation by reference in the registration
statement to be filed on Form S-4 of Star Gas Partners, L.P. of our report
dated March 20, 1998, relating to the consolidated balance sheets of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in shareholders'
equity (deficiency) and cash flows for each of the years in the three-year
period ended December 31, 1997 and related schedule, which report appears in
the December 31, 1997 annual report on Form 10-K of Petroleum Heat and Power
Co., Inc.
We also consent to the reference to our firm under the heading "Experts" in the
prospectus.
Stamford, CT
December 22, 1998
KPMG Peat Marwick LLP
