<PAGE>
As filed with the Securities and Exchange Commission on January 7, 2000
Registration No. 333-87371
Registration No. 333-87371-01
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
PETRO STOPPING CENTERS HOLDINGS, L.P.
(Exact name of each registrant as specified in its charter)
Delaware 5500 74-2922482
(State of Incorporation (Primary standard (I.R.S. employer
or organization) industrial classification identification number)
code number)
PETRO HOLDINGS FINANCIAL CORPORATION
Delaware 9999 74-2922355
(State of Incorporation (Primary standard (I.R.S. employer
or organization) industrial classification identification number)
code number)
6080 Surety Drive
El Paso, Texas 79905
(915) 779-4711
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
J.A. CARDWELL, SR.
President
Petro Stopping Centers Holdings, L.P.
6080 Surety Drive
El Paso, Texas 79905
(915) 779-4711
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With a copy to:
RICHARD M. RUSSO, ESQ.
Gibson, Dunn & Crutcher LLP
1801 California Street
Denver, Colorado 80202
(303) 298-5700
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be 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 Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+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 JANUARY 7, 2000
Petro Stopping Centers Holdings, L.P.
Petro Holdings Financial Corporation
[LOGO OF PETRO STOPPING CENTERS]
Offer to Exchange $113.4 Million Aggregate Principal Amount
at Stated Maturity of 15% Senior Discount Notes Due 2008
for 15% Series B Senior Discount Notes Due 2008
The old notes were issued on July 23, 1999, and, as of the date of this
prospectus, $113.4 million in principal amount at stated maturity is
outstanding. The old notes that were sold for cash were issued at a discount to
their principal amount at stated maturity of approximately 63%. This means that
for a note with a $1,000 principal amount at stated maturity, we received
approximately $366. The terms of the new notes are substantially identical to
the terms of the old notes, except that the new notes will be registered under
the Securities Act and will not contain any legends restricting their transfer.
The old notes and new notes are sometimes collectively referred to as the
"notes."
Terms of the Exchange:
. Expiration date of 5:00 p.m., New York City time, on February 15, 2000,
unless extended.
. Tenders may be withdrawn at any time prior to the expiration date.
. We will exchange new notes for all validly tendered old notes that are not
withdrawn.
. Exchanges of notes will not be taxable exchanges for U.S. federal income tax
purposes.
. We will not receive any proceeds from the exchange offer.
. If you fail to tender your old notes, you will continue to hold unregistered
securities and your ability to transfer them could be adversely affected.
Terms of the Notes:
. Interest will not accrue or be payable on the notes prior to August 1, 2004.
. Interest on the notes will accrue at the rate of 15% per annum from August 1,
2004 and will be payable semi-annually on each February 1 and August 1,
commencing February 1, 2005.
See "Risk Factors" beginning on page 12 of this prospectus for a discussion
of risks associated with owning notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes to be distributed in
the exchange offer or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The date of this prospectus is . , 2000
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Petro Stopping Centers Holdings, L.P. and Petro Holdings Financial
Corporation have jointly filed a registration statement on Form S-4 to register
with the Securities and Exchange Commission the new notes to be issued in
exchange for the old notes. This prospectus is part of that registration
statement. As allowed by the Commission's rules, this prospectus does not
contain all of the information you can find in the registration statement or
the exhibits to the registration statement. This prospectus contains summaries
of the material terms and provisions of certain documents and in each instance
we refer you to the copy of such document filed as an exhibit to the
registration statement.
Upon the effectiveness of the registration statement, of which this
prospectus forms a part, Petro Stopping Centers Holdings, L.P. and Petro
Holdings Financial Corporation will file annual, quarterly and other reports
and information with the Commission as required by the Securities Exchange Act
of 1934.
The registration statement and the periodic reports and other information
filed by Petro Stopping Centers Holdings, L.P. and Petro Holdings Financial
Corporation with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of these materials may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois, at prescribed rates. Such information may also be accessed
electronically by means of the Commission's homepage on the Internet at
http://www.sec.gov., which contains reports, proxy and information statements
and other information regarding registrants, including Petro Stopping Centers
Holdings, L.P. and Petro Holdings Financial Corporation, that file
electronically with the Commission.
Pursuant to the indenture governing the notes, Petro Stopping Centers
Holdings, L.P. and Petro Holdings Financial Corporation have agreed, whether or
not required by the Exchange Act, to provide the trustee and holders of the
notes with annual, quarterly and other reports at the times and containing in
all material respects the information specified in Sections 13 and 15(d) of the
Exchange Act and to file these reports with the Commission.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
with respect to exchanging old notes for new notes. You should read the entire
prospectus carefully, especially the "Risk Factors" starting on page 12.
The Exchange Offer
Securities to be On July 23, 1999, Petro Stopping Centers
Exchanged................... Holdings, L.P. and Petro Holdings Financial
Corporation issued $113.4 million aggregate
principal amount at stated maturity of old notes
in transactions exempt from the registration
requirements of the Securities Act of 1933. The
terms of the new notes and the old notes are
substantially identical in all material respects,
except that the new notes will be registered
under the Securities Act and therefore will not
have the transfer restrictions or the
registration rights that are applicable to the
old notes.
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount at stated maturity of new notes for each
$1,000 principal amount at stated maturity of old
notes. As of the date hereof, $113.4 million
aggregate principal amount at stated maturity of
old notes is outstanding.
Expiration Date.............
The exchange offer will expire at 5:00 p.m., New
York City time, on February 15, 2000, or any
later date and time to which it is extended.
Withdrawal Rights........... The tender of the old notes may be withdrawn at
any time prior to 5:00 p.m., New York City time,
on the expiration date. Any old notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
as soon as practicable after the expiration or
termination of the exchange offer.
Interest on the New Notes
and Old Notes...............
Interest on the new notes will accrue at the rate
of 15% per annum from August 1, 2004. No
additional interest will accrue or be paid on old
notes tendered and accepted for exchange.
Conditions of the Exchange The exchange offer is not conditioned upon any
Offer....................... minimum principal amount of old notes being
tendered for exchange. The only condition to the
exchange offer is the declaration by the
Commission of the effectiveness of the
registration statement of which this prospectus
constitutes a part.
Procedures for Tendering
Old Notes...................
Each holder of the old notes wishing to accept
the exchange offer must complete, sign and date
the letter of transmittal and follow the
instructions contained in this prospectus and in
the letter of transmittal itself. Each holder
must then mail or otherwise deliver the letter of
transmittal, or the copy, together with the old
notes and
1
<PAGE>
any other required documentation, to the
exchange agent at the address listed in this
prospectus. By executing or agreeing to be
bound by the letter of transmittal, each holder
will represent to us that, among other things:
. the new notes are being obtained in the
ordinary course of business of the person
receiving the new notes, whether or not the
person is the registered holder of the old
notes;
. the holder is not engaging in and does not
intend to engage in a distribution of the new
notes;
. the holder does not have an arrangement or
understanding with any person to
participate in the distribution of the new
notes; and
. the holder is not an "affiliate," as
defined under Rule 405 promulgated under
the Securities Act, of us.
Guaranteed Delivery If your old notes are not immediately available
Procedures.................. to you or if you cannot deliver your old notes or
any other documents required by the letter of
transmittal to the exchange agent prior to the
expiration of the exchange offer, you may tender
your old notes according to the guaranteed
delivery procedures described in the letter of
transmittal. See "The Exchange Offer Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes.......
We will accept for exchange any and all old notes
which are properly tendered, and not withdrawn,
in the exchange offer prior to 5:00 p.m., New
York City time, on the expiration date of the
exchange offer. The new notes will be delivered
promptly following the expiration of the exchange
offer.
Exchange Agent.............. State Street Bank and Trust Company is serving as
exchange agent.
Federal Income Tax The exchange of old notes for new notes will not
Consequences................ be a taxable event for federal income tax
purposes. See "U.S. Federal Income Tax
Considerations."
Resales of the New Notes.... Based on existing interpretations by the staff of
the Commission given in no-action letters issued
to third parties, we believe that new notes
issued to a holder in exchange for old notes may
be offered for resale, resold and otherwise
transferred by a holder without compliance with
the registration and prospectus delivery
provisions of the Securities Act, provided that
the holder is acquiring the new notes in the
ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate, in
a distribution of the new notes. These
interpretations by the staff of the Commission do
not apply to broker-dealers who purchased the old
notes directly from us for resale under Rule 144A
under the Securities Act or any other available
exemption under the Securities Act or affiliates
of ours
2
<PAGE>
within the meaning of Rule 405 under the
Securities Act. Each broker-dealer that receives
new notes for its own account in exchange for old
notes, where the old notes were acquired by the
broker as a result of market-making or other
trading activities, must acknowledge that it will
deliver a prospectus when any resale of the new
notes takes place. See "The Exchange Offer--
Resales of the New Notes" and "Plan of
Distribution."
Effect of Not Tendering Old
Notes for Exchange..........
Old notes that are not tendered or that are
tendered but not accepted will, following the
completion of the exchange offer, continue to
have transfer restrictions. We will have no
further obligation to provide for the
registration of the old notes under the
Securities Act.
Fees and Expenses........... All expenses incident to our consummation of the
exchange offer will be borne by us.
Description of the Notes
Except as otherwise indicated, the following description relates both to the
old notes and the new notes. The new notes will evidence the same indebtedness
as the old notes and will be entitled to the benefits of the same indenture.
The form and terms of the new notes are the same as the form and terms of the
old notes, except that the new notes have been registered under the Securities
Act and therefore will not bear legends restricting their transfer.
Notes Offered............... $113.4 million principal amount at stated
maturity of 15%
Series B Senior Discount Notes due 2008.
$82.7 million in principal amount at stated
maturity of old notes were issued with
warrants and sold for cash to investors. The
old notes sold for cash were issued at a
discount to their principal amount at stated
maturity of 63.4%. This means that for an old
note sold for cash with a $1,000 principal
amount at stated maturity, we received
approximately $366.
$30.7 million in principal amount at stated
maturity of old notes were issued without
warrants as partial consideration for the
purchase of partnership interests in one of
our affiliates. No cash was received upon the
issuance of the old notes issued without
warrants, which were deemed to be issued for
purposes of the indenture at approximately
$484. Under generally accepted accounting
principles, we are required to record these
notes on our financial statements at
approximately $366, which is the same amount
at which the old notes sold for cash are
recorded.
Interest will not accrue or be payable on the
notes prior to August 1, 2004. Prior to August 1,
2004, the value of a note for purposes of
redemption under the indenture will increase or
"accrete" from $483.64, the initial accreted
value assigned to all the old notes under the
indenture, at a rate of 15% per annum. The
initial accreted value of $483.64 was assigned
because it is the value from which accretion at
the rate of 15% will result in an accreted value
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of $1,000 on August 1, 2004, the date from which
cash interest will begin to accrue on the notes.
See "Optional Redemption" in this "Description of
Notes" section of the Summary.
Issuers..................... The notes will be the obligations of Holdings and
Petro Holdings Financial Corporation. Petro
Holdings Financial Corporation is a wholly-owned
subsidiary of Holdings formed to facilitate the
offering of the old notes.
Maturity Date............... August 1, 2008.
Interest.................... Interest on the notes will not accrue or be
payable prior to August 1, 2004. From August 1,
2004, interest on the notes will accrue on the
principal amount at maturity at a rate of 15% per
annum, and will be payable semiannually on each
February 1 and August 1, commencing February 1,
2005. For U.S. federal income tax purposes, you
will be required to include original issue
discount on a note in gross income for each
taxable year in which you hold the note even
though cash interest on the note does not begin
to accrue until August 1, 2004, and you will
receive no cash interest payments until February
1, 2005. See "Material Federal Income Tax
Consequences--The Notes--Original Issue
Discount."
Optional Redemption......... We may redeem:
. some or all of the notes at any time prior
to August 1, 2004, at the accreted value
of the notes plus a make-whole premium
described in the section "Description of
the Notes-Optional Redemption";
. some or all of the notes beginning on
August 1, 2004, at the redemption prices
described in the section "Description of
the Notes--Optional Redemption"; or
. not less than all of the notes originally
issued at any time prior to August 1, 2002
at a price of 115.0% of their accreted
value with money we raise in a public
equity offering of either issuer or a
successor entity.
Here, and throughout this prospectus, the term
"accreted value" means, at any time before August
1, 2004, an amount per note that is equal to the
sum of (a) $483.64 plus (b) an additional amount
equal to 15% per annum from July 23, 1999 through
and until August 1, 2004. After August 1, 2004,
accreted value per note will equal $1,000.
Ranking..................... The notes are senior unsecured obligations of
ours and rank senior in right of payment to any
of our subordinated indebtedness. However, the
notes are effectively subordinated in right of
payment to all existing and future indebtedness
and other liabilities, including trade payables,
of all of Holdings' subsidiaries, including our
principal operating subsidiary, Petro Stopping
Centers, L.P., and its subsidiaries. In addition,
the notes will be subordinated to all secured
indebtedness of Holdings.
4
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The indenture permits Holdings and its
subsidiaries to incur liens to secure
indebtedness of up to $170 million. At September
30, 1999, our subsidiaries had approximately
$234.8 million of total liabilities, including
approximately $181.4 million of indebtedness.
This indebtedness consists primarily of $40.0
million outstanding under the senior credit
facility, plus unsecured indebtedness of $6.2
million under the 12 1/2% notes, and $134.3
million under the 10 1/2% notes. In addition, we
had $85.0 million of additional borrowing
availability under our new senior credit
facility, which consists of a $40.0 million term
loan B and an $85.0 million revolving credit
facility.
Loans under our new senior credit facility are
secured by substantially all of the assets of
Petro Stopping Centers, L.P., which we call the
Operating Partnership, and its material
subsidiaries and the pledge by Holdings of all of
the partnership interests it holds in the
Operating Partnership.
The indenture restricts our incurrence of
additional debt. Our ability to finance our
operations and, if necessary, to borrow funds to
pay amounts due under the notes, will depend on
our ability to meet these restrictions. See
"Description of Other Indebtedness--New Senior
Credit Facility" and "Description of the Notes."
Mandatory Offer to If we sell assets or experience a change of
Purchase.................... control, as described in the indenture, we must
offer to purchase the notes at the prices
described in "Description of the Notes." If we
sell our assets and do not use the money we
receive as required by the indenture, we must
make an offer to purchase each note for 100% of
its accreted value if on or before August 1, 2004
or for $1,000 if after August 1, 2004. In the
case of a change of control, we must make an
offer to purchase each note for 101% of its
accreted value if on or before August 1, 2004 or
for $1,010 if after August 1, 2004.
Covenants................... The indenture contains covenants for your
benefit. Such covenants, among other things,
restrict our ability and the ability of our
material subsidiaries to:
. incur additional debt;
. pay dividends and make distributions;
. repurchase securities;
. make investments;
. create liens;
. issue or sell capital interests of
subsidiaries;
. transfer or sell assets;
. enter into transactions with affiliates;
. enter into sale and leaseback
transactions; or
. merge or consolidate.
However, these restrictions have a number of important qualifications and
exceptions. For more details, see "Description of the Notes--Covenants."
5
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Risk Factors
We believe that the principal risks associated with your investment are
those relating to:
. Our substantial indebtedness and resulting significant debt service
obligations which may:
--limit our ability to expand;
--make us more vulnerable to downturns in our business; and
--restrict the Operating Partnership's ability to pay Holdings the
cash it needs to meet its obligations on the notes.
. Holdings status as a holding partnership. This means that all our
operating assets and the revenues they generate are held in
subsidiaries and that the creditors of these subsidiaries will have
first claim on these assets and revenues before the claims of the
holders of notes.
. Our significant dependence on diesel fuel sales (66.5% of revenues in
1998), which are subject to fluctuations in availability and cost.
. Our ability to successfully accelerate the building and acquisition
of new Petro Stopping Centers.
You should read the "Risk Factors" section of this prospectus, beginning on
page 12 as well as the other cautionary statements throughout this prospectus
for a more detailed discussion about risks associated with the old notes and
the new notes, including various events that could negatively affect our
business.
Petro Stopping Centers
We are a nationwide operator of full service truck stops and have a network
of 29 company-operated and 22 franchised locations in 29 states. Petro Stopping
Centers are one-stop, multi-service facilities. Open 24 hours a day, seven days
a week, they offer a broad range of products and services intended to address
all of the personal and professional needs of truck drivers. We were founded in
1975 and have built our reputation by providing the "quality difference" --
what we believe to be a high level of customer service and what we believe are
perceived to be quality products delivered in a consistently clean and friendly
environment. Our primary customers are commercial trucking fleets and
professional truck drivers that comprise the long-haul sector of the trucking
industry. We are a privately owned company, controlled by affiliates of J.A.
Cardwell, Sr. and James A. Cardwell, Jr., Mobil Long Haul, Inc., an affiliate
of Mobil Corporation, and Volvo Petro Holdings, L.L.C., an affiliate of Volvo
Trucks of North America, Inc.
Holdings is a holding partnership that has no significant assets other than
its partnership interests in the Operating Partnership. Substantially all of
our operations are conducted through the Operating Partnership. Petro Holdings
Financial Corporation is a subsidiary of Holdings and was formed for the sole-
purpose of serving as a co-issuer of the old notes. Petro Holdings Financial
Corporation has never been nor will it be engaged in any business, and it has
no employees.
In July 1999, we consummated a series of transactions, which we refer to as
the "Recapitalization." The Recapitalization includes, among other things:
. the formation of Holdings, and all of the former owners in the Operating
Partnership, other than Chartwell Investments, Inc. and Kirschner
Investments, becoming owners in Holdings;
. the purchase by Holdings of the interests in the Operating Partnership
held by Chartwell and Kirschner;
. the Operating Partnership entering into a new senior credit facility; and
. the sale by Holdings of the old notes and the exchangeable warrants of
Petro Warrant Holdings Corporation, a corporation that conducts no business
other than to issue the warrants and hold a common limited partnership
interest in Holdings, currently equal to 10.0% of Holdings' common limited
partnership interests.
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The following table presents the common partnership ownership interests in
the Operating Partnership prior to the Recapitalization and in Holdings after
giving effect to the Recapitalization.
<TABLE>
<CAPTION>
Post-Recapitalization
------------------------
Pre-Recapitalization Primary Fully diluted(a)
-------------------- ------- ----------------
<S> <C> <C> <C>
Chartwell
General partnership interest.. 1.0% 0% 0%
Limited partnership interest.. 49.8 0 0
Cardwells and their affiliates
General partnership interest.. 1.2 1.1 1.1
Limited partnership interest.. 38.7 50.5 48.5
Volvo Trucks.................... 0.0 28.7 27.6
Mobil........................... 7.3 9.7 13.2
Petro Warrant Holdings
Corporation (b)................ 0.0 10.0 9.6
Kirschner....................... 2.0 0.0 0.0
----- ----- -----
Total......................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- --------
(a) Assumes conversion of the convertible preferred partnership interests owned
by Mobil, but not the exercise of management-held options. In addition to
the convertible preferred partnership interests, nonconvertible preferred
partnership interests are owned by Mobil ($12.0 million) and the Cardwells
and their affiliates ($7.6 million) that are entitled to cumulative
preferred returns at the rate of 9.5% and 8%, respectively, and at December
31, 1998 had aggregate accrued unpaid preferred returns of $3.6 million.
See Note 10 of Notes to Consolidated Financial Statements.
(b) The warrants that were issued with the old notes and sold for cash are
exchangeable for all the common stock of Petro Warrant Holdings
Corporation. Although an affiliate of J.A. Cardwell, Sr. is the nominal
holder of the only outstanding share of common stock of Petro Warrant
Holdings Corporation until the exchange takes place, J.A. Cardwell, Sr.
disclaims any beneficial interest in the limited partnership interests held
by Petro Warrant Holdings Corporation because of the limitations on the
economic and voting rights of the holder of that share prior to the
exchange of the warrants. See footnote (5) to the table contained in
"Security Ownership of Certain Beneficial Owners and Management."
The following diagram illustrates the corporate structure of Holdings,
including its significant affiliates and subsidiaries.
[CHART]
Our principal executive offices are located at 6080 Surety Drive, El Paso,
Texas 79905, and our phone number is (915) 779-4711.
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Business Strategy
The key components of our business strategy include the following
initiatives:
. Preserve and Enhance Our High Quality Reputation. We believe our
competitive success is largely attributable to our reputation for providing the
"quality difference" -- what we believe to be a high level of customer service
and what we believe are perceived to be quality products delivered in a
consistently clean and friendly environment.
. Capitalize on Alliances with Mobil and Volvo Trucks. We believe our
strategic alliances with Mobil and Volvo Trucks will strengthen our competitive
position by providing us with what we believe are widely known, high quality
brand name products, resulting in increased traffic and opportunities to
promote integrated products and services to the trucking industry.
. Fleet Marketing Opportunities. In an effort to maximize fuel volumes and
available discounts and rebates, many trucking fleets are narrowing their lists
of approved truck stop chains with whom their truckers are authorized to do
business. We believe that our strategic alliance with Volvo Trucks will enhance
our ability to meet the need of trucking fleets to keep their trucks on the
road by providing a national network of preventative maintenance, warranty and
repair work services and addressing their related data capture needs.
. Expansion of Nationwide Network. We believe that the expansion of our
nationwide network will strengthen our appeal to, and as a result, increase our
volume of business with, trucking fleets.
8
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary historical consolidated
financial data of Holdings. The summary income statement data for the years
ended December 30, 1994 and December 29, 1995 and the summary balance sheet
data as of December 30, 1994, December 29, 1995, and December 31, 1996, have
been derived and calculated from Holdings' financial statements not included
herein. The summary income statement data for the years ended December 31,
1996, 1997, and 1998 and the summary balance sheet data as of December 31, 1997
and 1998, have been derived and calculated from Holdings' audited financial
statements, included herein. The summary income statement data for the nine
months ended September 30, 1998 and 1999, and the summary balance sheet data as
of September 30, 1999 have been derived and calculated from Holdings' unaudited
financial statements, included herein. The summary balance sheet data as of
September 30, 1998 has been derived and calculated from Holdings' unaudited
financial statements not included herein. The unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments) which
Holdings considers necessary for a fair presentation of Holdings' financial
position and results of operations for these periods. Operating results for the
nine months ended September 30, 1998 and 1999, are not necessarily indicative
of the results that may be expected for a full year. The Summary Historical
Consolidated Financial Data should be read in conjunction with "Selected
Historical Consolidated Financial Data," "Management's Discussion and Analysis
of Results of Operations and Financial Condition," and Holdings' consolidated
financial statements, including the footnotes thereto, contained elsewhere
herein.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months
Year Ended Year Ended Year Ended Year Ended Year Ended Ended September 30,
December 30, December 29, December 31, December 31, December 31, -------------------
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
Fuel (including motor fuel
taxes).................... $350,570 $385,181 $478,312 $513,571 $464,025 $ 353,572 $ 357,154
Nonfuel.................... 137,323 147,834 158,745 172,158 189,391 141,805 148,607
-------- -------- -------- -------- -------- --------- ---------
Total net revenues........ 487,893 533,015 637,057 685,729 653,416 495,377 505,761
Costs and expenses
Cost of sales
Fuel (including motor
fuel taxes)............. 317,945 352,207 443,967 476,033 422,945 322,922 328,427
Nonfuel.................. 55,491 59,686 67,464 70,548 76,451 57,374 59,817
Operating expenses......... 64,968 73,052 81,522 85,560 93,012 69,136 73,630
General and
administrative............ 11,448 12,053 13,925 17,035 19,335 14,378 14,423
Employee severance, benefit
and placement expenses.... -- -- 2,534 -- -- -- --
Depreciation and
amortization.............. 8,851 11,144 12,204 14,315 15,749 11,413 10,401
(Gain) loss on disposition
of assets................. -- -- -- -- -- 13 (849)
-------- -------- -------- -------- -------- --------- ---------
Total costs and expenses.. 458,703 508,142 621,616 663,491 627,492 475,236 485,849
-------- -------- -------- -------- -------- --------- ---------
Operating income............ 29,190 24,873 15,441 22,238 25,924 20, 141 19,912
Recapitalization costs...... -- -- 2,938 -- -- -- 1,450
Equity in loss of
affiliate.................. -- -- -- -- -- -- 451
Interest expense, net....... 18,711 21,098 21,263 20,292 20,042 15,046 16,798
-------- -------- -------- -------- -------- --------- ---------
Income (loss) before
extraordinary item,
minority interest in
earnings (loss) of
consolidated subsidiaries,
and cumulative effect of a
change in accounting
principle................. 10,479 3,775 (8,760) 1,946 5,882 5,095 1,213
Extraordinary item(a)...... 5,250 -- -- 12,745 -- -- 2,016
Cumulative effect of a
change in accounting
principle(b)(c)........... -- -- -- 1,579 3,250 -- --
Minority interest in
earnings (loss) of
consolidated
subsidiaries.............. 2,307 1,729 (3,969) (6,642) 1,286 2,637 1,438
-------- -------- -------- -------- -------- --------- ---------
Net income (loss)(d)(e).... $ 2,922 $ 2,046 $ (4,791) $ (5,736) $ 1,346 2,458 $ (2,241)
======== ======== ======== ======== ======== ========= =========
Balance Sheet Data:
(at end of period)
Total assets ............... $206,148 $221,699 $209,100 $235,953 $223,490 $ 235,101 $ 298,718
Working capital............. (8,922) (9,607) (13,863) 3,850 (3,060) 4,031 1,950
Minority interest in
consolidated subsidiaries.. 38,131 39,685 35,716 21,051 21,290 22,894 --
Mandatorily redeemable
preferred partnership
interests.................. -- -- -- 21,202 23,172 22,674 29,858
Contingently redeemable
warrants................... -- -- -- -- -- -- 9,700
Partners' capital
(deficit).................. (30,253) (27,760) (32,551) (44,319) (44,721) (42,541) (18,664)
Other Financial Data:
Net cash provided by
operating activities....... $ 13,084 $ 12,766 $ 14,668 $ 30,328 $ 11,333 $ 10,627 $ 17,208
Net cash used in investing
activities................. (18,915) (21,130) (5,337) (15,779) (19,659) (11,936) (81,776)
Net cash provided by (used
in) financing activities... 2,441 10,229 (11,837) 7,065 (3,287) (2,344) 67,174
Capital expenditures(f)..... 8,428 19,508 5,523 15,870 20,309 13,018 22,123
Ratio of earnings to fixed
charges or deficiency (g).. 1.54x 1.17x $ (8,760) 1.08x 1.26x 1.31x 1.07x
Number of truck stops:
(at end of period)
Company-operated........... 24 26 26 28 28 28 29
Franchised................. 13 15 16 18 21 21 22
Independently operated..... 1 -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- ---------
Total .................... 38 41 42 46 49 49 51
======== ======== ======== ======== ======== ========= =========
</TABLE>
10
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- --------
(a) Extraordinary item reflects the write-off of deferred debt issuance
associated with retired debt.
(b) Cumulative effect of a change in accounting principle in 1997 reflects
expensing of costs related to process reengineering activities as required
by Emerging Issues Task Force Issue No. 97-13.
(c) Cumulative effect of a change in accounting principle in 1998 reflects
expensing of organization and start up costs as required by AICPA Statement
of Position 98-5.
(d) No provision for income taxes is reflected in the financial statements as
Holdings is a partnership for which taxable income and tax deductions are
passed through to the individual partners.
(e) Holdings considers EBITDA to be meaningful to investors in understanding
its operating performance because Holdings has no publicly traded equity
securities, it is capitalized largely with long-term debt (creating a
significant amount of interest expense), and it operates as a partnership
(it does not have a provision for income taxes). EBITDA represents
operating income plus depreciation and amortization. EBITDA data, which is
not a measure of financial performance under generally accepted accounting
principles, is presented because such data is used by certain investors to
determine a company's ability to meet historical debt service requirements.
Such data should not be considered as an alternative to net income as an
indicator of Holdings' operating performance or as an alternative to cash
flows as a measure of liquidity. EBITDA results were $38.0 million in 1994,
$36.0 million in 1995, $32.1 million in 1996, $36.6 million in 1997 and
$41.7 million in 1998 and $31.6 million and $30.3 million for the interim
periods in 1998 and 1999, respectively. EBITDA results for fiscal 1996
exclude certain one-time charges related to our 1997 recapitalization and
the change in management and operations. Included in the one-time charges
were $2.5 million related to severance and hiring costs; $1.4 million in
obsolete inventory reserves, included in cost of sales; and $0.5 million in
insurance related costs.
(f) Capital expenditures primarily represent the cost of new Petro Stopping
Centers and maintenance of existing Petro Stopping Centers. Holdings had no
capital expenditures related to new Petro Stopping Centers in 1994. Capital
expenditures related to new Petro Stopping Centers were $13.8 million in
1995, $1.9 million in 1996, $7.3 million in 1997 and $6.1 million in 1998,
and were $11.2 million for the first nine months of 1999.
(g) On a pro forma basis, after giving effect to the Recapitalization, the
deficiency of earnings to fixed charges would have been $4.2 million in
1998 and $4.4 million in the 1999 interim period.
11
<PAGE>
RISK FACTORS
You should consider carefully the risks we discuss in this section, together
with all of the other information in this prospectus, before you decide to
exchange your old notes for new notes.
Risks Relating to the Exchange of the Notes
Old Notes that are not Exchanged Will be More Difficult to Transfer than New
Notes
Holders of old notes who do not exchange their old notes for new notes
pursuant to the exchange offer will continue to have restrictions on the
transfer of their old notes. Accordingly, the liquidity of the market for a
holder's old notes will be adversely affected upon the completion of the
exchange offer if a holder does not exchange its old notes. See "The Exchange
Offer."
Risks Relating to Our Indebtedness
Our Indebtedness Results in Significant Debt Service Obligations that May
Limit Our Ability to Expand and to Respond to Changing Market Conditions
We have incurred substantial debt, and, as a result, we have significant
debt service obligations. At September 30, 1999, our total indebtedness was
$224.4 million. At September 30, 1999, we also had $85.0 million of additional
borrowing availability under our new senior credit facility. In addition, our
new senior credit facility and the indenture allow us to incur additional
indebtedness. Our indebtedness poses important consequences to you, including
risks that:
. because we estimate we will use approximately $21.8 million to pay
principal and interest on our debt in 1999 and approximately $21.9
million in 2000, we will have less funds available for expansion,
construction of new facilities, working capital, capital expenditures
and other general corporate purposes;
. we may be unable to obtain additional financing on satisfactory terms or
to otherwise fund working capital, capital expenditures, acquisitions,
and other general corporate requirements;
. our borrowings under our new senior credit facility will bear interest
at variable rates, which would create higher debt service requirements
if market interest rates increase;
. our degree of leverage may hinder our ability to adjust rapidly to
changing market conditions and could make us more vulnerable to
downturns in the economy generally or in our industry;
. our failure to comply with the financial and other covenants applicable
to our debt could result in an event of default, which, if not cured or
waived, could have a material adverse effect on us.
If we cannot generate sufficient cash flow from operations to meet our debt
service obligations, we may be forced to reduce or delay construction of new
facilities and other capital expenditures, sell assets, restructure or
refinance our debt, or seek additional equity capital. We cannot assure you
that these remedies would be available or satisfactory. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources," "Description of Other Indebtedness--New
Senior Credit Facility," and "Description of the Notes."
Holdings' Only Significant Assets are its Partnership Interests in the
Operating Partnership and Your Claim on the Assets of the Operating
Partnership are Junior to the Claims of the Creditors of the Operating
Partnership
Since Holdings is a holding partnership and conducts its business through
subsidiaries, the notes are effectively subordinated to all existing and future
claims of creditors of Holdings' subsidiaries because the
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<PAGE>
creditors of the subsidiaries have the first right of claim against the assets
of those subsidiaries. At September 30, 1999, our subsidiaries had
approximately $234.8 million of total liabilities, including approximately
$181.4 million of indebtedness. In addition, the indenture permits our
subsidiaries to incur additional indebtedness. Your rights as holders of the
notes to receive any payments from the sale or disposition of the assets of any
of our subsidiaries upon any subsidiary's liquidation will be limited by the
prior claims of the subsidiary's creditors. Because of these other payment
priorities, there may not be sufficient assets remaining to pay amounts due on
any or all of your notes. See "Description of the Notes" and "Description of
Other Indebtedness."
Holdings' only significant assets are the partnership interests in the
Operating Partnership. However, all of those interests are pledged as
collateral under the new senior credit facility. Therefore, if we are unable to
pay amounts when due on the notes, you will not be able to use those
partnership interests to satisfy your claims against us unless (1) you obtain a
judgment against us and (2) all amounts owing under the new senior credit
facility, the 10 1/2% Senior Notes Due 2007, the 12 1/2% Senior Notes Due 2002
and claims of all other creditors of the Operating Partnership have been fully
satisfied.
Upon an Event of Default Under the New Senior Credit Facility, Our Assets
Would be Controlled by Creditors Other Than You
Upon any event of default as defined under the new senior credit facility,
the lenders under the new senior credit facility could declare all the amounts
that we and the Operating Partnership owe under the new senior credit facility
to be immediately due and payable. Such action by the lenders under the new
senior credit facility would be an event of default under our 10 1/2% notes,
our 12 1/2% notes and the notes, entitling their holders to declare the
principal and any accrued interest or accreted value, as the case may be to be
immediately due and payable. In addition, as secured creditors, the lenders
under the new senior credit facility would control the disposition and sale of
the partnership interests in the Operating Partnership after an event of
default under the new senior credit facility and would not be legally required
to consider your interests as unsecured creditors with respect to any
disposition or sale. There can be no assurance that our assets, after the
satisfaction of claims of our secured creditors, would be sufficient to satisfy
any amounts we owe you as holders of the notes.
Most of the Indebtedness of the Operating Partnership Will be Payable
Before the Notes Become Payable And a Failure to Repay that Indebtedness or
to Successfully Refinance it Would Significantly Reduce Holdings' Ability
to Repay the Notes
The 10 1/2% notes, the 12 1/2% notes and all amounts owing under the new
senior credit facility will mature prior to the maturity of the notes. There
can be no assurance that if the Operating Partnership is required to refinance
its 10 1/2% notes, the 12 1/2% notes or any amounts under the new senior credit
facility, it will be able to do so under acceptable terms, if at all. The
Operating Partnership's failure to successfully refinance any of these
obligations or to otherwise repay them would significantly impair Holdings'
ability to repay the notes.
The Covenants in Our Debt Instruments May Limit Our Ability to Finance Our
Future Growth and Could Create Defaults Under Those Agreements
Our new senior credit facility, the indenture, the indenture for our 12 1/2%
notes and the indenture for our 10 1/2% notes each contain a number of
significant covenants. These covenants limit or restrict our ability to:
. incur additional debt;
. pay dividends and make distributions;
. repurchase securities;
. make investments;
. create liens;
. issue or sell capital interests of subsidiaries;
13
<PAGE>
. transfer or sell assets;
. enter into transactions with affiliates;
. enter into sale and lease back transactions; or
. merge or consolidate.
These limitations and restrictions may adversely affect our ability to
finance our future operations or capital needs or engage in other business
activities that may be in our best interests. In addition, our new senior
credit facility also requires us to satisfy various financial ratios. If we
breach any of the covenants in the new senior credit facility or the indenture,
or if we are unable to comply with the required financial ratios, we may be in
default under the new senior credit facility and the indenture. If we default
under the new senior credit facility, the lenders can declare all borrowings
outstanding, including accrued interest and other fees, due and payable. If we
use all of our available cash to repay borrowings under the new senior credit
facility, we may not be able to make payments on the notes. See "Description of
Other Indebtedness" and "Description of the Notes."
The Old Notes were and the New Notes will be Issued at an Original Issue
Discount Which Means You Will Have a Potential Income Tax Liability Before You
Receive Cash Payments on Your Notes
Original Issue Discount
The old notes were and the new notes will be issued at an original issue
discount. Original issue discount is the amount by which each note's stated
redemption price at maturity for income tax purposes, which is the total amount
of principal and interest Holdings is obligated to repay on each note, exceeds
each note's issue price, which is the total amount borrowed by Holdings in
exchange for the note. Each note will have $1,233.64 of original issue
discount. See "U.S. Federal Income Tax Consequences--The Notes--Original Issue
Discount" for a more detailed discussion.
Income Tax Consequences
Since the notes will be issued with original issue discount, the federal
income tax laws require you to include in your gross income for each taxable
year or portion thereof that you hold a note a portion of the $1,233.64 of
total original issue discount that exists with respect to a note, even though
no cash payments will be made on the notes until February 1, 2005. Accordingly,
you will have gross income and thus a potential income tax liability each
taxable year or portion thereof that you hold a note, even though you will not
receive any scheduled cash payments on a note until February 1, 2005. See "U.
S. Federal Income Tax Considerations--The Notes--Original Issue Discount" for a
more detailed discussion.
Repayment Consequences
If a bankruptcy case is commenced by or against us under the U.S. Bankruptcy
Code, your claim, as a holder of notes, for the principal amount we owe you may
be limited to the initial issue price plus that portion of the original issue
discount that is not considered "unmatured interest" under the U.S. Bankruptcy
Code. Any original issue discount that was not amortized under the bankruptcy
filing would constitute "unmatured interest."
Holdings Will be Controlled by the Holders of its Equity Securities Whose
Interests May Conflict with Your Interests
The Cardwells and their affiliates, Mobil and Volvo Trucks together control
Holdings. See "Description of the Holdings Partnership Agreement."
Consequently, under the Holdings partnership agreement, they have the power to
appoint all of the members of Holdings' Board of Directors that will control
the direction and future operations of Holdings. Circumstances could arise in
which the interests of our equity holders conflict with
14
<PAGE>
interests of the holders of the notes. For example, if we encounter financial
difficulties or are unable to pay our debts as they mature, the interests of
our equity investors might conflict with those of the holders of the notes. In
addition, the equity investors may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could
enhance their equity investment, even though the transactions might involve
risks to the holders of the notes.
A Change in the Control of Our Ownership Could Require Repayment of Our
Indebtedness, Which We Could be Unable to Fund
Changes in our ownership would result in an event of default under the new
senior credit facility. In the event we have not repaid all amounts outstanding
under the new senior credit facility, the lenders could accelerate the debt
under the new senior credit facility, which would in turn constitute an event
of default under the indenture for the 10 1/2% notes and the indenture for the
12 1/2% notes and allow those notes to be accelerated. In any event, changes in
our ownership would require the Operating Partnership to make an offer to
repurchase all of the outstanding 10 1/2% notes or the 12 1/2% notes at a price
in cash equal to 101% of the principal amount of notes plus accrued and unpaid
interest. We cannot assure you that we will have sufficient funds at the time
of any change in our ownership to repay debt under the new senior credit
facility and to redeem the 10 1/2% notes or the 12 1/2% notes.
Any failure to pay when due amounts outstanding under the new senior credit
facility, the 12 1/2% notes or the 10 1/2% notes would allow the acceleration
of the maturity of the notes. In addition, changes in our ownership will
require us to make an offer to repurchase all of the outstanding notes at a
purchase price in cash equal to (1) 101% of the accreted value if the notes are
purchased on or prior to August 1, 2004, or (2) 101% of the principal amount at
stated maturity together with accrued interest, if any, if the notes are
purchased after August 1, 2004. See "Description of the Notes--Change of
Control." We cannot assure you that sufficient funds will be available at the
time of any change in our ownership to redeem the notes.
The source of funds for any repurchase of debt will be our available cash,
cash from other sources, including borrowings, sales of assets or additional
private or public offerings of debt or equity securities, or cash from
operations of the Operating Partnership. However, the terms of the new senior
credit facility, the 10 1/2% notes and the notes may, depending upon our
financial condition, restrict additional borrowings and asset sales, and the
terms of the new senior credit facility and the 10 1/2% notes may restrict,
depending on our financial condition, the Operating Partnership from
distributing funds to Holdings. Additional detailed information on these
restrictions is set out under the headings "Description of Other Indebtedness"
and "Description of the Notes". Moreover, even if they were not restricted, we
cannot assure you that sources of additional funds would be available on
favorable terms.
Inability of Holdings' General Partner to Satisfy the Obligations of
Holdings
Petro, Inc. is the general partner of Holdings. Although a general partner
is legally responsible for the obligations of a partnership, Petro, Inc. does
not have sufficient financial resources to satisfy the obligations of Holdings.
Although holders of the notes will have a legal right to seek recovery from
Petro, Inc. if Holdings is unable to satisfy its obligations under the notes,
it is unlikely that Petro, Inc. will be able to satisfy those obligations.
Issuance of the Notes May Be Subject to Fraudulent Conveyance Laws, Which
Could Result in the Noteholders Not Receiving the Full Amount of the Principal
and Interest Due Under the Notes
Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance laws, if we, at the time
we incurred the debt evidenced by the notes:
(1) incurred the indebtedness with the intent to hinder, delay or defraud
creditors; or
(2) received less than reasonably equivalent value or fair consideration
for incurring the indebtedness, and
15
<PAGE>
. were insolvent at the time of incurrence;
. were rendered insolvent by reason of the incurrence;
. were engaged or were about to engage in a business or transaction for
which our remaining assets constituted unreasonably small capital to
carry on our business; or
. intended to incur, or believed that we would incur, debts beyond our
ability to pay the debts as they matured;
then, in each case, a court of competent jurisdiction could (1) void, in whole
or in part, the notes, and direct the repayment of any amounts paid thereunder
to our creditors, (2) subordinate the notes to our obligations to our existing
and future creditors, or (3) take other actions detrimental to the
noteholders. Any of these actions could result in the noteholders not
receiving the full amount of principal and interest due under the notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in each case. Generally, however, we would be considered
insolvent if the sum of our debts, including some measure of contingent
liabilities, were greater than all of our assets at fair valuation or if the
present fair saleable value of our assets were less than the amount that would
be required to pay the probable liability on our existing debts, including
contingent liabilities, as they become absolute and matured.
There can be no assurance as to what standard a court would apply to
determine whether we were "insolvent" as of the date the notes were issued, or
that, regardless of the method of valuation, a court would not determine that
we were insolvent on that date. Nor can there be any assurance that a court
would not determine, regardless of whether we were insolvent on the date the
notes were issued, that the payments constituted fraudulent transfers on
another ground.
Although prior to the Recapitalization we had $180.2 million of
indebtedness and a deficit in partners' capital of $44.3 million, when the old
notes were issued we believe that the indebtedness represented by the old
notes was incurred for proper purposes and in good faith and that we (1) were
solvent and will continue to be solvent after issuance of the notes, (2) have
sufficient capital for carrying on our business and (3) will be able to pay
our debts as they mature. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources." In
addition, we do not believe that the indebtedness represented by the old notes
was incurred with the intent to hinder, delay or defraud creditors.
Risks Relating to Our Business
We are Dependent on a Healthy Trucking Industry and Diesel Fuel Market for a
Significant Portion of Our Revenue
During the year ended December 31, 1998, diesel fuel accounted for
approximately 66.5% of our revenues and 24.5% of our gross margins. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." The volume of diesel fuel sold by us and the profit margins
associated with these sales are affected by numerous factors outside of our
control, including:
. the condition of the long-haul trucking industry;
. the supply and demand for diesel fuel; and
. the pricing policies of competitors.
A change in any of these factors could have a material adverse effect on
our profitability. For more information, see "--The Diesel Fuel Market Can be
Volatile and Higher Prices Have Negatively Impacted Profit Margins" and "--Our
Profitability is Dependent on the Strength of the Trucking Industry."
16
<PAGE>
The Diesel Fuel Market Can be Volatile and Higher Prices Have Negatively
Impacted Profit Margins
The cost of the diesel fuel we purchase, the price at which we resell diesel
fuel at our Petro Stopping Centers, and the resulting profit margins we
realize, are determined largely by supply and competitive conditions. Thus, our
gross margins on diesel fuel can fluctuate substantially in relatively short
periods of time. A material and sustained decline in gross margin on diesel
fuel sales would adversely affect our profitability. See "--Price Competition
in the Diesel Fuel Market can be Intense and May Adversely Affect Our
Profitability."
In 1997, we entered into an agreement with Mobil to supply all of the diesel
fuel sold at all company-operated and 12 franchise-operated Petro Stopping
Centers. The price we pay Mobil for diesel fuel is based upon a formula
determined by site, established on an annual basis. The formula allows us to
buy diesel through Mobil from third parties, if Mobil does not have adequate
supply or its prices are not competitive. To the extent that Mobil is unable to
meet our fuel needs from its own supply sources, we retain the right to seek
third-party sources of diesel supply, for which we may have to pay a price
different than the formula based pricing set forth in the Mobil fuel supply
agreement.
Numerous factors outside of our control may increase diesel fuel costs. For
example, we experienced rapid increases in diesel fuel costs during the latter
part of 1990, due to a combination of the effects of Iraq's invasion of Kuwait
and recessionary conditions in the United States. Similarly, during the first
quarter of 1999 fires at three California oil refineries and OPEC-imposed
reductions in oil production resulted in a rapid increase in diesel fuel costs.
During periods of very rapid increases we may not be able to keep pace at the
retail level with these rising costs because of competitive market conditions,
and therefore our fuel margins could be adversely affected. In addition, sharp
increases in diesel fuel retail prices at truck stops have historically led to
temporary declines in diesel fuel sales volumes.
An Interruption of Our Diesel Fuel Supply is Possible, Beyond Our Control,
and Would Have a Disruptive Effect on Our Business.
Unforeseeable interruptions in world fuel markets may cause shortages in, or
total curtailment of, fuel supplies world-wide. Any such shortages or
curtailment would likely limit the amount of diesel fuel available for our
purchase. If we suffered a material decrease in our supply of diesel fuel for
an extended time period, it would have a material adverse effect on the results
of our operations by limiting our revenues and negatively impacting our
margins.
A Decreased Supply or Demand for Diesel Fuel Would also Affect Sales of Our
Non-Fuel Items.
Any significant and sustained reductions in fuel supplies and/or sustained
volatility in fuel prices could result in reductions in the demand for our
diesel fuel which could have a material adverse effect on the profitability of
our operations due to a decrease in our customer traffic and a resulting
negative impact on the revenues and profitability of other site operations,
including our restaurant operations and our travel stores.
If We are Not Able to Implement Our Growth Strategy, We May Not Have
Sufficient Liquidity to Repay the Notes
An important component of our business strategy is accelerating the growth
of our network by building new locations, acquiring existing truck stops and
building or acquiring stand-alone Petro:Lubes. We currently estimate that a
typical Petro Stopping Center will take approximately nine to twelve months to
build from the commencement of construction and will cost between $10 million
and $11 million, including land acquisition costs. The construction costs will
depend on, among other factors, site preparation costs, paving and landscaping
required by local regulations and local construction industry costs. Acquiring
existing truck stops and conforming them to our specifications will also
require significant funds. Our current projected capital expenditures related
to network growth for the years ending December 31, 1999 and 2000 are
approximately $19.5 million and $46.5 million, respectively. This projected
level of expenditures is a significant increase from
17
<PAGE>
our historical levels of capital expenditures related to new Petro Stopping
Centers, which were $13.8 million in 1995, $1.9 million in 1996, $7.3 million
in 1997 and $6.1 million in 1998, and were $11.2 million for the first nine
months of 1999. We plan to fund these capital outlays through additional bank
financing under the new senior credit facility, internally generated cash and
additional financing. These estimates are based on current conditions, and our
actual costs will be influenced by weather, market prices for land, labor and
construction materials, and legal and regulatory requirements. If our
construction costs exceed these estimates, expanding our network will require
additional expenditures of funds. There can be no assurance that any funds
will be available or that the expenditure of funds will not adversely impact
our liquidity. In addition, our ability to add new sites is hindered by the
limited availability of suitable locations along or near interstate highways
and, even if suitable sites are available, we may not be able to acquire,
lease or franchise them on economically reasonable terms. We cannot assure you
that we will be able to implement our growth strategy successfully, which
might have adverse effects on our future earnings and, consequently, on our
ability to repay the notes when they become due.
We May Have Difficulty Meeting our Debt Obligations if We Are Unable to
Finance our Expansion Program
Our current projected capital expenditures related to network growth for
the years ending December 31, 1999 and 2000 are approximately $19.5 million
and $46.5 million, respectively. We plan to fund these capital outlays through
additional bank financing under the new senior credit facility, internally
generated cash and additional financing. However, there can be no assurance
that any debt or equity financing would be available on acceptable terms when,
and if, suitable strategic opportunities arise or that we would be able to
enter into necessary debt or equity arrangements due to restrictions placed
upon our activities under the new senior credit facility, the 10 1/2% notes
and the notes. If we are unable to generate the necessary funds, we may be
unable to finance our planned expansion program. In addition, to the extent
that we finance our expansion through borrowing, our ability to meet our debt
obligations and our liquidity will be affected. See "--Our Indebtedness
Results in Significant Debt Service Obligations that May Limit Our Ability to
Expand and to Respond to Changing Market Conditions" and "--The Covenants in
Our Debt Instruments May Limit Our Ability to Finance Our Future Growth and
Could Create Defaults Under Those Agreements."
Price Competition in the Diesel Fuel Market can be Intense and May Adversely
Affect our Profitability
The truck stop industry is highly competitive and fragmented. We believe
long-haul trucks can obtain diesel fuel from approximately 2,000 truck stops,
plus other sources, including their own fueling terminals, limited service
fueling facilities and some large service stations. Moreover, long-haul truck
fleets often have their truck maintenance performed at dedicated fleet
garages. We believe that, while we compete with all truck stops, our principal
competitors are increasingly other large, multi-service truck stop chains. Our
competitors could gain market share if they adopt pricing strategies or
marketing policies that we are unwilling to meet or if they provide products
or services that we do not offer. In addition, since our principal competitors
have substantially greater financial and marketing resources than we do, they
may be able to offer products and services and expand their markets with
greater financial flexibility than we have. A loss in our market share could
have an adverse effect on our profitability. Some of our competitors offer
diesel fuel at discount prices, which has occasionally caused severe price
competition in some of our markets. This price competition is often
exacerbated by the demands of fleet purchasers who frequently demand lower
prices on fuel purchases and in some cases choose to do business in a
particular market only with lower cost fuel providers. See "Business--
Competition."
Our Profitability is Dependent on the Strength of the Trucking Industry
Our business is dependent upon the trucking industry in general and upon
the long-haul truck segment in particular. In turn, the trucking industry is
dependent on:
. economic factors, such as the level of domestic economic activity and
interest rates;
. operating factors, such as fuel prices and fuel taxes; and
. regulation factors, such as permitted daily driving time, fuel composition,
taxes and tolls.
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We have no control over these factors, which could contribute to a decline
in truck travel. The long-haul trucking business is also a relatively mature
industry. Any sustained decline in operations by the long-haul trucking
industry would adversely affect our financial performance. In addition,
available data indicate that diesel consumption by the trucking industry has
grown more slowly than trucking ton-miles, as technological improvements in
truck engines have increased their fuel efficiency. This trend is expected to
continue.
We derive approximately 65% of our revenues as a result of realtionships
with fleet accounts, under which we provide diesel fuel, products and services
to fleet vehicles and their drivers. Travel center and truck stop chains
compete aggresively for fleet account business and any significant reduction
in fleet accounts or sales to those accounts would adversely affect us. No
assurance can be given as to the continuation of the current level of fleet
business.
We are Subject to Extensive Environmental Regulations Related to Our
Underground Storage Tanks, Which Could Require Expenditures Which Would
Increase Our Expenses and Reduce Our Ability to be Profitable
As part of our business, we store and dispense a significant amount of
petroleum products. One of these activities is storing petroleum products in
undergorund storage tanks. During 1998, we completed upgrading the fuel lines
and tanks at all but one of our existing facilities to comply with federal and
state law. At the one remaining facility, we have upgraded to meet federal
standards and have worked with state authorities to develop an upgrade program
to comply with state law. We believe this program has brought this site into
compliance with state law. Our expenditures for environmental matters were
$180,000 in 1996, $154,000 in 1997, and $385,000 in 1998. Our 1999
environmental expenditures, which will be for upgrades, are currently
projected to be approximately $1.0 million. See Note 2 to our Consolidated
Financial Statements for the year ended December 31, 1998 for a discussion of
our accounting policies relating to environmental matters. If additional
regulatory requirements are imposed on us in the future, additional
expenditures may be required, which would increase our expenses and reduce our
ability to be profitable.
We May be Liable for Environmental Cleanup Costs for Toxic Substances and
Hazardous Wastes
Our ownership or use of the properties and the operation of our business
exposes us to liability under various federal, state, and local environmental
laws, ordinances and regulations relating to cleanup and removal of hazardous
substances, which may include petroleum and petroleum products, on, under, or
in such properties. Some environmental laws impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of
hazardous or toxic substances. Persons who arrange, or are deemed to have
arranged, for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of these substances at
the disposal or treatment site, regardless of whether the site is owned or
operated by this person.
During 1998, we utilized approximately 405 million gallons of diesel fuel,
gasoline, oils and lubricants in our business. When handling such a volume of
potentially environmentally sensitive materials, the possibility increases
that substantial remediation expenditures may be required either because of an
accident or in order to comply with existing regulations.
We, along with 55 other companies, are currently party to such a proceeding
with the U.S. Environmental Protection Agency, in which they have named us as
a potentially responsible party regarding the clean-up of a waste oil storage
and recycling plant located in Patterson, Stanislaus County, California. We
and approximately twenty of the other 55 companies identified by the EPA are
working together towards a resolution and plan of action for completion of the
removal activities required by the EPA. If a plan of action cannot be agreed
upon or if the EPA or State of California impose remediation requirements
beyond the scope presently contemplated based upon our current understanding
with the EPA, our liability could exceed our current expectations. See Note 15
to our Consolidated Financial Statements for the year ended December 31, 1998
and "Business--Governmental Regulation--Environmental Regulation."
The Loss of a Significant Number of Our Francisees Would Negatively Impact
our Ability to Market Ourselves as Nationawide Chain
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Of our 51 Petro Stopping Centers, 22 are operated under franchise
agreements with franchisees, with 4 franchisees operating multiple locations.
During 1996, our franchisees expressed dissatisfaction with the terms of their
franchise agreements and their relationship with us. In 1997, new management
began work with the franchisees to address their concerns and to modify the
then existing franchise agreements. Although we believe that the relationship
with our franchisees has improved significantly since 1996, there can be no
assurance that improved relations will continue. If a significant number of
our franchisees were to leave our network, it would negatively impact our
ability to market ourselves as a national chain.
In the spring of 1999 we completed the revised form of our franchise
agreement with significant input from various current Petro Stopping Center
franchisees. Each of our franchisees is being given the option of entering
into the revised franchise agreement or remaining subject to the terms of
their currently existing agreements until those agreements expire, at which
time the franchisee will be expected to enter into the new franchise
agreement.
The initial ten year term provided for in six of our oldest franchise
agreements, two of which are with entities affiliated with the Cardwells, has
elapsed. Under the terms of these agreements, unless written notice of
termination is received from the franchisee twelve months prior to the tenth
anniversary date of the opening of the franchise location, the franchise is
automatically renewed for five additional years. No notices of termination
were received from the affected franchisees. By agreement with the affected
franchisees, execution of a renewal franchise agreement was delayed pending
completion of the revised franchise agreement. The
revised franchise agreement has now been given to these franchisees for
execution and each franchisee has been given the choice to either enter into
the new agreement or remain as franchisees under the terms of their existing
agreement.
We May Incur Significant Costs to Make Our Systems "Year 2000" Ready
We are aware of the complexity and the significance of the "Year 2000"
issue. The Year 2000 issue is a result of computer programs being written
using two digits, rather than four, to define the applicable year. Any of our
systems that utilize date-sensitive software may recognize a date using "00"
as the year 1900 rather than as the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although we have day-to-day operational contingency plans, management has
updated these plans for possible Year 2000 specific operational requirements.
There can be no assurance that either we or our trading partners will not
experience Year 2000 readiness difficulties which could have a material
adverse effect on our business. The costs and expenses associated with such
failure are not presently estimable. We believe our worst case scenario
related to Year 2000 issues is scattered interruptions of power and other
services which we believe would not interfere with our business in a material
manner. However, network-wide power outages at our locations for extended
periods of time could significantly interrupt the provision of services to our
customers and have a material adverse effect on our business operations. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Impact of the Year 2000 Issue."
Increases in Minimum Wage Requirements Will Increase Our Expenses and Reduce
Our Ability to Operate Profitably
The federal minimum hourly wage rate was increased from $4.75 in October
1996 to its current rate of $5.15. In addition, states can institute minimum
wage requirements in excess of the federal limits. We believe we are
particularly sensitive to increases in the minimum wage due to high percentage
of our employees who are paid at minimum wage levels. Further increases in the
minimum wage could result in labor cost increases, which we may be unable to
pass on to our customers through increased prices and thus reduce our ability
to be profitable.
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements, including statements
about our business strategy, our expected financial position and operating
results, and our financing plans and similar matters. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
. General economic and business conditions, both nationally and in our
markets.
. Our expansion opportunities.
. Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition.
. Anticipated trends in our business, including those described in
"Management's Discussion and Analysis of Results of Operations and
Financial Condition."
. Existing and future regulations affecting our business.
. Other risk factors discussed in "Risk Factors."
In addition, in those and other portions of this prospectus, the words
"believe," "may," "will," "estimate," "continue," "anticipate," "intend,"
"expect" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. All forward-looking statements
attributable to us or to persons acting on our behalf are expressly qualified
in their entirety by this cautionary statement.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus might not transpire.
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THE EXCHANGE OFFER
Purpose and Effect
On July 23, 1999, we sold $113.4 million principal amount at stated maturity
of old notes in transactions exempt from the registration requirements of the
Securities Act. When we sold the old notes, we entered into a registration
rights agreement, and we agreed, for the benefit of the holders of the old
notes and at our expense, to:
. file on or prior to the 75th calendar day following July 23, 1999
this registration statement with the Commission;
. use our best efforts to cause this registration statement to be
declared effective under the Securities Act on or prior to the 150th
calendar day following July 23, 1999; and
. use our best efforts to consummate the exchange offer on or prior to
the 30th business day following the date this registration statement
is declared effective.
If we fail to meet the time frames described in the preceding paragraph, we
will have to pay additional interest on the old notes. Additional interest for
the first 90-day period immediately following the occurrence of our failure to
meet any of the above time frames is equal to $0.05 per week per $1,000
accreted value of the old notes. For every 90-day period following the first
90-day period that we failed to meet any of the above time frames, the
additional interest to be paid on the old notes for each subsequent 90-day
period will increase by $0.05 per week per $1,000 accreted value of the old
notes; however, the maximum additional interest amount cannot exceed $0.30 per
week per $1,000 accreted value of the old notes.
We will keep the exchange offer open for not less than 20 business days
after the date we mail notice of the exchange offer to you. The exchange offer
is intended to satisfy our obligations under the registration rights agreement.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes except that the new notes have been registered under
the Securities Act and will not bear legends restricting their transfer and,
will not have registration rights, as discussed below. The new notes will
evidence the same debt as the old notes and will be issued under, and entitled
to the benefits of, the indenture under to which the old notes were issued.
Consequences of Failure to Exchange Old Notes
Following the expiration of the exchange offer, holders of old notes not
tendered, or not properly tendered, will not have any further registration
rights, and will continue to be bound by the existing restrictions on the
transfer of the old notes. Accordingly, the liquidity of the market for a
holder's old notes will be adversely affected upon expiration of the exchange
offer if a holder elects to not participate in the exchange offer.
Terms of the Exchange Offer
We offer, upon the terms and conditions described herein and in the
accompanying letter of transmittal, to exchange $1,000 in principal amount at
stated maturity of the new notes for each $1,000 in principal amount at stated
maturity of the outstanding old notes. We will accept for exchange any and all
old notes that are validly tendered on or prior to 5:00 p.m., New York City
time, on the expiration date of the exchange offer. Tenders of old notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date of the exchange offer. The exchange offer is not conditioned upon any
minimum principal amount of old notes being tendered for exchange. However, the
exchange offer is governed by the terms and provisions of the registration
rights agreement. See "--Conditions of the Exchange Offer."
Old notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of old notes may tender less than the aggregate principal
amount represented by the old notes held by them, provided that they
appropriately indicate this fact on the letter of transmittal accompanying the
tendered old notes.
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<PAGE>
As of the date of this prospectus, $113.4 million in aggregate principal
amount at stated maturity of old notes is outstanding. Only a holder of old
notes or a holder's legal representative or attorney-in-fact may participate in
the exchange offer. There will be no fixed record date for determining holders
of old notes entitled to participate in the exchange offer.
We shall be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice to the exchange agent. The exchange
agent will act as agent for the tendering holders of old notes and for the
purposes of receiving the new notes from us.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of other events described herein or otherwise,
certificates for any unaccepted old notes will be returned, without expense, to
the tendering holder as promptly as practicable after the expiration date of
the exchange offer.
Expiration Date; Extensions; Amendments
The expiration date of the exchange offer shall be February 15, 2000 at 5:00
p.m., New York City time, unless we, in our sole discretion, extend the
exchange offer, in which case the expiration date shall be the latest date and
time to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will make a public announcement,
each prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
We reserve the right, in our sole discretion, to:
. delay accepting any old notes;
. extend the exchange offer;
. if any of the conditions discussed below under "--Conditions of the
Exchange Offer" shall not have been satisfied, terminate the
exchange offer, by giving oral or written notice of a delay,
extension or termination to the exchange agent; and
. amend the terms of the exchange offer in any manner.
If the exchange offer is amended in a manner which we determine to
constitute a material change, we will promptly disclose the amendments by means
of a prospectus supplement that will be distributed to the registered holders
of the old notes.
Conditions of the Exchange Offer
The exchange offer is not conditioned upon any minimum principal amount of
the old notes being tendered for exchange. However, the exchange offer is
conditioned upon the declaration by the Commission of the effectiveness of the
registration statement of which this prospectus constitutes a part.
Accrued Interest
Interest on the new notes will accrue at the rate of 15% per annum from
August 1, 2004. No additional interest will accrue or be paid on old notes
tendered and accepted for exchange. See "Description of the Notes--Principal,
Maturity and Interest."
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<PAGE>
Procedures for Tendering Old Notes
The tender of a holder's old notes as described below and our acceptance by
us will constitute a binding agreement between the tendering holder and us upon
the terms and the conditions described in this prospectus and in the
accompanying letter of transmittal. Except as described below, a holder who
wishes to tender old notes for exchange must transmit the old notes, together
with a properly completed and duly executed letter of transmittal, including
all other documents required by the letter of transmittal, to the exchange
agent at the address listed on the back cover page of this prospectus prior to
5:00 p.m., New York City time, on the expiration date of the exchange offer.
The method of delivery of old notes, letters of transmittal and all other
required documents is at the election and risk of the holder. If delivery is by
mail, it is recommended that registered mail, properly insured, with return
receipt requested, be used. Instead of delivery by mail, it is recommended that
you use an overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure timely delivery.
Each signature on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
are tendered:
. by a registered holder of the old notes who has not completed either
the box entitled "Special Exchange Instructions" or the box entitled
"Special Delivery Instructions" in the letter of transmittal or
. by an Eligible Institution (as defined immediately below).
In the event that a signature on a letter of transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, the guarantee
must be by a firm which is a member of a registered national securities
exchange or the National Association of Securities Dealers, Inc., a commercial
bank or trust company having an office or correspondent in the United States or
otherwise be an "eligible guarantor institution" within the meaning of the
Exchange Act (collectively, "Eligible Institutions"). If the letter of
transmittal is signed by a person other than the registered holder of the old
notes, the old notes surrendered for exchange must either:
. be endorsed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution or
. be accompanied by a bond power, in satisfactory form as determined
by us in our sole discretion, duly executed by the registered
holder, with the signature thereon guaranteed by an Eligible
Institution.
The term "registered holder" as used herein with respect to the old notes means
any person in whose name the old notes are registered on the books of the
registrar.
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of old notes tendered for exchange will be determined
by us in our sole discretion, which determination shall be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered and to reject any old notes, our acceptance of which might, in our
judgment or our counsel's judgment, be unlawful. We also reserve the absolute
right to waive any defects or irregularities or conditions of the exchange
offer as to particular old notes either before or after the expiration date of
the exchange offer. Our interpretation of the terms and conditions of the
exchange offer shall be final and binding on all parties. Unless waived, any
defects or irregularities arising from tenders of old notes for exchange must
be cured within a period of time as we shall determine. We will use reasonable
efforts to give notification of defects or irregularities with respect to
tenders of old notes for exchange but shall not incur any liability for failure
to give notification. Tenders of the old notes will not be deemed to have been
made until any irregularities have been cured or waived.
If any letter of transmittal, endorsement, bond power, power of attorney or
any other document required by the letter of transmittal is signed by a
trustee, executor, corporation or other person acting in a fiduciary or
representative capacity, the person should so indicate when signing and, unless
waived by us, proper evidence satisfactory to us, in our sole discretion, of
that person's authority to so act must be submitted.
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<PAGE>
Any beneficial owner of the old notes whose old notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender old notes in the exchange offer should contact the
registered holder promptly and instruct that registered holder to tender on
that beneficial owner's behalf. If the beneficial owner wishes to tender
directly, the beneficial owner must, prior to completing and executing the
letter of transmittal and tendering old notes, make appropriate arrangements to
register ownership of the old notes in the beneficial owner's name. Beneficial
owners should be aware that the transfer of registered ownership may take
considerable time.
By tendering, each registered holder will represent to us that, among other
things:
. the new notes to be acquired by the holder and each beneficial owner
of the old notes are being acquired by the holder and each
beneficial owner in the ordinary course of business of the holder
and each beneficial owner;
. the holder and each beneficial owner are not participating, do not
intend to participate, and have no arrangement or understanding with
any person to participate, in the distribution of the new notes;
. the holder and each beneficial owner acknowledge and agree that any
person participating in the exchange offer for the purpose of
distributing the new notes must comply with the registration and
prospectus delivery requirements of the Securities Act and cannot
rely on the position of the staff of the Commission given in no-
action letters that are discussed herein under "--Resales of New
Notes;"
. that if the holder is a broker-dealer that acquired old notes as a
result of market-making or other trading activities, it will deliver
a prospectus when any resale of new notes acquired in the exchange
offer occurs;
. the holder and each beneficial owner understand that a secondary
resale transaction described in the third bullet point above should
be covered by an effective registration statement containing the
selling security holder information required by Item 507 of
Regulation S-K of the Commission; and
. neither the holder nor any beneficial owner is an "affiliate," as
defined under Rule 405 of the Securities Act, of us except as
otherwise disclosed to us in writing.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes and whose old notes are not
immediately available or who cannot deliver their old notes or any other
documents required by the letter of transmittal to the exchange agent prior to
the expiration date of the exchange offer may tender their old notes according
to the guaranteed delivery procedures discussed in the letter of transmittal.
Pursuant to those procedures:
. the tender must be made by or through an Eligible Institution and a
notice of guaranteed delivery must be signed by the holder;
. on or prior to the expiration date of the exchange offer, the
exchange agent must have received from the holder and the Eligible
Institution a properly completed and duly executed notice of
guaranteed delivery. The notice of guaranteed delivery states the
name and address of the holder, the certificate number or numbers of
the tendered old notes, and the principal amount of tendered old
notes, stating that the tender is being made thereby and
guaranteeing that, within four business days after the date of
delivery of the notice of guaranteed delivery, the tendered old
notes, a duly executed letter of transmittal and any other required
documents will be deposited by the Eligible Institution with the
exchange agent; and
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<PAGE>
. the properly completed and executed documents required by the letter
of transmittal and the tendered old notes in proper form for
transfer or confirmation of a book-entry transfer of the old notes
into the exchange agent's account at the DTC must be received by the
exchange agent within four business days after the expiration date
of the exchange offer.
Any holder who wishes to tender old notes by following the guaranteed delivery
procedures described above must ensure that the exchange agent receives the
notice of guaranteed delivery and letter of transmittal relating to the old
notes prior to 5:00 p.m., New York City time, on the expiration date of the
exchange offer.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of the conditions to the exchange offer, we will
accept any and all old notes that are properly tendered in the exchange offer
prior to 5:00 p.m., New York City time, on the expiration date of the exchange
offer. The new notes will be delivered promptly after acceptance of the old
notes. For purposes of the exchange offer, we shall be deemed to have accepted
validly tendered old notes, when, as, and if we have given oral or written
notice to the exchange agent.
In all cases, issuances of new notes for old notes that are accepted for
exchange will be made only after timely receipt by the exchange agent of the
old notes, a properly completed and duly executed letter of transmittal and all
other required documents or of confirmation of a book-entry transfer of the old
notes into the exchange agent's account at the DTC; provided, however, that we
reserve the absolute right to waive any defects or irregularities in the tender
or conditions of the exchange offer. If any tendered old notes are not accepted
for any reason, we will return any unaccepted old notes without expense to the
tendering holder as promptly as practicable after the expiration or termination
of the exchange offer.
Withdrawal Rights
Tenders of the old notes may be withdrawn by delivery of a written notice to
the exchange agent, at its address listed on the back cover page of this
prospectus, at any time prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. Any notice of withdrawal must:
. specify the name of the person having deposited the old notes to be
withdrawn;
. identify the old notes to be withdrawn, including the certificate number
or numbers and principal amount of the old notes, as applicable;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered or be
accompanied by a bond power in the name of the person withdrawing the
tender, in satisfactory form as determined by us in our sole discretion,
duly executed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution together with the other documents
required upon transfer by the indenture; and
. specify the name in which the old notes are to be re-registered, if
different from the depositor of the old notes.
Any questions as to the validity, form and eligibility of notices will be
determined by us, in our sole discretion. The old notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
exchange offer. Any old notes which have been tendered for exchange but which
are withdrawn will be returned to the holder without cost to the holder as soon
as practicable after withdrawal. Properly withdrawn old notes may be retendered
by following one of the procedures described under "The Exchange Offer--
Procedures for Tendering Old Notes" at any time on or prior to the expiration
date of the exchange offer.
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<PAGE>
The Exchange Agent; Assistance
State Street Bank and Trust Company is the exchange agent. All tendered old
notes, executed letters of transmittal and other related documents should be
directed to the exchange agent. Questions and requests for assistance and
requests for additional copies of the prospectus, the letter of transmittal and
other related documents should be addressed to the exchange agent as follows:
By Registered or Certified Mail:
State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, MA 02102-0778
Attn.: Jacklyn Thompson
By Facsimile:
State Street Bank and Trust Company
(617) 662-1465
Attention: Jacklyn Thompson
Confirm by Telephone: (617) 662-1685
By Overnight Courier:
State Street Bank and Trust Company
2 Avenue de Lafayette
Fifth Floor, Corporate Trust Window
Boston, MA 02111-1724
Attn.: Jacklyn Thompson
By Hand:
State Street Bank and Trust Company
2 Avenue de Lafayette
Fifth Floor, Corporate Trust Window
Boston, MA 02111-1724
Attn.: Jacklyn Thompson
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Fees and Expenses
All expenses incident to our consummation of the exchange offer and
compliance with the registration rights agreement will be borne by us,
including, without limitation:
. all registration and filing fees, which include, without limitation,
fees and expenses of compliance with state securities or "blue sky"
laws;
. printing expenses, which include, without limitation, expenses of
printing certificates for the new notes in a form eligible for
deposit with the DTC and of printing prospectuses;
. messenger, telephone and delivery expenses;
. fees and disbursements of our counsel;
. fees and disbursements of our accountants;
. rating agency fees; and
. our internal expenses, which include, without limitation, all
salaries and expenses of our officers and other employees performing
legal or accounting duties.
We have not retained any dealer-manager for the exchange offer and will not
make any payments to brokers, dealers or others soliciting acceptance of the
exchange offer. We will, however, pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable out-
of-pocket expenses.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes. If, however, a transfer tax is imposed for any reason other than the
exchange of old notes, then the amount of any transfer taxes will be payable by
the tendering holder. If satisfactory evidence of payment of these taxes or
exemption is not submitted with the letter of transmittal, the amount of any
transfer taxes will be billed directly to any tendering holder.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes,
as reflected in our accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by us for accounting purposes.
The expenses we incur to consummate the exchange offer will be amortized over
the term of the new notes.
Federal Income Tax Consequences
The following discussion summarizing federal income tax consequences of the
exchange offer is the opinion of Gibson, Dunn, & Crutcher LLP, our counsel, as
to material federal income tax consequences expected to result from the
exchange offer. An opinion of counsel is not binding on the IRS or the courts,
and there can be no assurances that the IRS will not take, and that a court
would not sustain, a position contrary to that described below. The summary is
based on the current provisions of the Internal Revenue Code of 1986, as
amended, and applicable Treasury Regulations, judicial authority and
administrative pronouncements. The tax consequences described below could be
modified by future changes in the relevant law, which could have retroactive
effect.
Exchanges of old notes for new notes will be treated as a modification of
the old notes that does not constitute a material change in their terms, and we
intend to treat the exchanges in that manner. Under that approach, a new note
is treated as a continuation of the corresponding old note. An exchanging
holder's holding period for a new note would include the holder's holding
period for the old note. Such holder would not recognize any gain or loss, and
the holder's basis in the new note would be the same as the holder's basis in
the old note. The exchange offer will result in no federal income tax
consequences to a non-exchanging holder.
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Resales of the New Notes
Based on an interpretation by the staff of the Commission given in no-action
letters issued to third parties, we believe that the new notes issued to a
holder in exchange for old notes may be offered for resale, resold and
otherwise transferred by holders without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the new notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the new notes. This interpretation of the
staff of the Commission does not apply to holders who are broker-dealers who
purchased old notes directly from us for resale under Rule 144A under the
Securities Act or any other available exemption under the Securities Act or
affiliates of us within the meaning of Rule 405 under the Securities Act.
We have not requested or obtained an interpretive letter from the Commission
staff with respect to this exchange offer, and neither we nor the holders are
entitled to rely on interpretive advice provided by the staff to other persons,
which advice was based on the facts and conditions represented in those
letters. However, the exchange offer is being conducted in a manner intended to
be consistent with the facts and conditions represented in those letters. If
any holder acquires new notes in the exchange offer for the purpose of
distributing or participating in a distribution of the new notes, that, holder
cannot rely on the position of the staff of the Commission enunciated in Morgan
Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Financial
Corporation (available April 13, 1989), or interpreted in the Commission's
letter to Shearman and Sterling (available July 2, 1993), or similar no-action
or interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act unless an exemption from
registration is otherwise available.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where the old notes were acquired by the broker-dealer as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus when any resale of the new notes occurs. See "Plan of
Distribution."
Sales of new notes acquired in the exchange offer by holders who are
"affiliates" of us within the meaning of the Securities Act will have
limitations on resale under Rule 144 of the Securities Act. Such persons will
only be entitled to sell new notes in compliance with the volume limitations
described in Rule 144, and sales of new notes by affiliates will have to meet
Rule 144 requirements as to the manner of sale, notice and the availability of
current public information regarding us. The foregoing is a summary only of
Rule 144 as it may apply to affiliates of us. Any affiliate must consult their
own legal counsel for advice as to any restrictions that might apply to the
resale of their notes.
The new notes will be freely transferable, except as otherwise described in
this section.
29
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the exchange of new notes for old
notes. When the old notes and the related warrants were originally sold for
cash, Holdings received gross proceeds of approximately $40 million, which were
utilized in the Recapitalization. The following table outlines the uses of the
funds employed in the Recapitalization and their sources (dollars in millions):
<TABLE>
<S> <C>
Sources of Cash:
New senior credit facility...................................... $ 40.0
Sale of old notes ($30.3 million) and warrants ($9.7 million)... 40.0
Old notes issued to Chartwell................................... 11.2(a)
Volvo Trucks investment......................................... 30.0
Mobil investment................................................ 5.0
------
Total sources................................................. $126.2
======
Uses of Cash:
Purchase of Chartwell partnership interests..................... $ 66.2(b)
Purchase of Kirschner partnership interests..................... 2.8
Repay old senior credit facility, including accured interest.... 38.1
Working capital................................................. 10.8
Recapitalization expenses....................................... 8.3
------
Total uses.................................................... $126.2
======
</TABLE>
- --------
(a) No cash proceeds were received from the issuance of these notes to
Chartwell. They were issued as part of the consideration paid to Chartwell
to repurchase Chartwell's partnership interest in the Operating
Partnership.
(b) Consisted of $55.0 million in cash and $14.8 million of old notes, less an
additional discount of $3.6 million to reflect a market rate of interest
equal to the interest rate on the old notes that were sold for cash.
30
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization before and after the
Recapitalization. The Recapitalization reflects the consummation of and the
application of the net proceeds from
. the investment in Holdings of new equity capital by Volvo Trucks and
additional equity capital by Mobil;
. the purchase by Holdings of the interests in the Operating Partnership held
by Chartwell and Kirschner;
. the Operating Partnership entering into the new senior credit facility and
immediately borrowing $40 million to repay the old senior credit facility;
and
. the sale by Holdings of the old notes and the exchangeable warrants of Petro
Warrant Holdings Corporation.
<TABLE>
<CAPTION>
Before After
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Cash and cash equivalents............................. $ 19,401 $ 30,293
========= =========
Long-term debt (including current portion):
Senior credit facility.............................. $ 38,056 $ 40,000
12 1/2% notes....................................... 6,190 6,190
10 1/2% notes....................................... 135,000 134,325 (a)
Capital lease obligation............................ 1,003 1,003
15% Senior Discount Notes Due 2008.................. -- 41,548 (b)
--------- ---------
Total long-term debt................................ 180,249 223,066
Other:
Minority interest in consolidated subsidiaries...... 21,844 -- (c)
Mandatorily redeemable preferred partnership
interests.......................................... 24,207 29,207 (d)
Contingently redeemable warrants.................... -- 9,700 (b)
Partners' deficit..................................... (44,349) (17,643)(e)
--------- ---------
Total capitalization............................ $ 181,951 $ 244,330
========= =========
</TABLE>
- --------
(a) The decrease in the 10 1/2% notes is due to the consent solicitation fee
paid to the holders of those notes in connection with the Recapitalization.
Pursuant to EITF 96-19 "Debtors Accounting for a Modification or Exchange
of Debt Instruments," the fee is treated as a discount and will be
amortized to interest expense over the remaining term of the 10 1/2% notes.
(b) Reflects the gross proceeds of approximately $40.0 million from the sale of
the old notes ($30.3 million) and warrants exchangeable into all of the
common stock of Petro Warrant Holdings Corporation ($9.7 million) and
approximately $11.2 million from the old notes issued to Chartwell and the
segregation of the fair value of the warrants of approximately $9.7 million
to contingently redeemable warrants. Holdings has a contingent obligation
to purchase the warrants issued by Petro Warrant Holdings Corporation. The
contingent obligation is outside the control of Holdings, and, therefore,
the warrants are classified outside partners' capital (deficit).
(c) The decrease is due to the purchase by Holdings of Chartwell's and
Kirschner's interests in the Operating Partnership.
(d) The increase in the preferred partnership interests is due to the
additional $5.0 million investment by Mobil.
(e) Reflects the $30.0 million equity investment by Volvo Trucks in the common
partnership interests of Holdings offset by $1.3 million in transaction
costs that must be expensed currently and the $2.0 million write-off of
deferred debt issuance costs related to the prior senior credit facility.
Included in partners' deficit before and after the Recapitalization are the
negative capital accounts ($0.6 million) of the remaining 0.5% of the
Operating Partnership interests held by the Cardwells. Pursuant to ARB 51
"Consolidated Financial Statements," debit balances of minority interests
arising from losses applicable to the minority interests should be charged
to the majority interests.
31
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated statements of income of Holdings for
the year ended December 31, 1998 and for the nine months ended September 30,
1999 have been prepared to reflect
. the investment in Holdings of new equity capital by Volvo Trucks and
additional equity capital by Mobil;
. the purchase by Holdings of the interests in the Operating Partnership held
by Chartwell and Kirschner;
. the Operating Partnership entering into the new senior credit facility; and
. the sale by Holdings of the old notes and the exchangeable warrants of Petro
Warrant Holdings Corporation.
Please see "Use of Proceeds" for the sources and uses of the proceeds and
see "Certain Relationships and Related Transactions--Recapitalization
Agreement" for a description of the terms of the above described transactions.
The pro forma consolidated statements of income have been prepared as if
such transactions occurred as of January 1, 1998. The Pro Forma Consolidated
Financial Statements include the historical consolidated financial statements
of Holdings and reflect the transactions described above. The Pro Forma
Consolidated Financial Statements are not necessarily indicative of the results
of operations of Holdings had the transactions therein actually been
consummated on the dates assumed and are not necessarily indicative of the
results of operations for any future period. The pro forma adjustments, as
described in the notes to the statements of income, are based on available
information and upon certain assumptions that management believes are
reasonable. The Pro Forma Consolidated Financial Statements should be read in
conjunction with "Summary Historical and Pro Forma Consolidated Financial
Data," "Selected Historical Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Holdings' consolidated financial statements, including the footnotes, contained
elsewhere herein.
32
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
--------------------------------- ---------------------------------
Pro Forma Pro Pro Forma Pro
Historical Adjustments Forma Historical Adjustments Forma
---------- ----------- -------- ---------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Fuel (including motor
fuel taxes)........... $464,025 -- $464,025 $357,154 -- $357,154
Nonfuel................ 189,391 -- 189,391 148,607 -- 148,607
-------- ------- -------- -------- ------- --------
Total net revenues.... 653,416 -- 653,416 505,761 -- 505,761
Costs and expenses
Cost of sales
Fuel (including motor
fuel taxes).......... 422,945 -- 422,945 328,427 -- 328,427
Nonfuel............... 76,451 -- 76,451 59,817 -- 59,817
Operating expenses..... 93,012 -- 93,012 73,630 -- 73,630
General and
administrative........ 19,335 (900)(a) 18,435 14,423 (502)(a) 13,921
Depreciation and
amortization.......... 15,749 2,394 (b) 18,143 10,401 1,335 (b) 11,736
(Gain) loss on
disposition of
assets................ -- -- -- (849) -- (849)
-------- ------- -------- -------- ------- --------
Total costs and
expenses............. 627,492 1,494 628,986 485,849 833 486,682
-------- ------- -------- -------- ------- --------
Operating income........ 25,924 (1,494) 24,430 19,912 (833) 19,079
Recapitalization costs.. -- -- -- 1,450 (1,450)(c) --
Equity in loss of
affiliate.............. -- -- -- 451 -- 451
Interest expense, net... 20,042 8,625 (d) 28,656 16,798 4,810 (d) 21,603
755 (e) 421 (e)
(448)(f) (248)(f)
75 (g) 42 (g)
3,300 (h) 1,840 (h)
(3,693)(i) -- (2,060)(i) --
-------- ------- -------- -------- ------- --------
Income (loss) from
continuing operations
before minority
interest............... 5,882 (10,108) (4,226) 1,213 (5,638) (4,425)
Minority interest in
earnings (loss) of
consolidated
subsidiaries........... 1,286 (1,286)(j) -- 1,438 (1,438)(j) --
-------- ------- -------- -------- ------- --------
Income (loss) from
continuing operations.. $ 4,596 $(8,822) $ (4,226) $ (225) $(4,200) $ (4,425)
======== ======= ======== ======== ======= ========
Ratio of earnings to
fixed charges or
deficiency............. 1.26x $ (4,226) 1.07x $ (4,425)
</TABLE>
33
<PAGE>
Notes to Pro Forma Consolidated Statements of Income
(a) Reflects the elimination of management fee expense paid to Chartwell and
Mobil. After the Recapitalization, none of the partners will receive a
management fee. We do not expect to hire any additional employees or retain
any outside services to compensate for the termination of these management
agreements.
(b) Reflects the depreciation of $575,000 for 1998, and $321,000 for the
interim period prior to July 23, 1999, of 1999, on the stepped-up portion
of buildings, furniture, and equipment over their estimated useful lives of
30 years for buildings, 8 years for equipment, and 8 years for furniture
and fixtures and amortization of $1,819,000 for 1998, and $1,014,000 for
the interim period prior to July 23, 1999, of goodwill over 20 years
related to the acquisition of both Chartwell's and Kirschner's interest in
the Operating Partnership. In accordance with the purchase method of
accounting, Holdings allocated the excess of the purchase price over net
book value first to identifiable tangible and intangible assets (only to
the extent of the interests acquired) with the remaining excess then
allocated to goodwill.
(c) Reflects the elimination of nonrecurring recapitalization costs directly
attributable to the transaction.
(d) Reflects the adjustment to interest expense related to the old notes which
were issued at a face value of $113,400,000 and a discounted value of
$41,548,000. The discount of $62,152,000 related to the 5 year non-interest
paying term of the old notes is amortized under the interest method at
18.2% per year. Additionally, the $9,700,000 discount related to the
Warrants issued with the $82,707,000 face value old notes is amortized over
the full term of those notes using the interest method resulting in an
effective rate of 18.2% per year.
(e) Reflects the amortization to interest expense of the deferred debt issuance
costs of $3,500,000 attributable to the old notes and $2,200,000
attributable to the new senior credit facility incurred in conjunction with
the Recapitalization. Deferred debt issuance costs are amortized over 9
years for the old notes and 7 years for the new senior credit facility
under the interest method.
(f) Reflects the adjustment to eliminate the historical amortization of
deferred debt issuance costs related to the prior senior credit facility in
place before the new senior credit facility.
(g) Reflects the amortization of the discount associated with the $675,000
consent solicitation fee on the 10 1/2% notes paid in connection with the
Recapitalization. This fee is being amortized over the remainder of the 9
year term of the 10 1/2% notes.
(h) Reflects the interest expense related to borrowings under the new senior
credit facility. Interest expense on the new senior credit facility is
based on the September 30, 1999 Eurodollar rate of 5.28% plus the
applicable spread (3.0%). An interest rate change of 1/8% will have a
$50,000 effect on income.
(i) Reflects the adjustment to eliminate the historical interest expense
related to borrowings under the prior senior credit facility in place
before the new senior credit facility.
(j) Reflects the elimination of the Chartwell and Kirschner minority interests
in the Operating Partnership's net income for 1998 ($1,235,000 related to
Chartwell's 50.8% interest and $51,000 related to Kirschner's 2.0%
interest) and for the interim period prior to July 23, 1999 ($1,384,000
related to Chartwell and $54,000 related to Kirschner). Historical and pro
forma minority interest in the net income of the Operating Partnership
owned by Petro, Inc. (0.25% sole general partner interest) and an affiliate
of the Cardwell's (0.25%) is allocated to the majority interest pursuant to
ARB 51.
34
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data of Holdings. The selected income statement data for the years
ended December 30, 1994 and December 29, 1995 and the selected balance sheet
data as of December 30, 1994, December 29, 1995, and December 31, 1996, have
been derived and calculated from Holdings' financial statements not included
herein. The selected income statement data for the years ended December 31,
1996, 1997, and 1998 and the selected balance sheet data as of December 31,
1997 and 1998, have been derived and calculated from Holdings' audited
financial statements included elsewhere herein. The selected income statement
data for the nine months ended September 30, 1998 and 1999, and the selected
balance sheet data as of September 30, 1998 have been derived and calculated
from Holdings' unaudited financial statements included elsewhere herein. The
selected balance sheet data as of September 30, 1998 have been derived and
calculated from Holdings' unaudited financial statements not included herein.
The unaudited financial statements include all adjustments (consisting only of
normal recurring adjustments) which Holdings considers necessary for a fair
presentation of Holdings' financial position and results of operations for
these periods. Operating results for the nine months ended September 30, 1998
and 1999, are not necessarily indicative of the results that may be expected
for a full year. The Selected Historical Consolidated Financial Data should be
read in conjunction with "Summary Historical and Pro Forma Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and Holdings' consolidated financial statements,
including the footnotes contained elsewhere herein.
35
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months
Year Ended Year Ended Year Ended Year Ended Year Ended Ended September 30,
December 30, December 29, December 31, December 31, December 31, --------------------
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
Fuel (including motor fuel
taxes).................... $350,570 $385,181 $478,312 $513,571 $464,025 $ 353,572 $ 357,154
Nonfuel.................... 137,323 147,834 158,745 172,158 189,391 141,805 148,607
-------- -------- -------- -------- -------- --------- ---------
Total net revenues....... 487,893 533,015 637,057 685,729 653,416 495,377 505,761
Costs and expenses
Cost of sales
Fuel (including motor
fuel taxes)............. 317,945 352,207 443,967 476,033 422,945 322,922 328,427
Nonfuel.................. 55,491 59,686 67,464 70,548 76,451 57,374 59,817
Operating expenses......... 64,968 73,052 81,522 85,560 93,012 69,136 73,630
General and
administrative............ 11,448 12,053 13,925 17,035 19,335 14,378 14,423
Employee severance, benefit
and placement expenses.... -- -- 2,534 -- -- -- --
Depreciation and
amortization.............. 8,851 11,144 12,204 14,315 15,749 11,413 10,401
(Gain) loss on disposition
of assets................. -- -- -- -- -- 13 (849)
-------- -------- -------- -------- -------- --------- ---------
Total costs and
expenses................ 458,703 508,142 621,616 663,491 627,492 475,236 485,849
-------- -------- -------- -------- -------- --------- ---------
Operating income............ 29,190 24,873 15,441 22,238 25,924 20,141 19,912
Recapitalization costs...... -- -- 2,938 -- -- -- 1,450
Equity in loss of
affiliate.................. -- -- -- -- -- -- 451
Interest expense, net....... 18,711 21,098 21,263 20,292 20,042 15,046 16,798
-------- -------- -------- -------- -------- --------- ---------
Income (loss) before
extraordinary item,
minority interest in
earnings (loss) of
consolidated subsidiaries,
and cumulative effect of a
change in accounting
principle................. 10,479 3,775 (8,760) 1,946 5,882 5,095 1,213
Extraordinary item(a)...... 5,250 -- -- 12,745 -- -- 2,016
Cumulative effect of a
change in accounting
principle(b)(c)........... -- -- -- 1,579 3,250 -- --
Minority interest in
earnings (loss) of
consolidated subsidiaries.. 2,307 1,729 (3,969) (6,642) 1,286 2,637 1,438
-------- -------- -------- -------- -------- --------- ---------
Net income (loss)(d)(e).... $ 2,922 $ 2,046 $ (4,791) $ (5,736) $ 1,346 $ 2,458 $ (2,241)
======== ======== ======== ======== ======== ========= =========
Balance Sheet Data:
(at end of period)
Working capital............ $ (8,922) $ (9,607) $(13,863) $ 3,850 $ (3,060) $ 4,031 $ 1,950
Total assets............... 206,148 221,699 209,100 235,953 223,490 235,101 298,718
Total debt................. 161,459 168,392 166,727 183,190 181,328 180,846 224,396
Minority interest in
consolidated
subsidiaries.............. 38,131 39,685 35,716 21,051 21,290 22,894 --
Mandatorily redeemable
preferred partnership
interests................. -- -- -- 21,202 23,172 22,674 29,858
Contingently redeemable
warrants.................. -- -- -- -- -- -- 9.700
Partners' capital
(deficit)................. (30,253) (27,760) (32,551) (44,319) (44,721) (42,541) (18,664)
Other Financial Data:
Net cash provided by
operating activities...... $ 13,084 $ 12,766 $ 14,668 $ 30,328 $ 11,333 $ 10,627 $ 17,208
Net cash used in investing
activities................ (18,915) (21,130) (5,337) (15,779) (19,659) (11,936) (81,776)
Net cash provided by (used
in) financing activities.. 2,441 10,229 (11,837) 7,065 (3,287) (2,344) 67,174
Capital expenditures(f).... 8,428 19,508 5,523 15,870 20,309 13,018 22,123
Ratio of earnings to fixed
charges or deficiency(g).. 1.54x 1.17x $ (8,760) 1.08x 1.26x 1.31x 1.07x
</TABLE>
36
<PAGE>
Notes to Selected Historical Consolidated Financial Data
(a) Extraordinary item reflects write-off of deferred debt issuance costs
associated with retired debt.
(b) Cumulative effect of a change in accounting principle in 1997 reflects
expensing of costs related to process reengineering activities as required
by Emerging Issues Task Force Issue No. 97-13.
(c) Cumulative effect of a change in accounting principle in 1998 reflects
expensing of organization and start-up costs as required by AICPA Statement
of Position 98-5.
(d) No provision for income taxes is reflected in the financial statements as
Holdings is a partnership for which taxable income and tax deductions are
passed through to the individual partners.
(e) Holdings considers EBITDA to be meaningful to investors in understanding
its operating performance because Holdings has no publicly traded equity
securities, Holdings is capitalized largely with long-term debt (creating a
significant amount of interest expense), and Holdings operates as a
partnership (it does not have a provision for income taxes). EBITDA
represents operating income plus depreciation and amortization. EBITDA
data, which is not a measure of financial performance under generally
accepted accounting principles, is presented because such data is used by
certain investors to determine a company's ability to meet historical debt
service requirements. Such data should not be considered as an alternative
to net income as an indicator of Holdings' operating performance or as an
alternative to cash flows as a measure of liquidity. EBITDA results were
$38.0 million, $36.0 million, $32.1 million, $36.6 million and $41.7
million for 1994, 1995, 1996, 1997 and 1998, respectively and $31.6 million
and $30.3 million for the interim periods in 1998 and 1999, respectively.
EBITDA results for fiscal 1996 exclude certain one-time charges related to
the 1997 recapitalization and the change in management and operations.
Included in the one-time charges were $2.5 million related to severance and
hiring costs; $1.4 million in obsolete inventory reserves, included in cost
of sales; and $0.5 million in insurance related costs.
(f) Capital expenditures primarily represent the cost of new Petro Stopping
Centers and maintenance of existing Petro Stopping Centers. Holdings had no
capital expenditures related to new Petro Stopping Centers in 1994. Capital
expenditures related to new Petro Stopping Centers were $13.8 million,
$1.9 million, $7.3 million and $6.1 million in 1995, 1996, 1997 and 1998,
respectively, and were $11.2 million for the first nine months of 1999.
(g) On a pro forma basis, after giving effect to the Recapitalization, the
deficiency of earnings to fixed charges would have been $4.2 million in
1998 and $4.4 million for the 1999 interim period.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Reporting Format
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which we adopted in 1998. SFAS No. 131
requires us to identify and report information regarding operating segments of
our business. The two reportable operating segments identified are our company-
operated truck stops and our franchise truck stops operations.
We operate large, multi-service truck stops in the United States. Our
facilities, which are known as Petro Stopping Centers, offer a broad range of
products, services and amenities, including diesel fuel, gasoline, home-style
restaurants, truck preventive maintenance centers and retail merchandise stores
to the highway motorist. We have aggregated our corporate truck stop operations
into one reportable operating segment based on the distribution of products and
services under one common site facility, classified as a multi-service truck
stop.
In addition to corporate operations, we are a franchisor to 22 Petro
Stopping Center locations. We collect royalties and fees in exchange for the
use of our name and for services provided to the franchisees. During the nine
months ended September 30, 1998 the revenues generated from our franchise
operations were $3,383,000 and during the nine months ended September 30, 1999,
the revenues were $3,743,000. During 1996 the revenues were $3,397,000; during
1997, they were $3,954,000; and during 1998, they were $4,497,000. The
increases in our franchise revenues are due to the addition of seven new
franchise locations since January 1996. These revenues are included in non-fuel
revenues reported on the accompanying consolidated statements of operations. We
do not allocate any expenses or assets in measuring this segment's profit and
loss.
We derive our revenues from:
. the sale of diesel and gasoline fuels;
. non-fuel items, including the sale of merchandise and offering of services
including truck tire sales and preventative maintenance, weighing scales,
showers, laundry, video games, franchise royalties and other operations; and
. restaurant operations which include Iron Skillet and fast-food operations.
The following table sets forth our total revenues by major source:
SUMMARY OF OUR SOURCES OF REVENUE
<TABLE>
<CAPTION>
Nine Months Ended September
Year ended December 31, 30,
---------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- ------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fuel.................... $478,312 75.1% $513,571 74.9% $464,025 71.0% $353,572 71.4% $357,154 70.6%
Non-Fuel................ 111,410 17.5% 122,609 17.9% 136,145 20.8% 101,699 20.5% 107,247 21.2%
Restaurant.............. 47,335 7.4% 49,549 7.2% 53,246 8.2% 40,106 8.1% 41,360 8.2%
-------- ----- -------- ----- -------- ----- -------- ---- -------- -----
Total Net Revenue....... $637,057 100.0% $685,729 100.0% $653,416 100.0% $495,377 100% $505,761 100.0%
======== ===== ======== ===== ======== ===== ======== ==== ======== ===== ===
</TABLE>
Our fuel revenues and cost of sales include federal and state motor fuel
taxes. Such taxes were $175.9 million for the year ended December 31, 1996,
$192.7 million for the year ended December 31, 1997,
38
<PAGE>
and $203.3 million for the year ended December 31, 1998. Such taxes were $155.1
million for the nine-month period ended September 30, 1998 and $152.6 million
for the nine-month period ended September 30, 1999.
No provision for income taxes is reflected in the financial statements
because we are a partnership for which taxable income and tax deductions are
passed through to the individual partners.
Holdings Formation
Holdings was formed in July 1999 as a holding partnership and conducts
substantially all of its operations through the Operating Partnership. As a
result of the Recapitalization (described below), the partners of Holdings are
as follows:
General Partner
Petro, Inc.
Limited Partners
Various individuals and entities affiliated with the Cardwells
Mobil Long Haul, Inc., an affiliate of Mobil Oil Corporation
Volvo Petro Holdings, L.L.C., an affiliate of Volvo Trucks North
America, Inc.
Petro Warrant Holdings Corporation
Petro, Inc. and various individuals and entities affiliated with Petro, Inc.
are controlled by the president of Holdings, J.A. Cardwell, Sr. Petro, Inc. is
a retailer of truck and passenger car tires and holds other investments that
include limited and general partner interests in Holdings and the Operating
Partnership and mandatorily redeemable preferred partnership interests in
Holdings.
Recapitalization
On July 23, 1999, the Operating Partnership, its partners and Volvo Trucks
consummated a series of transactions pursuant to which:
. Holdings was formed, and all of the present owners in the Operating
Partnership other than Chartwell, and Kirschner, a company franchisee,
exchanged their interests in the Operating Partnership for identical
interests in Holdings and became owners of Holdings;
. Petro Holdings Financial Corporation was formed for the purpose of
serving as co-issuer of the notes;
. Petro Holdings Financial Corporation, the Operating Partnership and its
subsidiary, Petro Financial Corporation, became subsidiaries of
Holdings;
. Petro Warrant Holdings Corporation was formed for the purpose of owning
a common limited partnership interest in Holdings and issuing the
warrants that are exchangeable into all of the common stock of Petro
Warrant Holdings Corporation;
. Volvo Trucks invested $30.0 million to acquire common limited
partnership interests in Holdings;
. Mobil invested an additional $5.0 million in Class B convertible
preferred partnership interests of Holdings;
. Holdings purchased the common interest in the Operating Partnership
owned by affiliates of Chartwell for aggregate consideration of
approximately $69.8 million, which consisted of a $55.0 million cash
payment and approximately $14.8 million in accreted value of old notes,
without warrants; and
. Holdings purchased the 2% common interests in the Operating Partnership
owned by Kirschner for cash consideration of $2.8 million.
. Holdings and Petro Holdings Financial Corporation sold for cash
$82,707,000 in principal amount at stated maturity of old notes together
with warrants to purchase all the common stock of Petro Warrant Holdings
Corporation.
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The foregoing is referred to as the "Recapitalization." The acquisition of
the Chartwell and Kirschner interest was accounted for under the purchase
method, which resulted in adjustments to the recorded value of land of $2.2
million, buildings of $5.8 million, equipment of $1.5 million, and furniture
and fixtures of $1.5 million, and the recording of goodwill in the amount of
$36.4 million that is being amortized over a period of 20 years.
As part of the Recapitalization, Holdings issued 82,707 units each
consisting of $1,000 principal amount at stated maturity of old notes and one
warrant. The warrants are exchangeable into all of the common stock of Petro
Warrant Holdings Corporation. As consideration for the old notes and warrants,
Holdings received cash proceeds of $40.0 million, of which $30.3 million was
allocated to the old notes and $9.7 million was allocated to the warrants.
Holdings had acquired the warrants from Petro Warrant Holdings Corporation for
$9.7 million. Petro Warrant Holdings Corporation, in turn, invested the $9.7
million to acquire a 10.0% common limited partnership interest in Holdings. The
amount allocated to the warrants is based on Petro Warrants Holdings
Corporation's 10.0% interest in Holdings and on Holdings' common equity value,
net of an estimate of Recapitalization costs not borne by Petro Warrant
Holdings Corporation, established in conjunction with the admission of Volvo
Trucks and the purchase of Chartwell's and Kirschner's interests in the
Operating Partnership. Upon an exchange event, such as a change in control,
IPO, or bankruptcy of Holdings, the warrants will be exchanged, for no
additional consideration, for 100% of the common stock of Petro Warrant
Holdings Corporation, whose sole asset is currently approximately 10.0% of the
common limited partnership interests in Holdings. Prior to August 1, 2002,
Holdings has the right to repurchase the warrants at a price per warrant
initially equal to $134.87 and increasing to $155.87 on August 1, 2000 and
$178.37 on August 1, 2001. If the warrants have not been exchanged by
August 1, 2004, we will be obligated to repurchase the warrants at fair market
value. As a result of the contingent repurchase obligation, the warrants have
been recorded outside partners' deficit as contingently redeemable warrants in
the unaudited condensed consolidated balance sheets located elsewhere in this
registration statement. Future changes (determined each balance sheet date in a
manner consistent with the determination of market price of partnership
interests described in Note 12 in the audited consolidated financial statements
of Holdings included elsewhere in the registration statement), if any, in the
value of the warrants will be charged directly to partners' capital (deficit).
As a result of the Recapitalization, Holdings is the owner of approximately
99.5% of the common partnership interests of the Operating Partnership, and the
minority interest is owned by affiliates of the Cardwells. The common
partnership interests of Holdings are owned by:
<TABLE>
<S> <C>
Cardwells and their affiliates:
General partnership interest....................................... 1.1%
Limited partnership interest....................................... 50.5%
Volvo Trucks......................................................... 28.7%
Mobil................................................................ 9.7%
Petro Warrant Holdings Corporation................................... 10.0%
</TABLE>
The mandatorily redeemable preferred partnership interests of Holdings are
owned by Mobil ($17.0 million) and the Cardwells and their affiliates ($7.6
million).
The formation of Holdings has been reflected in our consolidated financial
statements in a manner similar to a pooling-of-interests. Accordingly, our
consolidated financial statements reflect the historical amounts and results of
operations of Holdings' consolidated subsidiaries as if the exchange referred
to above had occurred on the first day of the first period presented.
The Operating Partnership also amended its senior collateralized credit
facility as part of the Recapitalization. The new senior credit facility
consists of an $85.0 million revolving credit facility and a $40.0 million Term
Loan B. The proceeds of the new Term Loan B were used to repay amounts due
under the Term A and B Loans and the expansion facility of the previous senior
credit facility of approximately $38.3 million. The new senior credit facility
is collateralized by substantially all of the Operating Partnership's assets
and contains covenants as described in "Descriptions of Other Indebtedness".
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As further discussed above, Holdings funded a portion of its purchase of
Chartwell's and Kirschner's interests in the Operating Partnership with debt.
Holdings currently has no operations of its own and is, therefore, dependent
upon the earnings and cash flows of the Operating Partnership to satisfy its
obligations under the notes.
1997 Recapitalization
On January 30, 1997, the Operating Partnership consummated a transaction
entered into in October 1996, under which:
. Chartwell invested $20.7 million and Mobil invested $15.0 million, to
directly acquire the 40% common partnership interests of the Operating
Partnership owned by the Fremont Partners for approximately $25.6
million and invest approximately $10.1 million in the Operating
Partnership;
. The Cardwells and their affiliates maintained their capital investment
in the Operating Partnership; and
. Kirschner, one of our franchises, invested $1.0 million in the Operating
Partnership in exchange for a 2% common partnership interest.
Following the investment by Mobil, Chartwell and Kirschner, the common
partnership interests of the Operating Partnership were owned by:
<TABLE>
<S> <C>
Chartwell............................................................ 50.8%
Cardwells and their affiliates....................................... 39.9%
Mobil................................................................ 7.3%
Kirschner............................................................ 2.0%
</TABLE>
The preferred partnership interests were owned by Mobil ($12.0 million) and
the Cardwells and their affiliates ($7.6 million). Chartwell and the Cardwells
and their affiliates owned both general and limited partnership interests and
Mobil and Kirschner owned only limited partnership interests. Mobil Oil Company
and the Operating Partnership also entered into supply and marketing
agreements.
As part of the 1997 recapitalization, the Operating Partnership issued the
10 1/2% notes and repurchased approximately 94% of the existing 12 1/2% notes
and approximately 100% the related outstanding debt warrants. In connection
with the issuance of the 10 1/2% notes, the Operating Partnership capitalized
approximately $14.5 million of debt issuance costs and wrote off, as an
extraordinary item, $12.7 million of debt restructuring costs. These costs
included the write-off of deferred financing costs relating to the replacement
of the old credit agreement, the retirement of Term A & B loans, the repurchase
of the 12.5% notes, and the related debt warrants.
At December 31, 1996, the Operating Partnership had incurred and accrued for
$2.5 million of one-time severance and hiring costs attributable to the removal
and replacement prior to December 31, 1996 of the Operating Partnership's pre-
1997 recapitalization management. In connection with the 1997 recapitalization,
the new partners required that old management be replaced, and the Operating
Partnership incurred costs and expenses with regard to their termination as
well as costs associated with their replacement with new management. The
termination costs, which were incurred during 1996, approximated $1.2 million,
were paid in January 1997, and related to four executive officers and other
members of management. The remaining costs were primarily related to the hiring
of new management, which occurred in 1996 and were expensed accordingly.
Additionally, during 1996 the Operating Partnership recognized $2.9 million
of legal, accounting and other professional fees, which were incurred during
1996 in connection with the 1997 recapitalization.
The Operating Partnership also amended its senior collateralized credit
facility. The new credit agreement consisted of a $25.0 million revolving
credit facility, a $14.0 million Term Loan A, a $30.0 million Term Loan B and a
$40.0 million expansion facility.
The 1997 recapitalization has been reflected in our consolidated financial
statements using recapitalization accounting, which results in the carryforward
of historical book values of assets and liabilities.
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Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Overview. Our net revenues of $505.8 million increased 2.1% in the first
nine months of 1999 from $495.4 million in the first nine months of 1998. The
increase was primarily due to an increase of 5.5% or $5.5 million and 3.1% or
$1.3 million in total non-fuel and restaurant sales, respectively, from the
prior year. Operating expenses increased 6.5% or $4.5 million from the prior
year due mainly to employee-related costs and system project costs. General and
administrative expenses increased only slightly to approximately $14.42 million
compared to $14.38 million in the prior year. Our operating income decreased
1.1% or $229,000 from the prior year.
Fuel. Revenues increased 1.0% to $357.1 million compared to $353.6 million
in 1998. Fuel revenues increased primarily due to a 3.4% increase in the
average retail-selling price per gallon stemming from higher fuel costs
compared to prior year. The increase in fuel prices was offset by a 2.3% or 8.3
million gallon decrease in fuel volume. Management believes the decreased
volume is due primarily to state tax changes negatively effecting volumes at
two locations, increased competition at two other locations and the
cancellation of our old customer loyalty program during the fourth quarter of
1998. Additionally, during the period, eleven of our locations' diesel fuel
islands were at limited capacity due to the installation of new fuel dispenser
equipment. Gross margin on fuel was $28.7 million for the nine months ended
September 30, 1999, compared to $30.7 million for the prior year period due
mainly to the decrease in volume and rising fuel costs, since we are not always
able to immediately pass these higher costs on to our customers.
Non-Fuel. Revenues increased 5.5% overall to $107.2 million from $101.7
million in the prior year. The increase in non-fuel revenues is primarily due
to a 6.8% or $1.5 million increase in oil, new and used tire and repair part
sales and a 5.5% or $1.8 million increase in sales at our retail stores. Gross
margins increased 6.5% to $59.1 million from $55.5 million for the nine months
ended September 30, 1999 compared to the prior year. We believe the improved
margins reflect the result of our continued focus on improving profitability in
those areas by increasing efficiency through greater procedural controls and
improved retailing.
Restaurant. Revenues of $41.4 million were 3.1% over prior year's revenues
of $40.1 million. We believe revenues were enhanced by the implementation of
new menus and featured meal specials, resulting in the average ticket price
increasing by 3.5% or approximately $.23 per customer ticket. Gross margins in
the restaurants improved by 2.7% or $777,000 due to increased revenues
resulting from the implementation of the menu changes.
Costs and Expenses. Total costs and expenses increased 2.2% or $10.6 million
compared to prior year. Cost of sales increased 2.1% or $7.9 million from the
prior year, primarily due to higher fuel costs in the current year. Operating
expenses increased $4.5 million, or 6.5%, to $73.6 million. The increase is
mainly due to a $2.8 million increase in employee-related costs and a $1.1
million increase in system project costs. General and administrative expenses
increased $45,000, or 0.3%, compared to $14.4 million during the same period in
the prior year. These costs and expenses were offset by a net gain of $849,000
on the disposition of location scale equipment as part of our strategy to focus
on our core business.
Recapitalization Costs. Our income was impacted by approximately $1,450,000
of expenses incurred in connection with the formation of Holdings, which were
primarily legal and accounting fees.
Equity in Loss of Affiliate. We recognized a $451,000 loss primarily from
startup costs related to our investment in the Wheeler Ridge facility in
Southern California, which opened in June 1999.
Interest Expense, net. Interest expense, net increased $1,752,000 to
$16,798,000 in the first nine months of 1999 primarily due to the issuance of
the old notes on July 23, 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Overview. Our net revenues decreased 4.7% from $685.7 million to $653.4
million for the year ended December 31, 1998. The decrease was due primarily to
a 9.6% or $49.5 million decrease in fuel revenues from the prior year as a
result of a 14.0% decline in the average retail-selling price per fuel gallon
from the prior year which was partially offset by a 4.3% or 19.6 million gallon
increase in fuel volumes. The decrease in fuel
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<PAGE>
revenues was partially offset by an 11.0% or a $13.5 million increase in non-
fuel sales and a 7.5% or a $3.7 million increase in restaurant sales from the
prior year. Operating expenses increased 8.7% to $93.0 million from $85.6
million in the prior year due mainly to employee related costs and the full
year effects of the addition of two new company-operated locations in 1997.
General and administrative expenses increased 13.5% to approximately $19.3
million from $17.0 million for the same period in the prior year. This increase
was principally due to employee related expenses from the expanding operations
and system costs.
Fuel. Revenues decreased 9.6% to $464.0 million in 1998 from $513.6 million
in 1997. Fuel revenues decreased primarily due to a 14.0% decline in average
retail selling price per gallon compared to 1997. The decrease in fuel prices
was offset by a 4.3% or 19.6 million gallon increase in fuel volumes, which
management believes, together with improved pricing strategies, increased fuel
margin dollars by 9.4% or $3.5 million compared to the prior year. On a
comparable unit basis, fuel volumes increased 0.8% or 3.6 million gallons in
1998 compared to prior year and fuel margin dollars increased 5.8% or $2.2
million in 1998 compared to prior year. A Petro Stopping Center is considered a
"comparable unit" as to a particular period in the current year if it was open
during the same period of the prior year.
Non-Fuel. Revenues increased 11.0% to $136.1 million in 1998 from $122.6
million in 1997. On a comparable unit basis, sales increased 8.0% or $9.9
million over the prior year. The increase in non-fuel revenues is primarily due
to a 21.5% increase in tire and repair part sales and a 9.3% increase in sales
at our retail stores and the full year effects of the addition of two new
company-operated locations in 1997. Gross margins increased 12.3% or $8.2
million to $74.7 million in 1998 from $66.5 million in 1997.
Restaurant. Revenues increased 7.5% to $53.2 million in 1998 from $49.5
million in 1997. On a comparable unit basis, revenues increased 2.5% or $1.2
million compared to the prior year. Revenue increases were primarily due to the
full year effects of the two new locations added in 1997. Management believes
revenues were enhanced by the implementation of new menus and featured menu
specials. Gross margin in the restaurants improved by 8.9% or $3.1 million
overall and 4.0% or $1.4 million on a comparable unit basis, due to continued
management focus on costs and implementation of menu changes, resulting in the
average ticket price increasing by 1.5%.
Costs and Expenses. Total costs and expenses decreased 5.4% to $627.5
million in 1998 from $663.5 million in 1997. On a comparable unit basis, total
costs and expenses decreased 8.6% or $57.3 million in 1998 compared to the
prior year. Costs of sales decreased $47.2 million or 8.6% from the prior year
primarily due to lower fuel costs experienced during the current year.
Operating expenses increased $7.5 million or 8.7% to $93.0 million in 1998. The
increase is mainly due to an 8.1% increase related to employee costs, including
the full year effect of our two new company-operated locations added in 1997.
During 1998 we also increased our provision for self-insurance claims by
approximately $1.0 million principally due to a change in estimate related to
specific claims as well as the full year effect of having two new company-
operated locations which were opened in August and September of 1997. In
addition, the allowance for doubtful accounts was increased principally to
reserve for a specific customer who filed for bankruptcy protection. This
specific reserve approximated $180,000. General and administrative expenses
increased 13.5% to approximately $19.3 million from $17.0 million in 1997. This
increase was principally due to a $1.8 million or 18.5% increase in employee
related expenses from our expanding operations and system costs totaling
$726,000.
Interest Expense, net. Interest expense, net decreased 1.2% to $20.0 million
in 1998 compared to 1997. This decrease was due primarily to lower debt levels
as a result of principal payments and a 0.25% per annum decrease in interest
rates on term loans A and B under the senior credit facility in place before
the new senior credit facility beginning March 31, 1998.
Extraordinary item. Extraordinary item in 1997 reflects a charge to earnings
of $12.7 million for the write-off of debt restructuring costs relating to the
1997 recapitalization.
Cumulative effect of a change in accounting principle. Cumulative effect of
a change in accounting principle in 1998 reflects the write-off of $3.3 million
of previously capitalizable costs. These costs, mainly
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<PAGE>
incurred in prior years, were related to start-up and organization costs, and
as required by the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 98-5, were expensed upon adoption during the fourth
quarter of 1998. Cumulative effect of a change in accounting principle in 1997
also reflects the write-off of $1.6 million of costs previously allowed to be
capitalized. These costs are related to process reengineering activities and,
as required by Emerging Issues Task Force (EITF) Issue No. 97-13, were written
off during the fourth quarter of 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Overview. Our net revenues increased $48.7 million or 7.6% to $685.7 million
for the year ended December 31, 1997. Revenues from comparable units
contributed 80.8% or $39.3 million of the increase. The increase was due
principally to a 10.1% or 41.3 million increase in fuel gallons and an increase
of 10.1% or $11.2 million in non-fuel sales and an increase of 4.7% or $2.2
million in restaurant sales from the prior year. The increases in revenues were
offset by product costs associated with higher levels of revenue and higher
general and administrative and operating expenses over the prior year. General
and administrative expenses increased 22.3% to approximately $17.0 million from
$13.9 million for the same period in the prior year. This increase was
principally due to an increase in employee expenses, transition costs for new
programs, and professional and travel related expenses in the current year.
Fuel. Revenues increased 7.4% to $513.6 million in 1997 from $478.3 million
in 1996. Fuel revenues increased due to a 10.1% increase in fuel volumes from
407.7 million gallons in 1996 to 449.0 million gallons in 1997. On a comparable
unit basis, fuel volumes increased 8.7% or 35.5 million gallons. Fuel costs
were up in the first quarter, but declined in the latter quarters. On a per
gallon basis, margins remained relatively flat compared to fuel margins in the
prior year.
Non-Fuel. Revenues increased 10.1% to $122.6 million in 1997 from $111.4
million in 1996. On a comparable unit basis, sales increased 8.8% or $9.8
million. Gross margins increased 14.7% to $66.5 million in 1997 from $58.0
million in 1996. This increase was due to improved cost management and lower
margins in 1996 due to establishment of $1.4 million in obsolete inventory
reserves.
Restaurant. Revenues increased 4.7% to $49.5 million in 1997 from $47.3
million in 1996. On a comparable unit basis, revenues increased 2.0% or $0.9
million. Management implemented menu changes designed to enhance revenues at
our Iron Skillet Restaurants in the first quarter, which contributed to the
increased sales. Gross margin in the restaurants improved by approximately 5.5%
or $1.8 million in total and approximately 2.9% or $1.0 million on a comparable
unit basis. The improvement was due in part to management's focus on costs and
implementation of menu changes, resulting in the average ticket price
increasing by 6.7%.
Costs and Expenses. Total costs and expenses increased 6.7% to $663.5
million in 1997 from $621.6 million in 1996. Included in 1996 expenses are
approximately $2.5 million of severance, benefit and placement expenses,
attributable to the termination of and replacement of our pre-1997
recapitalization management. The termination costs, which were incurred during
1996, approximated $1.2 million, were paid in January 1997, and related to four
executive officers and other members of management. The remaining $1.3 million
of the total were primarily costs related to the hiring of new management,
which occurred in 1996 and were expensed accordingly. These were one-time costs
and we do not believe that the replacement of these members of management has
had any significant impact in terms of compensation or benefit costs, on our
future results of operations. An additional one-time charge of approximately
$1.4 million, included in 1996 cost of sales, related to an increase in the
obsolete inventory reserve. The need for the increased reserve resulted
directly from the implementation of a new inventory information system, which
provided the ability to specifically identify individual inventory item
movement and better estimate the reserve for slow moving and obsolete items. On
a comparable unit basis, total costs and expenses increased 5.3% or $33.2
million in 1997. Costs of sales increased $35.2 million or 6.9% in 1997 from
1996. The increase was due to fuel costs increasing by 7.2% or $32.1 million
and non-fuel product costs increasing by 4.6% or $3.1 million. Operating
expenses increased $4.0 million or 5.0% to $85.6 million in 1997. The increase
was primarily due to employee
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<PAGE>
related expenses. General and administrative expenses increased 22.3% to
approximately $17.0 million from $13.9 million in the prior year. This increase
was principally due to increases in employee expenses totaling $1.3 million,
transition costs for new programs totaling $600,000, and professional and
travel related expenses in the current year totaling $1.1 million.
Recapitalization costs. During 1996 we recognized $2.9 million of legal,
accounting and other professional fees which were incurred in connection with
the 1997 recapitalization.
Interest Expense, net. Interest expense, net decreased $971,000 or 4.6% to
$20.3 million in 1997 compared to 1996 due to lower interest rates combined
with $917,000 of higher interest income from short-term investments.
Extraordinary item. Extraordinary item reflects a charge to earnings of
$12.7 million for the write-off of debt restructuring costs relating to the
1997 recapitalization. Specifically, this charge includes the write-off of
deferred financing costs relating to the replacement of the old credit
agreement, the retirement of term notes A & B, the repurchase of the 12 1/2%
notes, and the retirement of the debt warrants.
Cumulative effect of a change in accounting principle. Cumulative effect of
a change in accounting principle reflects the write-off of $1.6 million of
costs, previously allowed to be capitalized. These costs are related to process
reengineering activities and, as required by Emerging Issues Task Force
(EITF) Issue No. 97- 13, were written off during the fourth quarter of 1997.
Liquidity and Capital Resources
In recent years, our principal sources of liquidity have been:
. The proceeds from the issuance of our debt securities, which raised
gross proceeds of $135.0 million in 1997 (10 1/2% notes) and $40.0
million in 1999 (the old notes of $30.3 million and warrants of $9.7
million);
. Borrowings under the new senior credit facility, which provides for
aggregate borrowings up to $125.0 million;
. Sales of common and preferred partnership interests in the Operating
Partnership which raised $11.1 million in 1997 and $35.0 million in
1999;
. And cash flows from operations, which provided $14.7 million in 1996,
$30.3 million in 1997, $11.3 million in 1998 and $17.2 million in the
first nine months of 1999. The large increase for 1997 was primarily due
to the 1997 recapitalization, in which we redeemed approximately 94% of
the outstanding 12 1/2% notes and issued our 10 1/2% notes on which
initial interest payments of approximately $14.2 million per year, were
not due until February 1, 1998 in addition to normal fluctuations in the
timing of payments to Mobil Long Haul for fuel purchases.
Our cash flow used in investing activities was $5.3 million in 1996, $15.8
million in 1997, $19.7 million in 1998 and $81.8 million for the nine month
period ending September 30, 1999. This increase is due primarily to additional
investment in property and equipment of $5.5 million in 1996, $15.9 million in
1997, $20.3 million in 1998 and $22.1 million for the nine month period ending
September 30, 1999. The interim 1999 period also included $57.8 million related
to the purchase of the common interests in the Operating Partnership owned by
Kirschner and affiliates of Chartwell. Cash flow (used in) or provided by
financing activities was ($11.8) million in 1996, $7.1 million in 1997, ($3.3)
million in 1998 and $67.2 million for the nine months ending September 30,
1999. These fluctuations are almost entirely due to our borrowings and
repayments in the ordinary course of business with the exception of 1997 and
1999, which are related to the 1997 Recapitalization and the July 23, 1999
Recapitalization transaction, respectively.
We had negative working capital of $3.1 million at December 31, 1998 and
positive working capital of $2.0 million at September 30, 1999. Although
negative working capital is normal in the truckstop industry. We had positive
working capital at September 30, 1999 due to excess cash generated from the
Recapitalization. Diesel fuel
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<PAGE>
inventory turns every two to three days, while payment is generally required in
12-15 days. Approximately 74% of our sales are cash (or the equivalent in the
case of credit card sales or sales paid for by check on a daily basis by third-
party billing companies).
The new senior credit facility consists of an $85.0 million revolving credit
facility and a $40.0 million term loan B. As part of the recapitalization
transaction consummated on July 23, 1999, we used the proceeds from the term
loan B to repay principal amounts due under the previous senior credit facility
of $38.1 million plus accrued interest.
At September 30, 1999, we had standby letters of credit issued for
approximately $2.5 million resulting in availability of approximately $82.5
million on the revolving credit facility of the new senior credit facility. As
of September 30, 1999, there were no borrowings on the revolving credit
facility.
Principal payments on the term loan B are due quarterly, beginning September
30, 2000. The first sixteen quarterly payments due are $250,000 each. For
details of credit terms, rates, and maturity dates please refer to "Description
of Other Indebtedness--New Senior Credit Facility."
Accrual of dividends on mandatorily redeemable preferred partnership
interests amounted to $1.7 million (including $0.7 million from minority
partners in consolidated subsidiaries) for the nine months ended September 30,
1999. The dividends are only payable in cash if permitted by our then existing
debt instruments. The indenture, the notes and the new senior credit facility
restrict payment of dividends on mandatorily redeemable preferred partnership
interests.
We are self-insured, paying our own employment practices, general liability,
workers' compensation, and group health benefit claims, up to stop-loss amounts
ranging from $50,000 to $250,000 on a per-occurrence basis. During the nine
months ended September 30, 1999, we paid $6,261,000 on claims related to these
self-insurance programs. Provisions for these self-insurance programs are made
for both estimated losses on known claims and claims incurred but not reported,
based on claims history. During the nine months ended September 30, 1999, the
aggregated provisions amounted to approximately $6,278,000. At September 30,
1999, the aggregated accrual amounted to approximately $4,644,000 which we
believe, is adequate to cover both reported and incurred but not reported
claims.
Capital expenditures through the first nine months totaled $13.0 million for
1998 and $22.1 million for 1999. Included in capital expenditures for both 1998
and 1999 were funds spent on new and existing facilities, in addition to
information systems projects.
In addition to amounts expended during the first nine months of 1999, we
currently expect to invest approximately $16.0 million during the remainder of
1999 and $55.0 million during the year ended 2000 on capital expenditures. We
currently plan to construct six new truck stops, through year 2000, with a cost
of approximately $10.0 million to $11.0 million per site including land
acquisition costs. Approximately $10.0 million will be spent on regular
maintenance capital and volume building projects. These capital outlays will be
funded through additional bank financing under the new senior credit facility
and internally generated cash.
Management believes that internally generated funds, together with amounts
available under the new senior credit facility, will be sufficient to satisfy
its cash requirements for operations through 1999 and the foreseeable future
thereafter. We also expect that current and future expansion and acquisitions
will be financed from funds generated from operations, the new senior credit
facility and to the extent necessary, additional financing.
Impact of the Year 2000 Issue
We are aware of the complexity and the significance of the "Year 2000"
issue. The Year 2000 issue is a result of computer programs being written using
two digits, rather than four, to define the applicable year. Any of our systems
that utilize date-sensitive software may recognize a date using "00" as the
year 1900 rather than as the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
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Our sales, accounts receivable, inventory management, accounts payable,
general ledger, payroll and electronic data interchange systems comprise our
critical IT systems. We have assessed our Year 2000 readiness with regard to
critical IT systems and have replaced, upgraded and tested our computer systems
and applications. The financial reporting application will be upgraded in
November. At that point, all critical IT systems will be Year 2000 ready.
We continue to assess and communicate with the software vendors, hardware
vendors, banks, utilities, fuel suppliers, merchandise suppliers, customers,
partners, franchisees, service contract suppliers, and insurance companies with
whom we do significant business to determine the extent to which we are
vulnerable to those third parties' failure to remedy their own Year 2000
issues. We have received responses from approximately 84% of our suppliers,
partners, franchisees and vendors surveyed of which approximately 98% have
indicated that they will be compliant by the end of 1999. We have received
responses from approximately 75% of our major customers of which approximately
98% have indicated that they will be compliant by the end of 1999. Included in
the responses were communications from 100% of our financial and insurance
service providers and approximately 78% of our utility providers, all of which
have indicated that they will be Year 2000 ready by the end of 1999. We have
assumed non-responsive third parties will be non-compliant for the purpose of
risk assesment. We do not believe there has been or will be a significant
disruption of our business due to our Year 2000 remediation efforts.
Telecommunication and office automation systems that facilitate operations
of our locations and corporate headquarters, comprise our primary non-IT
systems. We have assessed the Year 2000 readiness of 100% of our non-IT systems
and have completed compliance testing to bring them into readiness.
We are using a mixture of internal and external resources to address Year
2000 issues. The total costs of achieving Year 2000 readiness is estimated to
be approximately $9.0 million, which includes the costs of software upgrades
and replacements we are currently making. We incurred $6.2 million in costs
attributable to projects that address the Year 2000 issue through the third
quarter of 1999 and expect to incur $2.8 million in such costs in the remainder
of fiscal year 1999. We expect that future expenses incurred will continue to
be financed from internally generated funds.
Although we have day-to-day operational contingency plans, management has
updated these plans for possible Year 2000 specific operational requirements.
We formed a committee to handle business interruption scenarios with respect to
Year 2000. We have established contingency plans for situations relating to
Year 2000 issues that may arise in our dealings with key third parties and our
IT and non-IT systems. Our contingency planning has taken into account various
operational functions within the company including, but not limited to, fuel
dispensing, credit acceptance and receivable tracking, sales tracking, accounts
payable processing, tendering and tender reconciliation and updating our
financial records. With respect to each operational function, a plan has been
created to address normal operations, emergency responses, alternate procedures
and restoration procedures. The various contingency plans have been documented
and copies of the plans retained both at the corporate office and in our field
locations. In addition a cross-functional management team has been established
to respond to any year 2000 event and will be accessible to all locations. We
believe our worst case scenario related to Year 2000 issues is scattered
interruptions of power and other services which we believe would not interfere
with our business in a material manner. However, network-wide power outages at
our locations for extended periods of time could significantly interrupt the
provision of services to our customers and have a material adverse effect on
our business operations.
Environmental
Accruals for environmental matters are recorded in operating expenses when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. The measurement of environmental
liabilities is based on an evaluation of currently available facts with respect
to each individual site and considers factors such as existing technology,
presently enacted laws and regulations and prior experience in remediation of
contaminated sites. Accrued liabilities are exclusive of claims against third
parties and are not discounted.
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Contingencies under environmental laws and regulations may require us to
take action to correct the effects on the environment of prior disposal
practices or releases of chemical or petroleum substances by us or other
parties. We have accrued liabilities for environmental remediation activities
consistent with the policy set forth in Note 2 to our Consolidated Financial
Statements. At December 31, 1997, this accrual amounted to approximately
$187,000, and as of December 31, 1998, this accrual amounted to approximately
$274,000. At September 30, 1999 this accrual amounted to approximately
$161,000. In management's opinion, these accruals were appropriate based on
existing facts and circumstances. We accrue for environmental remediation
expenses based upon initial estimates obtained from contractors engaged to
perform the remediation work as required by local, state and federal
authorities. It is often difficult to predict the extent and the cost of
environmental remediation until work has commenced and the full scope of the
contamination determined. Accruals are periodically evaluated and updated as
information regarding the nature of the clean up work is obtained. In the event
that future remediation expenditures are in excess of amounts accrued, we do
not anticipate that they will have a material adverse effect on our
consolidated financial position or results of operations of Holdings. Actual
results, however, could differ from estimated amounts and those differences
could be material. At September 30, 1999, we have recognized approximately
$161,000 in the consolidated balance sheet related to recoveries of remediation
costs from third parties.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in a derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allow a derivative's gain and loss to offset related results
on the hedged item in the income statement and requires that a company must
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 was originally effective for fiscal
years beginning after June 15, 1999, but has been postponed by Statement of
Financial Accounting Standard No. 137, "An Amendment of SFAS No. 133", for one
year with a mandatory effective date for fiscal years beginning after June 15,
2000. Additionally, SFAS 133 has been modified regarding recognition in the
balance sheet of an embedded derivative that is required to be separated from
the host contract. At the date of initial application of SFAS 133, an entity
may choose either to recognize these embedded derivatives or to select either
January 1, 1998 or January 1, 1999, as a transition date for embedded
derivatives. A company may also implement the statement as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1999 and thereafter). A company may also implement the statement as of the
beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied
retroactively. Management has not yet quantified the impact of adopting SFAS
No. 133 on our financial statements and has not determined the timing of, or
method of, adoption. However, the implementation of SFAS No. 133 could increase
volatility in earnings.
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BUSINESS
Petro Stopping Centers
Petro Stopping Centers generally are built on fifteen to thirty acres
situated at a convenient location with easy interstate highway access. They can
accommodate 200 to 300 trucks and 100 to 175 cars or recreational vehicles in
spacious, well-lit and fenced parking lots, which are designed to provide good
traffic flow, reduce accidents, and enhance security for the drivers, their
trucks and freight. Within the Petro Stopping Center network, we offer
standardized and consistent products and services to accommodate the varied
needs of professional truck drivers and other motorists. These include separate
gas and diesel fueling islands, our home-style "Iron Skillet" restaurants,
truck preventative maintenance and repair services, and travel and convenience
stores offering an array of merchandise selected to cater to professional truck
drivers' needs during long periods away from home. Additionally, we provide
amenities such as telephone, fax, photocopying, computer, other communication
services and postal services. Petro Stopping Centers also offer certified truck
weighing scales, truck washes, laundry facilities, private showers, game,
television and movie rooms, barbershops, and at some sites, medical services.
The following table sets forth our total revenues by major source:
<TABLE>
<CAPTION>
SUMMARY OF HOLDINGS' SOURCES OF REVENUE
Nine Months Ended September
Year Ended December 31, 30,
---------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fuel.................... $478,312 75.1% $513,571 74.9% $464,025 71.0% $353,572 71.4% $357,154 70.6%
Non-Fuel................ 111,410 17.5% 122,609 17.9% 136,145 20.8% 101,699 20.5% 107,247 21.2%
Restaurant.............. 47,335 7.4% 49,549 7.2% 53,246 8.2% 40,106 8.1% 41,360 8.2%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Net Revenue....... $637,057 100.0% $685,729 100.0% $653,416 100.0% $495,377 100.0% $505,761 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Of our 29 company-operated Petro Stopping Centers, 26 are full-size
locations and three are Petro:2 Centers. All of the company-operated Petro
Stopping Centers are owned by us except for the Wheeler Ridge, California
facility which is jointly-owned with Tejon Development Corporation. Of our 22
franchised facilities, seventeen are full-service locations and five are
Petro:2 Centers. Petro:2 Centers provide the same basic fuel and non-fuel
services as full-sized Petro Stopping Centers, but on a smaller scale and with
fewer amenities.
Fuel
Each Petro Stopping Center has a diesel fuel island, which is a self-service
facility for professional drivers and typically consists of eight to sixteen
fueling lanes. The fuel dispensers are computer driven, high speed units. Each
fueling lane permits simultaneous fueling of each of a truck's two tanks.
Pursuant to our strategic alliance with Mobil, we sell Mobil branded diesel
fuel at all of the company-operated diesel fuel islands. All diesel fuel
islands and dispensers we operate carry signage with both the "Petro" and
"Mobil" brand names.
In addition to the diesel fuel island for professional drivers, gasoline and
automobile diesel fuel are sold from a separate auto fuel island at 28 of our
29 company-operated locations. The auto fuel islands are accessed by separate
"auto-only" entrances, which help to separate auto and truck traffic at the
facility. The typical auto fuel island is equipped with four to six fuel
dispensers for convenient and efficient fueling.
Non-fuel
In 1983 we opened our first Petro:Lube facility to provide "while-you-wait"
preventive maintenance service for trucks. Since that time, Petro:Lubes have
been introduced at all but one of our company-operated Petro Stopping Centers.
In addition to Petro Stopping Center locations, we opened a stand-alone
Petro:Lube in 1996. Petro:Lube facilities offer oil, filter and lubrication
services, new, used and retread tires, as well as tire and other minor repairs.
We believe we were the first truck stop chain to offer these types of services
to truckers on an express basis.
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Each Petro:Lube sells a number of what we believe to be high-quality brands
such as: Mobil Delvac, and Chevron Delo heavy duty motor oils and Kelly,
Bridgestone, Michelin and Firestone tires. Petro:Lubes primarily feature
Mobil's Delvac brand lubricants as part of our marketing strategy with Mobil.
See "Certain Relationships and Related Transactions." Each Petro:Lube honors
manufacturers' warranties as well as our warranties for work performed at any
Petro:Lube throughout the country. Petro:Lube services are primarily utilized
by owner/operators and small fleets, but we believe that larger fleets are
increasingly looking to outsource their maintenance needs.
To attract the business of drivers seeking a quick refueling stop, each
diesel fuel island includes a "mini-mart" offering an array of deli take-out
food, snack foods, beverages, toiletries and a basic selection of trucker
accessories and supplies. In addition, other services (including certified
scales, check cashing, permit services, faxing and copying) are available at
the fuel islands. These facilities enable the driver seeking a quick refueling
stop to purchase consumables and services while refueling.
Each Petro Stopping Center also includes a "Travel Store," located in the
main facility away from the fueling islands. Travel Stores feature merchandise
specifically selected to cater to a professional truck driver's shopping needs
during the long periods typically spent away from home. Merchandise categories
include food items, clothing, electronics such as televisions, mobile satellite
dishes, VCR's and CB radios as well as toiletries, gifts and truck accessories
such as cables, fuses, reflectors and antennae. A Travel Store typically
carries approximately 7,500 SKUs and averages 1,900 square feet of selling
space.
To meet the personal and business needs of commercial drivers and other
motorists, we provide numerous additional services at the main facility of our
Petro Stopping Centers. At the typical Petro Stopping Center, customers have
access to telephone, internet, money wire services, fax and other
communications services at our facilities, overnight express drop boxes and
ATMs. In addition, customers may receive their paychecks and cash advances. At
most locations, professional drivers have convenient on-site access to a
certified truck weighing scale and a truck wash operated by a third-party that
leases part of a Petro Stopping Center to provide this service. For a driver's
comfort and relaxation, Petro Stopping Centers provide laundry facilities, game
rooms, television viewing rooms and, at approximately eight Petro Stopping
Centers, movie rooms. We also lease retail space at our Petro Stopping Centers
to independent merchants.
Each full-size Petro Stopping Center features twelve to eighteen private
shower facilities. The showers are fully tiled for easy maintenance and are
professionally cleaned after each use. Each shower room is equipped with a lock
to provide privacy and security.
Since June 1993, the Petro Stopping Centers located in Hammond and
Shreveport, Louisiana, have featured video poker operations. The primary
customers for these activities are local area residents. The video poker
operations at each of these sites feature 50 machines and are conducted in a
stand-alone building, separated from other facilities. A third-party operator
manages the video poker operations and incurs all material related expenses
while paying a portion of each machine's "winnings" to us. During 1996, the
State of Louisiana enacted a statute requiring the cessation of video poker
operations unless the parish in which the operations were conducted voted to
allow the continued operations of video poker machines. On November 5, 1996,
the parish in which the Shreveport facility is located voted to continue to
allow video poker operations, while the parish in which the Hammond facility is
located voted to disallow video poker operations. Therefore, we were required
to phase out video poker operations at the Hammond facility at the end of
June 1999.
Restaurants
Each full-size Petro Stopping Center includes our trademarked "Iron Skillet"
restaurant. This home-style, sit down restaurant typically seats approximately
180 customers, and features counter and wait service, a soup and salad bar and
three "All-You-Can-Eat" buffets per day. The Iron Skillet prides itself on
"home cooked" items prepared fresh at each location. Recipes developed at our
test kitchen in El Paso are accessible from each location by computer.
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Iron Skillet restaurants are open 24 hours per day, 365 days per year and
have "drivers only" sections, which are preferred by drivers who like to
socialize and exchange information with other drivers at our restaurants.
Public telephones are generally available throughout the dining area for
customer convenience.
We have introduced nationally branded fast food concepts at nine of our
locations. We currently operate, under franchise agreements, one Wendy's, three
Baskin-Robbins, two Blimpie Subs & Salads and six Pizza Hut Express units and
plan to selectively expand our fast food program during the next several years.
In addition, we have introduced our own branded deli program in some Petro
Stopping Centers known as "The Filling Station." At September 30, 1999, we had
ten locations that offered Filling Stations and plan to expand the concept in
the future.
Competition
The U.S. truck stop industry is large and highly fragmented. Management
believes that there are approximately 2,000 truck stops located on interstate
highways, approximately 23% of which are operated by four national truck stop
chains, of which we are one. The other three chains are TravelCenters of
America, Inc., (approximately 160 locations), Flying J Inc. (approximately 120
locations) and Pilot Corporation (approximately 120 locations). We believe
that, while we compete with all truck stops, our principal competitors are
increasingly these nationwide, multi-service truck stop chains. We also believe
that some of these chains have substantially greater financial and marketing
resources than we do.
While we price our diesel fuel competitively, we believe our larger sites
with more amenities offer a competitive advantage. A number of other large,
multi-service truck stop chains build somewhat smaller and less expensive
facilities, emphasizing low-priced diesel fuel and fast food restaurants. Many
of the other truck stop chains employ discount pricing of diesel fuel to
compete. At the same time, increased competition and consolidation among
trucking companies in recent years have increased truck fleet owners' focus on
reducing their operating costs. This trend has put increased pressure on diesel
fuel margins for us and our competitors. In addition, from time to time, we
face intense price competition in some of our markets. Given that approximately
two out of every three stops made by a trucker is for a reason other than the
purchase of fuel, we believe that the variety of non-fuel services and products
we offer will continue to attract professional truck driver business and
provide us a competitive advantage in spite of continued fuel pricing
competition.
Fuel and Lubricant Suppliers
As part of the Recapitalization, we terminated our existing fuel and
lubricant supply agreements and entered into new ten-year supply agreements
with Mobil Oil Corporation under which Mobil Oil Corporation will supply the
company-operated Petro Stopping Centers' diesel fuel requirements as well as
gasoline requirements in those markets in which Mobil branded gasoline is
available for sale. Under the lubricant supply agreement, we are allowed to
purchase such quantities of lubricants as we require at the prices set forth in
the agreement. The diesel fuel sold at all of our company-operated and some of
our franchise operated Petro Stopping Centers is branded Mobil Diesel, and all
of our company-operated Petro:Lubes feature Mobil Delvac lubricants. Under the
new fuel supply agreement and the agreement for the resale of oils and greases
with Mobil Oil Corporation, both dated July 23, 1999, we agreed to purchase
Mobil branded lubricant products and Mobil branded diesel fuel for sale and
distribution under Mobil's trademarks at our company-operated and 12 of our
franchise operated truck stops and Mobil branded gasoline for sites as selected
by Mobil, as limited however, by existing contractual obligations to purchase
gasoline from other suppliers. The Mobil Supply Agreements require that we
purchase from Mobil-specified distribution terminals, a minimum number of
gallons of diesel fuel on an annual basis, depending on product availability
and reductions by Mobil Oil Corporation under described circumstances. For
1999, our annual volume commitment is 172.3 million gallons of Mobil diesel
under the fuel supply agreement and 1.2 million gallons of Mobil lubricants
under the lubricant supply agreement. This constitutes approximately 42% of our
current diesel fuel requirements and approximately 52% of our lubricant
requirements. If we do not purchase any diesel fuel from Mobil Oil Corporation
under our Mobil Supply Agreements, our maximum penalty in any year would be
$0.0035 per gallon multiplied by the annual volume commitment as provided for
in the Mobil Supply Agreements plus
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additional amounts for each new Petro Stopping Center we open and which Mobil
Oil Corporation agrees to supply. As a result of the Mobil Supply Agreements
and to comply with the laws governing the branding of diesel fuel, if Mobil Oil
Corporation is unable to supply 100% of our diesel fuel demand due to limited
product availability, Mobil Diesel Supply Corporation, a wholly-owned
subsidiary of Mobil Oil Corporation, purchases additional diesel fuel from
third-party suppliers and then sells it to us. Under the terms of the Mobil
Supply Agreements, we negotiate with third parties regarding price and other
terms, and then designate them to Mobil Diesel Supply Corporation. Third party
suppliers are approved by Mobil if the fuel to be supplied by the third party
meets all federal, state and local diesel requirements. Our fuel purchase
arrangement with Mobil Diesel Supply Corporation enables us to meet our diesel
fuel needs and to comply with branding laws, which require Mobil to first take
possession of the fuel before it can be branded as Mobil diesel.
The Mobil Supply Agreements allow us to continue to negotiate for the
purchase of diesel fuel with third-party suppliers approved by Mobil Diesel
Supply Corporation. If we are able to obtain a lower diesel fuel price from a
third-party supplier in a particular market area, we may request that Mobil
meet the lower price or allow a portion of our diesel fuel requirements to be
supplied from the Mobil Diesel Supply Corporation-approved third-party
supplier, in which case Mobil Diesel Supply Corporation would purchase the
diesel fuel from the supplier and resell the product to us. Any change in
supply source, other than a change resulting from Mobil's inability to supply,
does not affect our requirement to purchase the annual minimum number of
gallons from Mobil-specified distribution terminals fixed by the Mobil Supply
Agreements. The Mobil Supply Agreements also place a monthly limit on the
maximum number of gallons of diesel fuel and gasoline that we may lift from
Mobil-specified distribution terminals. Prices to be charged for fuel sold to
us under the Mobil Supply Agreements are based on referenced prices minus
discounts and plus delivery costs. See "Certain Relationships and Related
Transactions." Upon the expiration of the ten year initial term, the Mobil
Supply Agreements are renewable for another five year term at the option of
Mobil; however, we have the ability to terminate the agreements at the end of
the ten year term at a price based on a formula discussed in the Mobil Supply
Agreements.
We purchase diesel fuel for each of our company-operated Petro Stopping
Centers on a daily basis. Each location typically maintains a one to three day
inventory of fuel. During 1998, we purchased 100% of our diesel fuel through
Mobil Diesel Supply Corporation, approximately 64.4% of which was third-party
fuel purchased through this arrangement. The approximate aggregate amount paid
under the Mobil Supply Agreements from July 23, 1999 through November 29, 1999
is $186.0 million.
Trademarks and Service Marks
We are the owner in the United States of various registered trademarks and
service marks, including "Petro Stopping Centers," "Petro:Lube," "Iron Skillet"
and "Petro:2." We grant franchisees the non-exclusive right to use these
proprietary marks at franchised locations. We regard our trademarks and service
marks as valuable assets and believe that they have significant value in the
marketing of our products and services. We also have several applications to
register trademarks and service marks currently pending in the United States
Patent and Trademark Office.
Governmental Regulation
Environmental Regulation
We conduct our operations under extensive federal and state laws,
regulations and requirements relating to environmental matters. We use
underground and above ground storage tanks to store petroleum products and
waste oils. Statutory and regulatory requirements for storage tank systems
include requirements for tank construction, integrity testing, leak detection
and monitoring, overfill and spill control, and mandate corrective action in
case of a release from a storage tank into the environment. We also face
regulation relating to vapor recovery and discharges into the water. During
1998, we continued the installation of cathodic protection and overfill
equipment and devices in our older storage tanks, as required by federal and
state law, and all work
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was completed in December 1998, except in the Corning, California location,
where completion of the state-required upgrades is ongoing under an agreement
between the State of California and the Operating Partnership. The Corning,
California work was completed during the third quarter of 1999, and we expended
approximately $1 million during 1999 to complete this work. Some site
remediation will be required in Corning, California as a result of completion
of the 1998 upgrade work. Upon completion of the work at the Corning site,
management believes that all of our storage tanks will be in compliance in all
material respects with applicable environmental laws, regulations and
requirements. Our expenditures for environmental matters were $180,000 in 1996,
$154,000 in 1997 and $385,000 in 1998. See Note 2 to our Consolidated Financial
Statements for the year ended December 31, 1998 for a discussion of our
accounting policies relating to environmental matters.
Our ownership of the properties and the operation of our business, may
subject us to liability under various federal, state, and local environmental
laws, ordinances and regulations relating to cleanup and removal of hazardous
substances (which may include petroleum and petroleum products) on, under or in
our property. Some laws impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of hazardous or toxic substances.
Persons who arrange, or are deemed to have arranged, for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of these substances at the disposal or treatment site,
regardless of whether the site is owned or operated by that person.
We are currently party to one proceeding with the EPA regarding a waste oil
storage and recycling plant located in Patterson, Stanislaus County,
California. In the ordinary course of our operations, waste oil products are
generated which are required to be transported to off-site facilities for
treatment and disposal. Between June 1991 and February 1995 we arranged for the
transportation of waste oil products from the Corning location to the Patterson
Site. Sometime in 1997 the owners of the Patterson Site abandoned operation of
the site, the condition of the site began to deteriorate, and in October 1997
the EPA responded to a request for assistance from the California Department of
Toxic Substances Control. Notwithstanding that our activities with regards to
use of the Patterson Site were lawfully conducted and have not been challenged
by the EPA, by Order issued by the EPA on August 12, 1998, we and 55 other
companies were identified by the EPA as "generators, transporters or arrangers
for disposal of hazardous substances" as those terms are defined under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C., Sections 9601 to 9675, as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("CERCLA"), and thus are named in the EPA Order as
potentially responsible parties, strictly liable under CERCLA for removal
activities associated with the Patterson Site. We and approximately 20 of the
other 55 companies identified by the EPA are working together towards a
resolution and plan of action for completion of the removal activities required
by the EPA Order. Although we do not believe that our involvement in the
Patterson Site will have a material adverse effect on our consolidated
financial condition or results of operation, if a plan of action cannot be
agreed upon or if the EPA or the State of California imposes remediation
requirements beyond the scope presently contemplated based upon our current
understanding with the EPA, our liability could exceed our current
expectations. See Note 15 to our Consolidated Financial Statements for the year
ended December 31, 1998.
We are defendants in two lawsuits brought by adjoining land owners alleging
damage to their property resulting from the discharge of sewage and other run-
off at one of our Petro Stopping Centers. We do not believe that our
involvement in these matters will have a material adverse effect on our
consolidated financial condition or results of operation.
Where required or believed by us to be warranted, we take action at our
locations to correct the effects on the environment of prior disposal practices
or releases of chemical or petroleum substances by us or other parties. In
light of our business and the quantity of petroleum products that we handle,
there can be no assurance that hazardous substance contamination does not exist
or that material liability will not be imposed in the future.
Other Regulations
We also operate under local licensing ordinances. The issuance of permits for
service station and lubrication operations is generally a matter of discretion
and dependant on the underlying requirement that the
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granting of the permit be consistent with the health, safety and moral welfare
of the community. Although we believe that careful planning and site selection
reduces the likelihood of significant zoning opposition, significant opposition
to the construction of a Petro Stopping Center, if encountered, may cause us to
incur substantial expenses and delay.
Our restaurant operations are conducted under federal, state and local
regulations concerning health standards, sanitation, fire and general safety,
noncompliance with which could result in temporary or permanent curtailment or
termination of a restaurant's operations. In addition, difficulties in
obtaining the required licensing or approvals could result in delays or
cancellations in the openings of new restaurant facilities.
In addition, state and local authorities oversee our video poker operations.
During 1996, the State of Louisiana enacted a statute requiring the cessation
of video poker operations unless the parish in which the operations were
conducted voted to allow the continued operations of video poker machines. On
November 5, 1996, the parish in which the Shreveport facility is located voted
to continue to allow video poker operations, while the parish in which the
Hammond facility is located voted to disallow video poker operations.
Therefore, we were required to phase out video poker operations at the Hammond
facility at the end of June 1999. We are, in accordance with normal procedure,
in the process of applying to the Louisiana authorities for a 1999/2000 license
for the Shreveport facility.
As a franchisor we also operate under federal and state regulation in the
states in which we offer franchises or where franchised Petro Stopping Centers
are currently operating. Federal regulations require that we provide each
prospective franchisee with a disclosure document that provides information
regarding the Operating Partnership and the relevant provisions of the
franchise agreement and other ancillary contracts. In addition, some state
regulations require that the franchisor be registered or be exempt from the
applicable registration requirements. Federal and state franchising laws
prohibit "deceptive trade practices" and, in some cases, impose fairness and
"anti-discrimination" standards on us.
In addition to the franchise regulations outlined immediately above, our
operations are conducted under the Petroleum Marketing Practices Act. The
Petroleum Marketing Practices Act is a federal law that prohibits a franchisor
engaged in the sale, consignment or distribution of refiner-branded motor fuels
from terminating or failing to renew a "franchise" or "franchise relationship,"
except on specified grounds and only after compliance with the statute's
notification provisions. The Petroleum Marketing Practices Act expressly
preempts state law concerning the termination, nonrenewal and notice with
respect to motor fuel franchises. The Petroleum Marketing Practices Act is
enforced judicially through cases interpreting the statute.
We are considered a franchisor under the Petroleum Marketing Practices Act
because we distribute and sell diesel fuel and gasoline under Mobil's
trademarks to our franchisees. Thus, we are subject, as a franchisor, the
Petroleum Marketing Practices Act's termination, nonrenewal and notice
requirements in each of our individual motor fuel contracts with our
franchisees. At the same time, we are entitled to the Petroleum Marketing
Practices Act's protections in our branded supply agreements with Mobil, as
well as other branded suppliers. At September 30, 1999, we are not party to any
Petroleum Marketing Practices Act litigation.
Under the Americans with Disabilities Act of 1990, all public accommodations
are required to meet federal requirements related to access and use by disabled
persons. While we believe our facilities are in compliance with these
requirements, a determination that we are not in compliance with the Americans
with Disabilities Act could result in the imposition of fines or an award of
damages, which could adversely affect us.
We believe that all of our Petro Stopping Centers are in compliance in all
material respects with existing laws and regulations. However, new laws and
regulations could require us to incur significant additional costs.
Employees
As of September 30, 1999, we had a total of 4,023 employees, of which 3,784
were full-time and 239 were part time. At that date, 586 of our employees were
salaried and performed executive, management, or administrative functions and
the remaining 3,437 employees were hourly employees. Almost 96% of our
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employees worked at the Petro Stopping Centers and most employees at the Petro
Stopping Centers work on an hourly basis.
We have never had a work stoppage. We believe that we provide working
conditions, wages and benefits that are competitive with other providers of the
kinds of products and services offered by us. We believe that our relations
with our employees are good.
Properties
Our corporate headquarters is located in a three-story building in El Paso,
Texas, which contains approximately 30,000 square feet of space. We lease the
entire building from an affiliate of the Cardwells. See "Certain Relationships
and Related Transactions."
We own the underlying land and all facilities at 24 of our 29 company-
operated Petro Stopping Centers, own all but four acres of the West Memphis
Stopping Center site, own the facility and lease the land at the Hammond,
Louisiana site and lease both the Effingham, Illinois and North Baltimore, Ohio
Petro Stopping Center sites in their entirety. The Petro Stopping Center
located in Effingham, Illinois, is leased from an entity owned by current and
former employees of the Operating Partnership. See "Certain Relationships and
Related Transactions."
In 1998, we purchased land in Mebane, North Carolina and Glendale, Kentucky
for the future construction of two new Petro Stopping Centers. In 1998 we also
entered into a ground lease in Jackson, Mississippi on which to build a new
Petro Stopping Center. We also own a site in Green River, Wyoming which is
suitable for the construction of a new Petro Stopping Center. We have options,
which expire in December 2006, to purchase vacant land owned by the Cardwells
or their affiliates that is located adjacent to four existing Stopping Centers:
Shreveport, Louisiana (seven acres); Weatherford, Texas (thirty-four acres);
Beaumont, Texas (seventeen acres); and Oklahoma City, Oklahoma (thirty acres).
See "Certain Relationships and Related Transactions."
The following table outlines the company-operated Petro Stopping Centers at
September 30, 1999:
<TABLE>
<CAPTION>
Size of Main
Petro Stopping Total Location Building
Location Date Opened Center Acreage Acreage (Sq. Ft.)
-------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
El Paso, Texas.......... April 1975 31 51 20,000
Weatherford, Texas...... September 1977 25 25 21,000
Beaumont, Texas......... May 1981 20 20 13,500
San Antonio, Texas...... September 1982 21 21 13,200
Eloy/Casa Grande,
Arizona................ June 1984 23 36 12,300
Corning, California..... May 1985 18 18 12,300
Amarillo, Texas......... June 1985 20 32 17,300
Shreveport, Louisiana... November 1985 18 21 13,800
Hammond, Louisiana...... January 1986 16 21 12,300
West Memphis, Arkansas.. August 1986 24 63 15,700
Milan, New Mexico....... November 1986 23 30 13,800
Knoxville, Tennessee.... March 1987 25 25 13,800
Kingman, Arizona........ December 1987 38 67 18,200
Oklahoma City,
Oklahoma............... May 1988 30 30 14,600
Perrysburg/Toledo,
Ohio................... August 1988 33 74 20,000
Kingdom City, Missouri.. February 1989 25 35 20,500
Bucksville, Alabama..... February 1990 48 51 14,400
Girard/Youngstown,
Ohio................... May 1990 29 98 20,000
Vinton, Texas........... January 1991 8 19 4,800
Effingham, Illinois..... March 1991 30 30 20,000
Kingston Springs,
Tennessee.............. September 1991 9 12 6,900
Shorter, Alabama........ September 1991 9 9 12,700
Atlanta, Georgia........ March 1992 64 69 21,500
Laramie, Wyoming........ October 1993 35 50 15,500
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Size of Main
Petro Stopping Total Location Building
Location Date Opened Center Acreage Acreage (Sq. Ft.)
-------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Medford, Oregon......... January 1995 15 15 11,500
Ocala, Florida.......... June 1995 37 170 20,500
North Baltimore, Ohio... August 1997 17 40 29,000
North Little Rock,
Arkansas............... September 1997 17 24 16,000
Wheeler Ridge,
California (1)......... June 1999 51 76 27,900
</TABLE>
- --------
(1) The Wheeler Ridge facility is company-operated and jointly-owned with Tejon
Development Corporation. See, "Agreement with Tejon."
We also have under construction new Petro Stopping Centers in Jackson,
Mississippi and Mebane, North Carolina.
Franchises
Each existing franchise agreement grants to the franchisee the right and
license to operate a Petro Stopping Center in a specified territory. The
franchise agreements require that the franchisee, at its expense, build and
operate the Petro Stopping Center in accordance with requirements, standards
and specifications prescribed by us, including site approval, and that the
franchisee purchase products from suppliers approved by us. We, in turn, are
obligated to provide the franchisee with, among other things, advisory
assistance with the operation of the Petro Stopping Center and advertising and
promotional programs.
The agreements require the franchisee to pay us, in addition to initial fees
and training fees, a monthly royalty fee and a monthly advertising fee
(administered through an advertising fund for national and regional
advertising). In some instances, we may waive our contractual right to receive
royalties with respect to a particular location for short periods of time.
During 1998, our revenues from our 21 franchise locations totaled $4.5 million.
In addition, franchisees contributed $401,000 to the advertising programs.
While a majority of diesel purchases at Petro Stopping Centers are paid for
by third-party billing companies, a portion of diesel fuel purchases are paid
for through direct billing arrangements with particular trucking companies. As
provided in the franchise agreements, we purchase all of the receivables
generated by the franchisees from customers using direct billing arrangements.
These purchases are on a non-recourse basis to the franchisee.
In addition, upon termination or expiration of the franchise agreement in
the event that the franchisee wishes to accept an offer from a third-party to
purchase its facility, each franchise agreement grants us a right of first
refusal to purchase the facility, at the price offered by the third party.
Similarly, in fourteen cases, we have the right to purchase the franchise for
fair market value, as determined by the parties or an independent appraiser,
upon termination or expiration of the franchise agreement.
All franchises are operated under franchise agreements which, with the
exception of one, are for an initial ten-year term and are automatically
renewed for two consecutive five-year terms, unless the franchisee gives a
termination notice at least twelve months prior to the expiration of the
franchise agreement. As of September 30, 1999, we had 22 franchise locations
open and operating in the following markets:
<TABLE>
<CAPTION>
Expiration of
Location Date Opened Initial Franchise Term
-------- ----------- ----------------------
<S> <C> <C>
Elkton, Maryland......................... Sept. 1985 Sept. 1995(a)
Ft. Chiswell, Virginia................... Mar. 1986 Mar. 1996(a)
Portage, Wisconsin (b)................... Sept. 1986 Dec. 2001
Joplin, Missouri......................... Oct. 1987 Oct. 1997(a)
Lake Station, Indiana.................... Oct. 1987 Oct. 1997(a)
Ruther Glen, Virginia.................... Mar. 1988 Mar. 1998(a)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Expiration of
Location Date Opened Initial Franchise Term
-------- ----------- ----------------------
<S> <C> <C>
Benton Harbor, Michigan................... July 1989 July 1999(a)
New Paris, Ohio........................... Oct. 1989 Oct. 1999(a)
Salina, Kansas............................ Feb. 1990 Feb. 2000
Jerome/Twin Falls, Idaho.................. Dec. 1990 Dec. 2000
Florence, South Carolina.................. Feb. 1991 Feb. 2001
Rochelle, Illinois........................ Apr. 1992 Apr. 2002
Fargo North Dakota........................ Nov. 1994 Nov. 2004
Carnesville, Georgia...................... Jan. 1995 Jan. 2005
Bordentown, New Jersey.................... Jan. 1996 Jan. 2006
York, Nebraska............................ Dec. 1996 Dec. 2006
Dupont, Pennsylvania...................... May 1997 May 2007
Claysville, Pennsylvania.................. Nov. 1997 Nov. 2007
Breezewood, Pennsylvania.................. Feb. 1998 Feb. 2008
Milton, Pennsylvania...................... Mar. 1998 Mar. 2008
Monee, Illinois........................... April 1998 April 2008
Lowell, Indiana........................... April 1999 April 2009
</TABLE>
- --------
(a) The initial ten year term provided for in six of our oldest franchise
agreements has elapsed. Under the terms of these agreements, unless written
notice of termination is received from the franchisee twelve months prior
to the tenth anniversary date of the opening of the franchise location, the
franchise is automatically renewed for five additional years. No notices of
termination were received from the affected franchisees. By agreement with
the affected franchisees, execution of a renewal franchise agreement was
delayed pending completion of the revised form franchise agreement. The
revised franchise agreement has now been given to these franchisees for
execution and each franchisee has been given the choice to either enter
into the new agreement or remain as franchisees under the terms of their
existing agreement.
(b) The franchise agreement for the Portage, Wisconsin location has been
amended so that its initial term is approximately fifteen years (expiring
in December 2001). The agreement provides for only one five-year renewal.
Two franchisees operate four locations, one operates three locations, one
operates two locations, and nine operate one location each. All of the
franchisees are unaffiliated with us, except Highway Service Ventures, Inc.,
which operates four of our franchised locations. See "Certain Relationships and
Related Transactions." In addition to our currently operational 22 franchise
locations, we have signed an agreement for an additional franchise location in
Frederick, Maryland, which is in the final stages of construction.
Agreement with Tejon
We have entered into an operating agreement and formed a limited liability
corporation, Petro Travel Plaza LLC, with Tejon to build and operate a Petro
Stopping Center branded location in southern California. Pursuant to the terms
of the Limited Liability Company Operating Agreement of Petro Travel Plaza LLC,
dated as of December 5, 1997, among the Operating Partnership, Tejon and Tejon
Ranch Company, as guarantor, we made an initial capital contribution of $2.0
million for working capital and inventory, which is our basis for the
investment in the LLC interest. The agreement contemplates that the limited
liability company will finance construction of the location with a non-recourse
credit facility. Under the agreement, we will receive an administrative fee of
$250,000 per annum and as a 40% member in the limited liability company, will
receive 40% of the location's operating earnings. This location opened in June
1999.
Business Strategy
Our primary strategic goal is to maximize profitability through (1)
continued expansion of products and services available at our Petro Stopping
Centers, (2) increases in our fuel volume, and (3) cross marketing and
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<PAGE>
promoting the multiple products and services available at Petro Stopping
Centers to direct additional customer traffic to higher margin products and
services. The key components of this strategy include the following
initiatives:
Preserve and Enhance Our High Quality Reputation. We believe our competitive
success is largely attributable to our reputation for providing the "quality
difference" -- what we believe to be a high level of customer service and
quality products delivered in a consistently clean and friendly environment.
The physical design and lay-out of a Petro Stopping Center, which is
standardized network-wide, has been created to attract the professional truck
driver as well as tourist traffic and local clientele. A typical Petro Stopping
Center is built on approximately 25 acres of land, which we believe is two to
three times larger than the size of our competitors' typical sites. The
facility design and lay-out provides for gas islands in the front of our
properties for appeal to the tourist traffic and local clientele, and diesel
fuel islands, which are self-serve facilities of eight to sixteen lanes,
designed to accommodate the professional truck driver, located in the rear of
the properties.
Given that approximately two out of every three stops by truck drivers are
for a reason other than the purchase of fuel, and that the average length of
time for a truck stop by a truck driver is four to five hours, we have designed
our Petro Stopping Centers to be destination stops with multiple amenities --
meals, laundry, showers, exercise and entertainment, and truck repair and
maintenance -- in addition to fuel. For example, a typical Iron Skillet
restaurant has a seating capacity of 180, with areas designated for both
"trucker"' and "non-trucker" patrons. In addition to the Iron Skillet, we have
introduced nationally branded food offerings such as Blimpie Subs and Salads,
Wendy's, Pizza Hut, and Baskin-Robbins in our facilities, and we intend to
selectively expand these offerings in the future. Our travel stores offer
merchandise such as food, clothing, electronics, toiletries, gifts and truck
accessories from an average retail selling area of approximately 1,900 square
feet.
Capitalize on Alliances with Mobil and Volvo Trucks. We believe our
strategic alliances with Mobil and Volvo Trucks will strengthen our competitive
position by providing us with what we believe to be well known, high quality
brand names, increased traffic, and opportunities to promote integrated
products and services to the trucking industry. Our strategic alliance with
Mobil began in 1997, and currently we are Mobil's second largest domestic
distributor of motor fuels. Today Mobil branded diesel fuel is sold in all of
our company-operated Petro Stopping Centers and Mobil branded gasoline is sold
in various of our sites, as designated by Mobil. Mobil branded oils and
lubricants are sold in all company-operated truck preventative maintenance
centers, Petro:Lubes. We believe that the Mobil brand enhances our appeal to
highway motorists. In addition, we and Mobil jointly developed an enhanced
diesel additive product that helps our customers achieve cost savings and
improved fuel efficiencies.
We are in the process of developing plans with Volvo Trucks, the world's
second largest heavy truck manufacturer, based on total unit production, to
expand the truck repair and maintenance services available through our
Petro:Lubes. These plans will include a repair overflow program for Volvo
Trucks to be offered in conjunction with Volvo Trucks' dealership network, and
initiatives to jointly market Volvo Trucks' and our services. We believe that
these initiatives with Volvo Trucks can be accomplished utilizing our existing
facility infrastructure. Through our existing operations and strategic
alliances with Volvo Trucks and Mobil, we believe trucking fleets and owner
operators will look to Petro Stopping Centers as their source for fully
integrated, "turn-key" services.
Fleet Marketing Opportunities. In an effort to maximize fuel volumes and
available discounts and rebates, many trucking fleets are narrowing their lists
of approved truck stop chains with whom their truckers are authorized to do
business. In addition, trucking fleets are increasingly concerned with
attracting and retaining truck drivers in an effort to reduce both overhead
expenses and annual driver turnover, which approximates 100% industry-wide. We
believe that our strategic alliance with Volvo Trucks will enhance our ability
to meet the need of trucking fleets to keep their trucks on the road, by
providing a national network of preventative maintenance, warranty and repair
work services and addressing their related data capture needs.
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<PAGE>
We also believe our nationwide network of full service facilities and our
appeal to professional truck drivers will enable us to capture an additional
share of the fleet market.
Expansion of Nationwide Network and Upgrade of Facilities. We believe that
the expansion of our nationwide network will strengthen our appeal to, and as a
result, increase our volume of business with, trucking fleets. We plan to
expand our network by acquiring vacant land to build new company-operated Petro
Stopping Centers, entering into arrangements for additional franchised Petro
Stopping Centers, and acquiring and upgrading existing independent truck stops.
We estimate that a typical company-operated Petro Stopping
Center will require between $10 million and $11 million of initial capital
expenditures, take approximately nine to twelve months to build from the
commencement of construction, generate positive operating contribution within
three months of completion and achieve full operating contribution levels
within three years of completion. In addition to the recently opened Petro
Stopping Center in Wheeler Ridge, California and the Petro Stopping Centers
currently under construction in Jackson, Mississippi and Mebane, North
Carolina, our current expansion plans include the commencement of construction
of six new company-operated locations through December 31, 2000. We estimate
that construction of all of these facilities will require capital expenditures
of approximately $63 million, which we intend to finance with additional
borrowings under our new senior credit facility and internally generated cash.
We are also considering the franchising of up to an additional seven facilities
over the same time period.
During 1998 we evaluated all existing company-operated Petro Stopping
Centers and developed a plan to upgrade, enhance and expand existing facilities
to maximize product and service offerings. The contemplated upgrades include
remodeling bathrooms, showers and our Iron Skillet restaurants, installing
state-of-the-art kitchen equipment, adding lube bay capacity and upgrading our
travel stores. In addition, we have embarked on a systems upgrade effort,
designed to maximize network efficiencies in capturing point-of-sale and
inventory control data and to take advantage of evolving telecommunications
technology.
59
<PAGE>
MANAGEMENT
The following sets forth certain information with respect to the persons who
are members of the Board of Directors and senior management team of Holdings,
Petro Holdings Financial Corporation and the Operating Partnership as of
September 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
J.A. Cardwell, Sr. ...... 67 Chairman(a), President, Chief Executive
Officer(a), Member of the Executive Committee(a)
and Director
Evan C. Brudahl.......... 44 Senior Vice President of Operations(a)
James A. Cardwell, Jr. .. 39 Senior Vice President of Marketing and Business
Development(a) and Director
Travis R. Roberts........ 63 Vice President of Real Estate Acquisitions(a)
Nancy C. Santana......... 43 Vice President and General Counsel(a) and
Secretary
David Latimer............ 41 Vice President of Petro:Lube(a)
David A. Appleby......... 32 Vice President of Finance, Treasurer and
Assistant Secretary(a)
Nancy B. Carlson......... 43 Director
Kevin T. Weir............ 42 Director and Member of the Audit Committee and
Executive Committee(a)
Larry J. Zine............ 44 Director
Robert Grussing IV....... 41 Director
Martha P. Boyd........... 37 Director
</TABLE>
- --------
(a) Position held only with the Operating Partnership.
J.A. Cardwell, Sr.--J.A. Cardwell, Sr. opened the first Petro Stopping
Center in 1975 and has been serving as our Chairman and Chief Executive Officer
since May 1992. J.A. Cardwell, Sr. has responsibility for our overall
performance, defining our image in the marketplace, identifying growth
opportunities and overseeing employee and customer retention. He served as the
Chairman of the National Association of Truck Stop Operators in 1983 and 1984
and has worked on various committees of the association since that time. He
currently serves as a trustee for Archstone Communities and as a director of El
Paso Electric Company (both publicly traded companies). J.A. Cardwell, Sr. is
the father of James A. Cardwell, Jr.
Evan C. Brudahl--Evan Brudahl is the Senior Vice President of Operations and
is acting as our interim Chief Operating Officer while we complete our search
for a new President and Chief Financial Officer. Mr. Brudahl is responsible for
our operations, overseeing engineering, fuel purchasing and transportation,
franchise operations and the Diesel Fuel Island, Travel and Convenience Stores
and Petro:Lube operations. Mr. Brudahl worked for Mobil Corporation for 21
years holding various management positions. Mr. Brudahl worked for us on
secondment from Mobil Corporation from January 1997 until March 31, 1999, when
he became our employee. From January 1997 to March 31, 1999, while Mr. Brudahl
was still an employee of Mobil Corporation, he served as Mobil's representative
on the Board of Directors, but resigned from the Board when he became our
employee.
James A. Cardwell, Jr.--James A. Cardwell, Jr. is Senior Vice President of
the Marketing and Business Development, responsible for marketing fleet
business and the Iron Skillet and branded fast food operations. Mr. Cardwell
has been involved with the Operating Partnership full time for 15 years and has
held various positions including operations management as Vice President of
Operations from 1986 to 1992. Prior to his current position, he served as Vice
President of National Sales and Promotions from June 1993 to January 1997 and
as Senior Vice President of Operations and Marketing during 1997 and early
1998. James A. Cardwell, Jr. is the son of J.A. Cardwell, Sr.
Travis R. Roberts--Travis Roberts is Vice President of Real Estate
Acquisitions. Mr. Roberts oversees new site selections. Mr. Roberts has been
involved with the Operating Partnership since 1975 and prior to his current
position, he served as Vice President of Engineering from 1992 to 1998.
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<PAGE>
Nancy C. Santana--Nancy Santana joined the Operating Partnership effective
July 1, 1998 in the capacity of Vice President, Secretary and General Counsel,
after a sixteen year legal career in private practice. Prior to joining us, Ms.
Santana was the Chairman of the Real Estate, Banking and Lending section at
Kemp, Smith, Duncan & Hammond, P.C., in El Paso, Texas. Ms. Santana is
responsible for coordination of all our legal matters, real estate acquisitions
and risk management.
David Latimer--David Latimer joined the Operating Partnership in 1983, and
has been serving as Vice President of Petro:Lube since April 1995. Mr. Latimer
also serves as our representative to the National Tire Dealers and Retreaders
Association and The Maintenance Council.
David A. Appleby--David Appleby has been the Vice President of Finance and
Treasurer since March 1999 and is responsible for all accounting, finance,
treasury and credit operations. Prior to assuming this position, Mr. Appleby
was the Controller for the Operating Partnership, a position he had held since
February 1998. Prior to his position with the Operating Partnership, Mr.
Appleby was a Senior Audit Manager with KPMG Peat Marwick, LLP from 1991 to
1998.
Nancy B. Carlson--Nancy Carlson has been a director of the Operating
Partnership since May 1999. Ms. Carlson currently serves as the Manager of the
Automotive Lubricant Business for Mobil's North American business. Prior to her
current position, she served as the Global Brand Manager for Mobil Corporation.
Prior to these positions, Ms. Carlson held several marketing positions within
North America's Marketing and Refining division. Ms. Carlson has been an
employee of Mobil Corporation for 20 years.
Kevin T. Weir--Kevin Weir has been a director of the Operating Partnership
since January 1999. Mr. Weir currently serves as Manager of the North American
Distillate Business for Mobil Oil Corporation Prior to his current position at
Mobil Corporation, he served as Retail Dealer Operations Manager and Surface
Transportation Manager of Mobil Oil Corporation's North America Marketing and
Refining division. Mr. Weir has been an employee of Mobil Corporation for 20
years.
Larry J. Zine--Larry Zine was hired in December 1996 as Executive Vice
President and Chief Financial Officer of the Operating Partnership. In January
1999, Larry Zine was elected President and a member of the Board of Directors
of the Operating Partnership and became responsible for all finance,
accounting, management information systems and insurance and benefit services
for the Operating Partnership. Mr. Zine resigned from these positions effective
upon the consummation of the Recapitalization. Mr. Zine remains a Director and
has agreed to remain with us in a limited employment capacity. Prior to joining
the Operating Partnership Mr. Zine was the Executive Vice President and Chief
Financial Officer for The Circle K Corporation, the second largest chain of
convenience stores in the United States, from 1988 to 1996. Mr. Zine has been a
director of MMH Holdings, Inc., a holding company whose sole direct subsidiary
is Morris Material Handling, Inc., a manufacturer, distributor and service
provider of "through-the-air" material handling equipment, since March 30,
1998.
Effective upon the announcement of Mr. Zine's resignation, Evan Brudahl, who
was formerly an employee of Mobil Corporation and has been working for us since
January 1997, assumed the role of Interim Chief Operating Officer while we
complete our search for a new President. Until Mr. Zine's replacement is found,
David Appleby, who has been with us since February 1998 and is currently our
Vice President of Finance, has assumed Mr. Zine's financial responsibilities.
In addition, J.A. Cardwell, Sr., our founder, Chairman and Chief Executive
Officer, will remain active in our daily operations.
Robert Grussing IV--Robert Grussing has been a director of the Operating
Partnership since July 1999. Mr. Grussing currently serves as Senior Vice
President, Business Development and Strategic Planning for Volvo Trucks North
America in Greensboro, NC. From 1992 to 1997, he served in a number of
executive positions at Mack Trucks, Inc. in Allentown, PA. From 1980 to 1992,
Mr. Grussing was an employee of General Electric Company. Mr. Grussing
currently serves as Chairman of the Board for Volvo Trucks Canada, Inc. and is
a director of Volvo Trucks de Mexico, S.A. de C.V. and Arrow Truck Sales, Inc.
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<PAGE>
Martha P. Boyd--Martha Boyd has been a director of the Operating Partnership
since July 1999. Ms. Boyd is employed by Volvo Trucks of North America, Inc. as
Special Counsel, Strategic Support. In her current role, she acts as liaison
between Volvo Trucks of North America and companies in which it holds a
substantial interest. She has been employed in the legal department of Volvo
Trucks of North America for nine years, most recently as Vice President,
General Counsel and Secretary. Prior to joining Volvo Trucks of North America,
Ms. Boyd practiced commercial litigation with the law firm of Balch & Bingham.
Employment Agreements
The Operating Partnership has entered into three employment agreements with
company executives: J.A. Cardwell, Sr., James A. Cardwell, Jr. and Evan C.
Brudahl.
J.A. Cardwell, Sr.'s employment agreement commenced on February 10, 1999 and
will expire on February 10, 2002. J.A. Cardwell, Sr.'s employment agreement is
automatically renewable each year for one additional year, unless either party
gives at least three months prior written notice not to renew the agreement.
Under his employment agreement, J.A. Cardwell, Sr.'s annual base salary is
$420,000 and may be increased by the Operating Partnership's Board of Directors
or compensation committee, if one is elected. J.A. Cardwell, Sr. is entitled to
receive an annual bonus of between 0%-120% of his annual base salary based on
our financial performance measured by EBITDA targets. The EBITDA targets are
mutually agreed upon between J.A. Cardwell, Sr. and the Operating Partnership.
Under the terms of his employment agreement, J.A. Cardwell, Sr. also receives a
car, life insurance, tax preparation advice and a country club membership,
which, in the aggregate, costs the Operating Partnership approximately $33,000
per annum.
The employment of J.A. Cardwell, Sr. may be terminated either with cause,
which includes termination for felony conviction, misconduct or continued
failure to use reasonable best efforts, or without cause. He may elect to
terminate his employment agreement at any time with 60 days notice; and in any
of these cases, he will be entitled to receive his base salary and accrued
vacation pay. If the Operating Partnership terminates J.A. Cardwell, Sr.
because of a disability, he will be entitled to his base salary and accrued
vacation pay through the date of termination, offset dollar for dollar by any
disability insurance benefits he receives from insurance the Operating
Partnership provides. J.A. Cardwell, Sr.'s employment agreement contains
customary non-solicitation provisions upon termination of the agreement.
James A. Cardwell, Jr.'s employment agreement commenced on February 10, 1999
and will expire on February 10, 2002. Under his employment agreement, the
annual base salary of James A. Cardwell, Jr. is $180,000 and may be increased
by the Operating Partnership's Board of Directors or compensation committee, if
one is elected. James A. Cardwell, Jr. is entitled to receive an annual bonus
of between 0%-110% of his annual base salary based on our financial performance
measured by EBITDA targets. The EBITDA targets are determined at the sole
discretion of the Operating Partnership's Board of Directors. Under the terms
of his employment agreement, James A. Cardwell, Jr. also receives life and
disability insurance and a country club membership, which, in the aggregate,
costs the Operating Partnership approximately $11,000 per annum.
Under his employment agreement, the Operating Partnership may terminate
James A. Cardwell, Jr.'s employment with cause, which includes termination for
felony conviction, misconduct or continued failure to use reasonable best
efforts, without cause, or due to his disability. James A. Cardwell, Jr. may
terminate his employment either for good reason, which includes a reduction in
base salary or the Operating Partnership's failure to provide the material
benefits due to him, or without good reason. Generally termination of the
employment agreement by the Operating Partnership without cause or by James A.
Cardwell, Jr. for good reason entitles him to receive his base salary and
accrued vacation pay through the date of termination, a lump-sum payment equal
to one times his then-current base salary, specified benefits for twelve months
following the date of termination, and his annual bonus for the year his
employment terminates which he would have otherwise received, pro-rated to the
date of termination. Termination of the employment agreement by the Operating
Partnership with cause or by James A. Cardwell, Jr. without good reason
entitles him to receive only his base salary and accrued vacation pay through
the date of termination. If the Operating Partnership terminates James
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<PAGE>
A. Cardwell, Jr. because of his disability, he will be entitled to his base
salary and accrued vacation pay through the date of termination, offset dollar
for dollar by any disability insurance benefits he receives from insurance the
Operating Partnership provides. James A. Cardwell, Jr.'s employment agreement
contains non-solicitation provisions upon termination of the agreement.
Evan C. Brudahl's employment agreement commenced on April 1, 1999 and will
expire on December 31, 2003. Mr. Brudahl received a one-time signing bonus of
$38,000 upon execution of his employment agreement. Mr. Brudahl's annual base
salary is $189,600 and may be increased by the Operating Partnership's Board of
Directors or compensation committee, if one is elected. Mr. Brudahl is entitled
to receive an annual bonus of between 0%-120% of his annual base salary based
on our financial performance measured by EBITDA targets. The EBITDA targets are
determined at the sole discretion of the Operating Partnership's Board of
Directors. Under the terms of his employment agreement, Mr. Brudahl also
receives disability insurance and a country club membership, which, in the
aggregate, costs the Operating Partnership approximately $10,000 per annum.
Under his employment agreement, the Operating Partnership may terminate his
employment with cause, which includes termination for felony conviction,
misconduct or continued willful failure to use reasonable best efforts, without
cause, or due to his disability. Mr. Brudahl may terminate his employment for
good reason, which includes a reduction in base salary, the Operating
Partnership's failure to provide the material benefits due to him, or the
Operating Partnership's failure to appoint him President after the current
President ceases to serve in that capacity, or without good reason. Generally,
termination by of the employment agreement by the Operating Partnership without
cause or by Mr. Brudahl for good reason entitles him to receive his base salary
and accrued vacation pay through the date of termination, a lump-sum payment
equal to two times his then-current base salary, specified benefits for twelve
months following the date of termination, and his annual bonus for the year his
employment terminates which he would have otherwise received, pro-rated to the
date of termination and an additional cash payment of $50,000. Failure by the
Operating Partnership to negotiate the renewal of Mr. Brudahl's employment
agreement in good faith prior to its expiration will also entitle him to a lump
sum payment equal to his annual base salary plus an additional payment of
$50,000.
Termination of the employment agreement by the Operating Partnership with
cause or by Mr. Brudahl without good reason entitles him to receive only his
base salary and accrued vacation pay through the date of termination. If the
Operating Partnership terminates him because of his disability, Mr. Brudahl
will be entitled to his base salary and accrued vacation pay through the date
of termination, offset dollar for dollar by any disability insurance benefits
he receives from insurance the Operating Partnership provides. The employment
agreement contains customary non-solicitation provisions upon termination of
the agreement.
Generally, if a third party acquires more than 50% of the common partnership
interests in the Operating Partnership, or the Operating Partnership transfers
more than 50% of its equity interests to an unrelated third party, and any
payments made to Mr. Brudahl as a result of this change in control are subject
to the excise tax imposed under the Internal Revenue Code on "excess parachute
payments" (as defined in the Code), Mr. Brudahl's employment agreement provides
that the Operating Partnership will make an additional tax gross-up payment to
Mr. Brudahl to reimburse him for all excise taxes imposed on all such payments
and for any income taxes imposed on the additional gross-up payment.
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<PAGE>
Executive Compensation
The following tables present information concerning the compensation paid
for services rendered to the Operating Partnership during 1996, 1997 and 1998,
to the Chief Executive Officer of the Operating Partnership and the four other
most highly paid executive officers employed by the Operating Partnership at
the end of 1998, collectively, the "Named Executive Officers." After the
Recapitalization, the individuals listed below, other than Mr. Zine, continued
to hold the same positions with the Operating Partnership, but the option award
obligations described below were assumed on an equivalent economic basis by
Holdings.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------
Long-Term
Compensation
Name and Other Annual Awards Options All Other
Principal Position Year Salary Bonus Compensation (% Interest)(1) Compensation
- ------------------ ---- -------- -------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
J.A. Cardwell, Sr. ..... 1998 $398,566 $240,000 -- $248,242(2)
Chief Executive Officer 1997 362,700 -- -- 247,177(2)
1996 363,686 -- -- 247,037(2)
Larry J. Zine........... 1998 328,462 198,000 -- 3,049(3)
Executive Vice President 1997(4) 290,000 174,000 -- 2.75(5) 64,728(6)
&
Chief Financial Officer
Evan C. Brudahl......... 1998 160,000 96,000 --
Senior Vice President--
Operations 1997(4) 135,000 81,000 -- .90(7)
James A. Cardwell, Jr... 1998 160,135 96,000 -- 4,692(8)
Senior Vice President-- 1997 135,000 81,000 -- .90(7) 1,326(9)
Marketing & Business
Development 1996 107,882 -- -- 1,179(9)
David Latimer........... 1998 131,101 64,704 -- 2,772(10)
Vice President--Lube
Operations 1997 128,516 90,959 -- .25(7) 3,166(9)
1996 123,296 -- -- 2,767(9)
</TABLE>
- --------
(1) Options granted to the Named Executive Officers in the Operating
Partnership, expressed as a percent of the Operating Partnership equity.
(2) Represents employer contributions to a 401(k) Plan of $4,702, $3,637 and
$3,497 in 1998, 1997 and 1996, respectively, and life insurance premiums
paid for the benefit of J.A. Cardwell, Sr. in the amount of $243,540
annually for 1998, 1997 and 1996.
(3) Represents employer contributions to a Deferred Compensation Plan.
(4) Mr. Zine's employment commenced December 1996 and Mr. Brudahl's commenced
January 30, 1997.
(5) Represents options to purchase 2.75% of the common partnership interests
of the Operating Partnership granted under the terms of his employment
agreement; 25% of the options become exercisable on each of December 31,
1997, 1998, 1999, and 2000.
(6) Represents payments in connection with relocation expenses incurred by Mr.
Zine.
(7) Represents options to purchase the indicated percentage of the Class B
limited partnership interests of the Operating Partnership granted under
the option plan; 25% of the options become exercisable on each of January
30, 1998, 1999, 2000 and 2001.
(8) Represents employer contributions to a 401(k) Plan and Nonqualified
Deferred Compensation Plan of $3,459 and $1,233, respectively.
(9) Represents employer contributions to a 401(k) Plan.
(10) Represents employer contributions to a 401(k) Plan and Nonqualified
Deferred Compensation Plan of $1,450 and $1,322, respectively.
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<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-end Option/SAR Values
<TABLE>
<CAPTION>
Operating
Partnership
Interests
Underlying Value of Unexercised
Unexercised Options/SARs In-The-Money Options/SARs
at Fiscal at Fiscal
Amount Acquired Value Year-end(%)(2) Year-end($)(3)
Name on Exercise(%)(1) Realized($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
J.A. Cardwell, Sr. ..... -- -- -- --
Larry J. Zine........... -- -- 1.375/1.375(4) $1,346,125/1,346,125
Evan C. Brudahl......... -- -- .225/.675 220,275/660,825
James A. Cardwell,
Jr. ................... -- -- .225/.675 220,275/660,825
David Latimer........... -- -- .0625/.1875 61,188/183,562
</TABLE>
- --------
(1) No options were exercised in 1998.
(2) Options granted to the Named Executive Officers in the Operating
Partnership, expressed as a percent of the Operating Partnership equity.
(3) No market exists for the partnership interests under option. Fair value for
purposes of this table has been determined based on the values received by
Kirschner and Chartwell for their interests in connection with the
Recapitalization.
(4) The unexercisable portion of Mr. Zine's options became exercisable as a
result of the Recapitalization.
Compensation of Members of the Boards of Directors
Members of the Boards of Directors of Holdings, Petro Holdings Financial
Corporation or the Operating Partnership who are not full-time employees of the
Operating Partnership receive a payment of $3,500 per meeting from the
Operating Partnership for their services. Members who are our full-time
employees or employees of our partners do not receive a salary or any other
payment for their services on the Boards of Directors.
Partnership Interests Option Plan
We have established an equity incentive plan to attract and retain key
personnel, including senior management, and to enhance their interest in our
continued success. We apply Accounting Principles Board Opinion No. 25 in
accounting for our plan.
The plan permits the grant of options to purchase up to 7.25% of the limited
partnership interests in the Operating Partnership. Generally, options to
purchase between 0.03 to 0.90 percent of the Class B limited partnership
interests are granted to eligible employees at an exercise price that is not
less than 100% of the fair market value of the limited partnership interests
determined as of the date the option is granted, subject to adjustments in the
event of distributions or redemptions. Accordingly, no compensation cost has
been recognized in the Consolidated Statement of Operations from options issued
under the partnership interest option plan. Class B limited partnership
interests represent ownership interests, but do not include any other rights
such as voting, tax distribution, etc. of common limited partnership interests.
Options generally become vested at a rate of 25% per year. Participants
become fully vested upon:
. the occurrence of a change in control;
. a sale of substantially all of the assets of the Operating Partnership;
. the liquidation of the Operating Partnership;
. the Operating Partnership's consummation or adoption of a plan to make
an extraordinary distribution or redemption; or
65
<PAGE>
. a closing of an initial public offering of equity securities. Options
may be exercised at any time, to the extent that such options are
vested.
All options expire on the earliest to occur of
(a)the tenth anniversary of the date the option was granted;
(b) one year after the participant ceases to be an employee of the
Operating Partnership due to retirement, death or disability;
(c) immediately, if the participant ceases to be an employee of the
Operating Partnership for cause; or
(d) ninety days after the occurrence of the termination of the
participant's employment with the Operating Partnership, for any
reason other than (b) or (c) above.
If a participant ceases to be an employee, all nonvested options are
forfeited.
Effective upon the consummation of the Recapitalization, the option plan,
under its terms, became sponsored by Holdings, and all then outstanding options
granted under the option plan were converted on an equivalent economic basis to
options for equity interests in Holdings on the same terms and conditions,
including their vesting schedules. Due to the necessity of a cash outlay in
order to exercise the options and the illiquid nature of the equity interest
which may thereby be obtained, we are considering the adoption of a phantom
option plan. We believe that the phantom option plan would be more effective in
promoting the goals of equity compensation, while avoiding the practical and
administrative problems inherent in the current option plan.
It is anticipated that the phantom option plan would be structured similarly
to the option plan, with the exception that awards would be paid in cash, and
no equity interest issued. Under the phantom option plan, the vesting schedule
would be increased to no fewer than six years. However, employees would be
guaranteed awards under the phantom option plan which would be at least equal
to the difference between the current value of equity interest subject to their
option award, minus the current exercise price. Participants in the current
option plan would not be eligible to participate in the proposed phantom option
plan unless they agreed to waive any rights under the option plan. Employees
who did not elect to participate in the phantom option plan within a specified
period of time following its adoption would not be permitted to enter the plan
at a later date.
We anticipate that the aggregate equity-related interests under the option
plan, the phantom option plan and any future plans will be between 5% and 10%
of the fully-diluted equity interests of Holdings. At December 31, 1998,
options covering 6.76% of the partnership interests in the Operating
Partnership were outstanding. At December 31, 1998, approximately 2.3% of the
partnership interests were vested. No options were exercised during 1998.
Mr. Zine was granted options separate from the option plan to acquire an
ownership interest in the Operating Partnership, which options became fully
vested and exercisable to purchase partnership interests in Holdings as a
result of the Recapitalization.
Compensation Committee
The Operating Partnership does not maintain a formal Compensation Committee.
Executive level compensation is established by the Board of Directors while
other levels of compensation are established pursuant to established policies
and procedures. The officers administer any bonus plan adopted by the Board of
Directors. The Chief Executive Officer's salary is determined by the Executive
Committee of the Board of Directors. The members of the Executive Committee are
J.A. Cardwell, Sr., Robert Grussing and Kevin Weir.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Holdings is the owner of approximately 99% of the common limited partnership
interests of the Operating Partnership. Petro, Inc. owns 100% of the general
partnership interests of the Operating Partnership. The following table sets
forth certain information regarding beneficial ownership of Holdings' common
partnership interests by each general partner, each limited partner who owns
more than 5% of Holdings' common partnership interests, each director who
beneficially owns partnership interests, each executive officer who
beneficially owns partnership interests and all directors and executive
officers of Holdings as a group. Except as discussed in the footnotes to the
table, each partner listed below has informed us that it will have (1) sole
voting and investment power with respect to its partnership interests, except
to the extent that authority is shared by spouses under applicable law and (2)
record and beneficial ownership with respect to such partner's partnership
interests.
<TABLE>
<CAPTION>
Type of Class of Percentage
Name and Address Interest Interest of Class (1)
- ---------------- --------------- -------- ------------
<S> <C> <C> <C>
J.A. Cardwell, Sr.......................... General Partner Common 1.1%(2)
6080 Surety Drive Limited Partner Common 45.6%(3)
El Paso, Texas 79905
James A. Cardwell, Jr. .................... Limited Partner Common 4.9%(4)
6080 Surety Drive
El Paso, Texas 79905
Mobil Long Haul Inc........................ Limited Partner Common 9.7%
3225 Gallows Road
Fairfax, Virginia 22037
Volvo Petro Holdings, L.L.C................ Limited Partner Common 28.7%
7900 National Service Road
Greensboro, NC 27402-6115
Petro Warrant Holdings Corporation......... Limited Partner Common 10.0%(5)
6080 Surety Drive
El Paso, Texas 79905
All directors and officers as
a group ................................. 51.6%
</TABLE>
- --------
(1) Does not assume conversion of the convertible preferred limited partnership
interests to be owned by Mobil Oil Corporation or the exercise of
management-held options. If conversion of Mobil Oil Corporation's interests
is assumed, Mobil's percentage of the common limited partnership interests
would increase to 13.2% and the interests of the other partners would be
J.A. Cardwell, Sr. (1.0% general partner and 44.0% limited partner), James
A. Cardwell, Jr. (4.6%), Volvo (27.6%) and Petro Warrant Holdings
Corporation (9.6%). In addition to the convertible preferred limited
partnership interests, preferred limited partnership interests are owned by
Mobil Long Haul Inc. ($12.0 million) and the Cardwells or their affiliates
($7.6 million) that are entitled to cumulative preferred returns at the
rate of 9.5% and 8%, respectively, and at December 31, 1998 had aggregate
accrued unpaid preferred returns of $3.6 million. See Note 10 of Notes to
Consolidated Financial Statements.
(2) Represents partnership interests owned of record by Petro, Inc. Petro, Inc.
is a wholly owned subsidiary of Nevada Trio, Inc., a Nevada corporation,
which is a wholly owned subsidiary of Card Partners, L.P., a Texas limited
partnership of which J.A. Cardwell, Sr. and Mrs. J.A. Cardwell, Sr. are
limited partners and of which Texas Mec, Inc., a Texas corporation, is the
general partner. J.A. Cardwell, Sr. is the sole shareholder of Texas Mec,
Inc. Accordingly, J.A. Cardwell, Sr. may be deemed to have beneficial
ownership of the partnership interests owned by Petro, Inc.
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<PAGE>
(3) Represents only partnership interests owned of record by Petro, Inc. and
interests owned individually by J.A. Cardwell, Sr. Until the exchange of
the warrants, which are exchangeable for all of the common stock of Petro
Warrant Holdings Corporation, an affiliate of J.A. Cardwell, Sr. will be
the nominal holder of the only outstanding share of Petro Warrant Holdings
Corporation, which share will be redeemed for $1.00 upon the exchange of
the warrants. J.A. Cardwell, Sr. disclaims any beneficial interest in the
limited partnership interests of Holdings held by Petro Warrant Holdings
Corporation because of the limitations on the economic and voting rights of
the holder of that share prior to the exchange of the warrants and the
acquisition of all the equity interest in Petro Warrant Holdings
Corporation by the holders of the warrants.
(4) Represents partnership interests owned of record by JAJCO II, Inc. as well
as interests owned by James A. Cardwell, Jr. James A. Cardwell, Jr. is the
sole shareholder of JAJCO II, Inc. and may be deemed to have beneficial
ownership of the partnership interest owned by JAJCO II, Inc.
(5) Until the exchange of the warrants, which are exchangeable for all of the
common stock of Petro Warrant Holdings Corporation, an affiliate of J.A.
Cardwell, Sr. will be the nominal holder of the only outstanding share of
Petro Warrant Holdings Corporation, which share will be redeemed for $1.00
upon the exchange of the warrants. J.A. Cardwell, Sr. disclaims any
beneficial interest in the limited partnership interests of Holdings held
by Petro Warrant Holdings Corporation because of the limitations on the
economic and voting rights of the holder of that share prior to the
exchange of the warrants and the acquisition of all the equity interest in
Petro Warrant Holdings Corporation by the holders of the warrants.
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<PAGE>
MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS
Since 1997, all new related party transactions or the renewal of existing
related party transactions have been subject to a process whereby the project
is competitively bid, and, if awarded to a related party, is reviewed by a
member of senior management not affiliated with the Cardwells, Mobil
Corporation or Volvo Trucks to ensure that the contracts contain arms-length
terms and competitive pricing. We believe this process ensures that our current
affiliated transactions are on arms-length terms.
Many of the relationships described below between the Operating Partnership
and entities affiliated with the Chartwells were entered into prior to 1992,
when the Cardwells or their affiliates owned 100% of the Operating Partnership.
Prior to 1997, other than Board of Director approval, there was no formal
procedure to ensure that related party contracts contained arms-length terms
and competitive pricing. We believe that all of our existing related party
transactions are on terms comparable to those which could have been received in
an arms-length transaction.
Recapitalization Agreement
On July 23, 1999, Holdings consummated an agreement with Chartwell, Mobil,
Volvo Trucks, the Cardwells and their affiliates, the Operating Partnership and
Petro Warrant Holdings Corporation. Under this agreement:
. Holdings purchased the partnership interests held by Chartwell in
exchange for $55.0 million in cash and a note with an accreted value on
the date of issuance of $14.8 million;
. the Cardwells and their affiliates and Mobil contributed all or a
portion of their common limited and preferred limited partnership
interests in the Operating Partnership, as the case may be, to Holdings,
in exchange for like partnership interests in Holdings;
. Mobil invested an additional $5.0 million in Holdings in exchange for a
Class B preferred limited partnership interest in Holdings;
. Volvo Trucks invested $30.0 million in Holdings in exchange for a common
limited partnership interest in Holdings; and
. Petro Warrant Holdings Corporation invested $9.7 million in Holdings in
exchange for a common limited partnership interest.
Concurrently with the consummation of these transactions, the Operating
Partnership also entered into agreements with Mobil and Volvo Trucks, which are
described below.
On July 23, 1999, Holdings also consummated an agreement with Kirschner,
under which Holdings purchased the common limited partnership interest held by
Kirschner in the Operating Partnership in exchange for $2.8 million in cash.
Tax Reimbursements
The Holdings partnership agreement requires us to make distributions to each
of the Holdings partners in an amount sufficient to allow each partner to pay
federal, state and local income taxes with respect to allocations of taxable
income to each partner by us. For the fiscal year ended December 31, 1998, tax
distributions made to the partners of the Operating Partnership were $823,000.
No tax distributions were made to the partners of the Operating Partnership in
the fiscal years ending December 31, 1996 and 1997. Tax distributions in the
future will be based on separate allocations of taxable income of Holdings.
Principal Executive Offices
The office building in which our principal executive offices are located is
owned by J.A. Cardwell, Sr. We lease the entire building under a lease expiring
on December 31, 2005. Under the lease, we pay rent totaling
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<PAGE>
$336,000 per year, as well as taxes, maintenance and other operating expenses.
For each of the fiscal years ended December 31, 1996, 1997 and 1998, we made
annual rental payments of $336,000.
Effingham, Illinois Stopping Center
The Stopping Center located in Effingham, Illinois is owned by Truck Stop
Property Owners, Inc. which is owned by Travis Roberts, who is a current
officer of the Operating Partnership, and five former employees of the
Operating Partnership. Mr. Roberts owns 22% of the stock of Truck Stop. We
lease the Effingham Center under a lease expiring in May 2006, which provides
for adjustable base rental payments tied to interest rates plus taxes and
operating expenses. We have three consecutive options to renew the lease for
terms of five years each at rental rates equal to the adjustable base rent,
plus adjustments at the time of renewal. We also have a right of first refusal
to purchase the Petro Stopping Center at any purchase price agreed upon between
Truck Stop and a third party. We made rental payments to Truck Stop of
$1.1 million in 1996, $1.1 million in 1997 and $1.1 million in 1998.
Highway Service Ventures, Inc.
Highway Service Ventures, Inc., a corporation in which J.A. Cardwell, Sr.
owns a 32.5% interest, operates four franchised Petro Stopping Centers located
in Elkton, Maryland; Ruther Glen, Virginia; Florence, South Carolina; and
Carnesville, Georgia. The original franchise agreements with respect to two of
these Petro Stopping Centers have expired and Highway Service Ventures has been
unwilling to enter into long-term extensions of its franchise agreements.
Highway Service Ventures continues to operate all four locations as Petro
Stopping Centers under the terms of the prior agreements. We have finalized a
new form of franchise agreement with input from Highway Service Ventures, and
we expect Highway Service Ventures to enter into this new agreement.
Alternatively, Highway Service Ventures has been given the choice to continue
to operate under the terms of its existing franchise agreement. See "Risk
Factors--The Loss of a Significant Number of Our Franchises Would Negatively
Impact Our Ability to Market Ourselves as a Nationwide Chain." None of these
franchise agreements contains terms that are any more favorable to HSV than the
terms in any of our other franchise agreements.
Petro:Tread
In May 1992, we leased a facility in El Paso, Texas from a trust, in which
J.A. Cardwell, Sr. is a 50% beneficiary, to operate our retread plant, which
produces retread tires for sale at Petro Stopping Centers and to others. The
lease, which expired in October 1995, provided for two consecutive renewal
options for terms of five years each. We exercised our first renewal option in
October 1995 to renew the lease for five years commencing November 1, 1995. We
made lease payments of $72,000, for the fiscal years ended December 31, 1996,
1997 and 1998. In addition, had sales which amounted to $153,000 in 1996,
$47,000 in 1997 and $60,000 in 1998 of retread tires to El Paso Tire Center
Inc., of which J. A. Cardwell, Sr. owns 100% of the equity interest.
Product Services Agreement and Fuel Sales Agreement
Under an exemption from the exclusive terms of the Mobil Gasoline Supply
Agreement and under the terms of three petroleum products agreements with C&R
Distributing, Inc. we currently purchase Chevron branded gasoline and motor
oils at cost for three of our facilities from C&R, a corporation whose sole
shareholder is Nevada Trio, Inc., a Nevada corporation which is owned 100% by
the Cardwells and their affiliates. The C&R fuel agreement requires us to keep
Chevron unleaded gasoline, regular gasoline and motor oils continuously stocked
and offered for sale in quantities sufficient to meet demand. Under the C&R
fuel agreement, we and C&R have also agreed to notify each other if either
party has petroleum products for sale with no obligation to purchase any
portion of these products. In addition, in January 1997, we entered into a
product services agreement with C&R which terminates in December 2004, under
which C&R provides us with
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<PAGE>
fuel hauling and fuel pump maintenance and services within the El Paso, Texas
metropolitan area, if requested by us. The C&R services agreement provides that
C&R will charge us for these services at the lowest rates charged by C&R for
similar services and, in any event, at rates that will not exceed rates
available from unrelated parties providing similar services. The C&R fuel
agreement is exclusive but allows us to cancel the agreement with 30 prior days
notice. The C&R services agreement is non-exclusive and allows us to enter into
similar agreements with other parties. We made purchases from C&R under these
two agreements aggregating $11.4 million in 1996, $5.1 million in 1997 and $4.0
million in 1998. We made sales of diesel fuel to C&R under these two agreements
aggregating $4.6 million in 1996, $3.3 million in 1997 and $169,000 in 1998.
Option and Right of First Refusal Agreement
Concurrently with the formation of the Operating Partnership in April 1992
under an option and right of first refusal agreement, J.A. Cardwell, Sr. and
James A. Cardwell, Jr. granted to the Operating Partnership and another third
party options, which expire in December 2006, to purchase properties owned by
the Cardwells or their affiliates that are located near or adjacent to our
Petro Stopping Centers located in Shreveport, Louisiana (seven acres),
Weatherford, Texas (thirty-four acres), Beaumont, Texas (seventeen acres) and
Oklahoma City, Oklahoma (thirty acres), and a right of first refusal on each of
the Option Properties. All rights under the option and right of first refusal
agreement have been assigned to Mobil, Petro Holdings GP Corporation and Petro
Holdings LP Corporation. The price at which an Option Property may be purchased
will be equal to the fair market value of the property when the option is
exercised as determined by an independent appraisal.
Alcohol Sales and Servicing Agreements
To continue engaging in retail sales of beer, wine or wine coolers at seven
of our facilities after the formation of the Operating Partnership in 1992, we
entered into agreements with C and PPR, Inc., Petro Truckstops, Inc., CYMA
Development Corporation and Petro Beverage, Inc., which collectively hold
permits or licenses to sell alcoholic beverages in the states of Louisiana,
Texas and Oregon. J.A. Cardwell, Sr. owns 60% of the stock, James A. Cardwell,
Jr. owns 30% of the stock and Mrs. J.A. Cardwell, Sr. owns 10% of the stock of
C&PPR. James A. Cardwell, Jr. is the sole shareholder of CYMA Development,
Petro Truckstops and Petro Beverage, Inc. The agreements continue in effect
until terminated by either party. Under the servicing and license agreements
with C&PPR dated April 30, 1992, we have agreed to operate the alcohol sales
business at four locations in exchange for 15% of the gross receipts generated
from alcoholic beverage sales, of which 5% is the Operating Partnerships
reimbursement of all related operating expenses. Under similar agreements with
Petro Truckstops, dated January 26, 1995, and April 8, 1994, and with Petro
Beverage, Inc., dated February 10, 1995, and CYMA Development dated April 30,
1992, each of which has a one year initial term and continues in effect until
terminated by either party, we receive 15% of gross receipts generated from
alcoholic beverage sales, of which 5% is the Operating Partnership's
reimbursement of all related operating expenses. In each of the agreements, the
net payments to us are approximately equal to the gross profit received by the
above entities.
The amounts collected to date under each of these agreements is:
<TABLE>
<S> <C>
C&PPR, Inc. .................................................... $306,400
Petro Beverage, Inc. ........................................... $ 18,300
Petro Truckstops, Inc. ......................................... $ 98,000
CYMA Development Corporation.................................... $ 16,000
</TABLE>
Motor Media Arrangements
Concurrently with the formation of the Operating Partnership in May 1992,
Motor Media, Inc., a company owned 100% by James A. Cardwell, Jr., entered into
a five year agreement with us, under which Motor Media leases floor and wall
space at all Petro Stopping Centers operated by us and sells space for in-store
advertising to third parties. Under the agreement, Motor Media pays the
Operating Partnership 25% of the gross revenues generated by the advertising.
Motor Media received $214,000 in 1996, $234,000 in 1997 and $215,000 in 1998
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<PAGE>
before its selling, maintenance and administrative expenses, representing its
share of the gross receipts generated. Motor Media has entered into similar
floor and wall space leases with other truck stops nationwide. The Operating
Partnership and Motor Media have extended the term of the agreement through
April 2002, which will be automatically extended until canceled by either party
with 60 days written notice.
Amusement and Video Poker Games Agreements
Under an agreement between us and El Paso Vending and Amusement Company, of
which J.A. Cardwell, Sr. owns 99% and James A. Cardwell, Jr. owns 1%, El Paso
Vending furnishes video and other games to 24 of our Petro Stopping Centers and
services these games. Under this agreement 50%, of the revenues from the gaming
operations goes to El Paso Vending and 50% goes to us. Although most of the
sites are serviced under the terms of the agreement (as amended), at one site,
we are guaranteed a minimum annual revenue of $180,000. At another site, we pay
40% of the revenues generated by the games to El Paso Vending and we retain the
remaining 60%. El Paso Vending received $2.0 million in 1996, $2.4 million in
1997 and $2.6 million in 1998 in revenues generated from the furnishing and
servicing of games located at the Petro Stopping Centers. Payments to us under
this arrangement aggregated $2.0 million during 1996, $2.1 million during 1997
and $2.2 million during 1998. The agreement with El Paso Vending has been
amended to extend its term through May 2002.
Since June 1993, the two Petro Stopping Centers located in Louisiana have
featured video poker games housed in a separate on-site facility and operated
by a third party under terms of a contract, which pays to us from 20% to 70% of
the revenue generated from the machines. The licenses to operate video gaming
in Louisiana are issued to Petro Truckstops, Inc., a company wholly owned by
James A. Cardwell, Jr. Previously, Petro Truckstops, Inc. leased from the
Operating Partnership only that portion of the facility premises in Shreveport
and Hammond whereat the video gaming was conducted. As a result of meetings
with the Louisiana State Gaming Commission and in order to satisfy state gaming
law requirements, the Operating Partnership and Petro Truckstops, Inc. have now
entered into a property lease agreement for the entire truck stop facility
premises, exclusive of the portions of the property where the Petro:Lube, truck
scales and truck wash facilities are located. Petro Truckstops, Inc. pays to
the Operating Partnership a fair market value rental under the terms of the
lease. Petro Truckstops, Inc. contracts with a third party operator to run the
video games. During 1996, the State of Louisiana enacted a statute requiring
the cessation of video poker operations unless the parish in which the
operations were conducted voted to allow the continued operation of video poker
machines. On November 5, 1996, the parish in which the Shreveport facility is
located voted to continue to allow video poker operations, while the parish in
which the Hammond facility is located voted to disallow video poker operations.
Therefore, we were required to phase out video poker operations at the Hammond
facility at the end of June 1999.
Indemnity Agreements
Concurrently with the Recapitalization, and in compliance with applicable
Internal Revenue Code and Treasury Regulation provisions dealing with recourse
debt, J.A. Cardwell, Sr., James A. Cardwell, Jr., Petro, Inc. and JAJCO II,
Inc. each entered into an indemnity agreement under which each agreed to
indemnify the Operating Partnership and Holdings, and the general and limited
partners thereof in the event that the indemnified parties are required to pay
any current indebtedness or any other liabilities of Holdings or the Operating
Partnership after a default, acceleration by the creditor and exhaustion of any
collateral securing the credit facility.
Motor Fuels Franchise Agreement
On July 23, 1999, the Operating Partnership and Mobil Oil Corporation
entered into a fuel supply agreement whereby we agreed to purchase Mobil
branded diesel fuel and gasoline for sale and distribution under Mobil's
trademarks at our truck stops. See "Business--Fuel Suppliers." Under our
previous fuel supply agreement with Mobil Oil Corporation, we purchased diesel
fuel from Mobil Diesel Supply in 1997 and 1998 totaling $172.8 million in 1997
and $199.6 million in 1998. We purchased gasoline under our previous fuel
supply agreement from Mobil Diesel Supply in 1997 and 1998 totaling $5.5
million in 1997 and $15.3 million in 1998.
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Master Supply Contract for Resale of Oils and Greases
On July 23, 1999, Mobil Oil Corporation and the Operating Partnership also
entered into a ten year supply agreement whereby we will purchase and feature
Mobil branded oils and lubricants at the truck stop locations operated by us.
Under the terms of our previous oil and lubricant supply agreement with Mobil
Oil Corporation, our purchases of Mobil branded oils and lubricants from Mobil
totaled $3.3 million in 1997 and totaled $5.0 million in 1998.
Marketing Relationships
Contemporaneously with the consummation of the Recapitalization, Volvo
Trucks and the Operating Partnership entered into an Operating Agreement which
reflects the desire and intention of both companies to cooperate in business
activities which:
. enhance each company's brand image and awareness;
. expands the truck parts and service support segment of each company's
business;
. develops closer ties with Volvo Trucks' franchised dealers;
. improves the lifestyle of truck drivers and results in innovative
approaches to customer services; and
. supports both companies' growth and expansion.
The Volvo Operating Agreement addresses the warranty, maintenance and
service work Petro will provide to Volvo managed vehicles, the sale by Petro of
Volvo truck parts, on a preferred basis, joint advertising and marketing
initiatives, and the co-development of truck stops by Volvo and Petro so as to
utilize truck stop space for Volvo truck sales and marketing. In addition,
under the terms of the Volvo Operating Agreement, Volvo and Petro have
committed to work together to develop a common maintenance system or data link
between Volvo's and Petro's respective maintenance systems in order to provide
individualized customer service to the truck drivers.
Relationships Between Related Parties, Affiliated Entities and the Cardwells
and their Affiliates
Each of the related parties and/or affiliates of Holdings involved in the
transactions described in this section, with the exception of Mobil Oil
Corporation, Volvo Trucks and the Effingham, Illinois Stopping Center, is owned
or controlled to some degree by the Cardwells or their affiliates. Related
party transactions, other than those specifically discussed above, generally
arise in the ordinary course of business as a result of our purchase of trade
accounts receivable or receipt of franchisee fees from Highway Service
Ventures, Inc., a corporation in which J.A. Cardwell, Sr. owns an interest,
which owns properties that are part of our truck stop network. For the years
ended December 31, 1997 and 1998, we purchased receivables from affiliated
franchises in the amounts of $18,200,000 and $16,900,000, respectively and
received franchise fees from related parties in the amounts of $987,000 and
$1,000,000, respectively.
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DESCRIPTION OF OTHER INDEBTEDNESS
New Senior Credit Facility
Concurrently with the Recapitalization, the Operating Partnership amended
its existing senior credit facility with BankBoston, N.A., individually and as
agent for the lenders, BancBoston Robertson Stephens Inc., as arranger, and the
lenders party thereto, to provide for:
. a five-year revolving/term facility in an aggregate principal amount of
up to $85.0 million, which includes a $10.0 million sublimit for stand-
by letters of credit and
. a seven-year term loan in an aggregate principal amount of
$40.0 million.
Proceeds of the loans under the new senior credit facility were used to
provide additional financing to effect the Recapitalization, and may be used to
refinance existing indebtedness, to finance capital expenditures, to pay fees
and expenses relating to the Recapitalization and for general corporate and
working capital purposes.
Repayment. On the third anniversary of the closing date, the portion of any
principal amount outstanding under the revolver in excess of $25.0 million will
automatically convert to a two-year term loan. Following the conversion, $25.0
million will continue to be available under the revolver. The two-year term
loan will mature on the fifth anniversary of the closing date and will amortize
in eight consecutive quarterly installments, each equal as near as possible to
one eighth of the principal amount outstanding on the third anniversary of the
closing date. The seven-year term loan is expected to be amortized in
consecutive quarterly installments commencing on September 30, 2000 as follows:
the first 16 quarterly installments of $250,000 each, the next four quarterly
installments of $3.0 million each and the last three quarterly installments of
$6.0 million each, with the remaining unpaid balance being due in full on the
maturity date.
The revolver and the term loans will also, in some circumstances, be
required to be prepaid with proceeds from asset sales, equity issuances and
insurance claims subject to reinvestment rights. The revolver and the term
loans will also be required to be prepaid with an amount equal to 50% of the
excess cash flow of the Operating Partnership, which requirement will be waived
as long as a specified leverage ratio is maintained by the Operating
Partnership and no default exists under the new senior credit facility.
Security; Guaranty. The new senior credit facility is secured by a perfected
first priority lien on substantially all of the property, rights and interests
of the Operating Partnership and its domestic subsidiaries (other than
immaterial subsidiaries) and the pledge by Holdings of all of the partnership
interests in the Operating Partnership. The new senior credit facility is
guaranteed by Holdings and all material domestic subsidiaries of the Operating
Partnership.
Interest Rates. The Operating Partnership may elect that all or a portion of
the Term Loans and the Revolver, except for the stand-by letters of credit,
bear interest at
. the eurodollar rate or
. the base rate, plus the applicable interest margin.
The base rate is expected to be defined as the higher of
. the annual rate of interest announced from time to time by BankBoston's
head office as its "base rate" and
. the federal funds rate plus one-half of one percent ( 1/2%). The
eurodollar rate is expected to be defined as the applicable reserve-
adjusted rate at which eurodollar deposits for specified monthly periods
are offered to BankBoston in the interbank eurodollar market.
For base rate loans, the applicable interest margin for the revolver and
two-year term loan will range from 0.75% to 1.25%, based on the consolidated
leverage ratio of the Operating Partnership and its subsidiaries, and will be
1.50% for the seven-year term loan. For eurodollar rate loans, the applicable
interest margin for the revolver and two-year term loan will range from 2.25%
to 2.75%, based on the consolidated leverage ratio, and will be 3.00% for the
seven-year term loan. Stand-by letters of credit will be subject to an issuance
fee equal to one-eighth of one percent ( 1/8%) plus an applicable margin
ranging from 2.25% to 2.75%, based on the consolidated leverage ratio.
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Interest on base rate loans will be payable quarterly. Interest on
eurodollar rate loans will be payable either at the end of each applicable
interest period or, if longer than three month interest periods, then at three
month intervals.
Covenants. The new senior credit facility contains customary representations
and warranties and affirmative and negative covenants including, among others,
covenants relating to financial and compliance reporting, covenants restricting
Holdings, the Operating Partnership and its subsidiaries from incurring debt,
including guarantees; creating liens; consummating transactions such as
dispositions of assets, mergers, acquisitions, reorganizations and
recapitalizations; making investments and loans, making dividends and other
distributions; and transactions with affiliates. There are numerous industry
related exceptions to the prohibition on the Operating Partnership's ability to
incur debt under the new senior credit facility as well as the allowance of
debt incurred under the new senior credit facility and debt evidenced by the 10
1/2% notes and the 12 1/2% notes. The new senior credit facility permits the
Operating Partnership to make payments to Holdings to enable Holdings to pay
reasonable operating expenses and interest on the notes. In addition, if the
Leverage Ratio, which is the ratio of the aggregate amount of indebtedness to
EBITDA, of the Operating Partnership is not greater than 3:00:1.00, the
Operating Partnership is permitted to make payments to Holdings for
distributions on Holdings' limited partnership interests in an amount not
exceed in any fiscal year 20% of the results of Consolidated Net Income of the
Operating Partnership less Tax Distributions made by the Operating Partnership
with respect to such fiscal year. The new senior credit facility also requires
the Operating Partnership to meet financial tests including interest coverage,
cash flow, minimum net worth and maximum leverage ratios, and a $10,000,000
limit on annual rental expenses under operating leases in any fiscal year. The
Maximum Consolidated Leverage Ratio of the Operating Partnership cannot exceed
a ratio that decreases from 5.00:1.00 to 4:00:1:00. the Operating Partnership's
ratio of Consolidated Cash Flow to Consolidated Financial Obligations cannot be
less than a ratio that varies from 1.25:1.00 to 1.00:1.00. The Operating
Partnership's Ratio of Consolidated EBITDA to Consolidated Cash Interest
Expense cannot be less than a ratio that increases from 2.00:1:00 to 2.75:1.00.
The new senior credit facility also contains customary events of default
including, among others, upon a change of control. An event of default under
the new senior credit facility will allow the lenders to accelerate or, in some
cases, will automatically cause the acceleration of, the maturity of the debt
under the new senior credit facility.
10 1/2% Notes
In 1997, the Operating Partnership and Petro Financial Corporation issued
$135.0 million principal amount of 10 1/2% notes. The 10 1/2% notes are
redeemable at the option of the Operating Partnership during the twelve month
period commencing February 1, 2002 at 105.25% of the principal amount of the
notes, during the twelve month period commencing February 1, 2003 at 103.50% of
the principal amount of the notes, during the twelve month period commencing on
February 1, 2004 at 101.75% of the principal amount of the notes and thereafter
at 100% of the principal amount of the notes, in each instance plus accrued and
unpaid interest.
The indenture for the 10 1/2% notes contains certain covenants including
limitations on indebtedness, limitations on restricted payments, limitations on
sales of restricted subsidiary stock, limitations on transactions with
affiliates, limitations on liens, limitations on disposition of proceeds of
asset sales, limitations on dividends and other payment restrictions affecting
restricted subsidiaries and restrictions on mergers and transfers of assets.
The 10 1/2% notes indentures permits the Operating Partnership to incur debt if
its ratio of earnings to interest expense is greater than 2.25:1. In addition,
the Operating Partnership can borrow, among other permitted borrowings, up to
$75 million pursuant to a credit agreement. Subject to some limited exceptions,
the Operating Partnership may not make restricted payments, which includes
distributions to partners or repurchases of partnership interests, unless the
total of such restricted payments is less than the sum of (i) 50% of the
Operating Partnership's income and (ii) all equity contributions made to the
Operating Partnership from the date of issuance of the 10 1/2% notes.
By means of a solicitation for consent from the holders of the 10 1/2% notes
dated June 15, 1999 and extended to July 21, 1999 we received consent to amend
the definitions of "Change of Control" and
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"Permitted Holders" in the indenture for the 10 1/2% notes to reflect the new
holding company ownership structure and to match the definitions to be included
in the indenture.
12 1/2% Notes
In 1994, Petro PSC Properties, L.P., a Delaware limited partnership (the
predecessor of the Operating Partnership) and Petro Financial Corporation
issued, in units, $100.0 million principal amount of 12 1/2% notes and 100,000
exchangeable debt warrants. The 12 1/2% notes are redeemable at our option
during the twelve month period commencing June 1, 1999 at 103.57% of the
principal amount of the notes, during the twelve month period commencing June
1, 2000 at 101.79% of the principal amount thereof and thereafter at 100% of
the principal amount of the notes, in each instance plus accrued and unpaid
interest.
In 1997, $93.8 million of the 12 1/2% notes and all of the exchangeable debt
warrants were acquired by the Operating Partnership. Currently, $6.2 million of
the 12 1/2% notes are outstanding. In connection with this transaction most of
the restrictive covenants in the indenture governing the 12 1/2% notes were
eliminated.
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DESCRIPTION OF THE NOTES
We issued the old notes, and we will issue the new notes, under an
indenture, dated July 23, 1999, among Holdings, Petro Holdings Financial
Corporation and State Street Bank and Trust Company, as trustee. The terms of
the notes include those stated in the indenture and those made a part of the
indenture by reference to the Trust Indenture Act of 1939.
We summarize below provisions of the indenture and the notes, but do not
restate the indenture and the notes in their entirety. We urge you to read the
indenture because it, and not this description, defines your rights as a Holder
of the notes. We have filed copies of the indenture as an exhibit to the
registration statement which includes this prospectus.
You can find the definitions of certain terms used in this section under the
subheading "--Certain Definitions." When we refer to "Holdings" in this
section, we mean Petro Stopping Centers Holdings L.P., and when we refer to
Issuer and Issuers, we mean Holdings, Petro Holdings Financial Corporation or
both, as the context requires. Unless otherwise indicated, references under
this section to Sections or Articles are references to sections and articles of
the indenture.
General
The notes:
. are general senior unsecured obligations of ours, ranking senior in
right of payment to any of our subordinated indebtedness;
. are effectively subordinated in right of payment to both all existing
and future obligations of Holdings' subsidiaries, including the
Operating Partnership, and any secured debt of Holdings.
As of September 30, 1999, there was approximately $234.8 million of total
liabilities, including $181.4 million of indebtedness, to which the notes were
effectively subordinated.
Maturity, Interest and Principal
The notes will mature on August 1, 2008. The old notes, except for the old
notes issued to Chartwell, were issued at a discount to their principal amount
at maturity of 63.4%. This means that for a note with a $1,000 principal amount
at maturity that was sold for cash consideration, we received approximately
$366. Prior to August 1, 2004, the value of a note for purposes of redemption
under the indenture will increase or "accrete" from $483.64, the initial
accreted value assigned to a note under the indenture, at a rate of 15% per
annum. The initial accreted value of $483.64 was assigned because it is the
value from which accretion at the rate of 15% will result in an accreted value
of $1,000 on August 1, 2004, the date from which cash interest will begin to
accrue on the notes. The old notes issued to Chartwell were issued, without
warrants, for purposes of the indenture at their accreted value of $483.64.
Although issued at their accreted value, under generally accepted accounting
principles, we are required to record these notes on our financial statements
at approximately $366, which is the same amount at which the old notes sold for
cash are recorded.
Interest will not accrue or be payable on the notes prior to August 1, 2004.
From August 1, 2004, interest on the notes will accrue at the rate of 15% per
annum and will be payable semi-annually on each February 1 and August 1,
commencing February 1, 2005. We will make interest payments to the holders of
record of notes at the close of business on the immediately preceding January
15 and July 15. Interest on the notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from August 1,
2004. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Based on the accreted value given at the time of issuance, the yield to
maturity of the notes is 15% per annum, which is computed on a semi-annual bond
equivalent basis. The yield of the notes includes both (i) the increase in the
principal amount of the notes prior to August 1, 2004, and (ii) the interest
payable on the notes after August 1, 2004.
For U.S. federal income tax purposes, you will be required to include
original issue discount on a note in gross income for each taxable year in
which you hold the note even though cash interest on the note does not
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begin to accrue until August 1, 2004, and you will receive no cash interest
payments until February 1, 2005. See "U.S. Federal Income Tax Considerations--
Taxation of the Notes--Original Issue Discount."
Principal of and premium, if any, and interest on the notes will be payable,
and the notes will be transferable, at the office or agency of the Issuers in
The City of New York maintained for such purposes, which, initially, will be
the office of the trustee or an agent of the Trustee. We will also have the
option of making payment by check mailed to the entitled person as shown on the
security register.
The old notes were issued, and the new notes will be issued, only in fully
registered form without coupons, in denominations of $1,000 and any integral
multiple of $1,000. No service charge will be made for any registration of
transfer, exchange or redemption of notes, except for any tax or other
governmental charge that may be imposed.
Additional Notes
Subject to the limitations discussed under "--Restrictive Covenants--
Limitation on Debt," we may incur additional debt. At our option, this
additional debt may consist of additional notes in one or more transactions,
which have identical terms as the notes. Holders of additional notes would have
the right to vote together with Holders of the notes as one class.
Sinking Fund
There are no mandatory sinking fund payment obligations with respect to the
notes.
Optional Redemption
We have the option to redeem the notes, in whole or in part, at any time,
upon not less than 30 nor more than 60 days notice, at a Redemption Price equal
to:
. if the Redemption Date is prior to August 1, 2004, the Accreted Value of
the notes, plus the Make-Whole Premium, as of the Redemption Date; or
. if the Redemption Date is on or after August 1, 2004, the redemption
prices (expressed as percentages of principal amount at Stated Maturity)
plus accrued and unpaid interest, if any, to the Redemption Date, if
redeemed during the 12 month period beginning on August 1, of the years
indicated:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2004........................................................... 107.500%
2005........................................................... 105.000%
2006........................................................... 102.500%
2007 and thereafter............................................ 100.000%
</TABLE>
In addition to the optional redemption of the notes in accordance with the
provisions of the preceding paragraph, prior to August 1, 2002, we may redeem
all, but not less than all, of the outstanding notes at a Redemption Price
equal to 115.0% of the Accreted Value thereof. If we elect to make such
redemption, the redemption must:
. be made with the net proceeds of a Public Equity Offering of Qualified
Capital Interests in either Holdings or a Successor Entity; and
. occur within 90 days following the closing of such Public Equity
Offering.
If we are not redeeming all of the notes, the trustee shall select the notes
to be redeemed in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are then listed. If the notes
are not then listed on a national securities exchange, the trustee shall select
the notes on a pro rata basis, by lot or in another fair and reasonable manner
chosen at the discretion of the trustee. The notes will be
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redeemable in whole or in part upon not less than 30 nor more than 60 days'
prior written notice, mailed by first class mail to a holder's address as it
shall appear on the register maintained by the registrar of the notes. On and
after any, redemption of notes, Accreted Value will cease to accrete or
interest will cease to accrue, as the case may be, on the notes or portions
thereof called for redemption.
Change of Control
If a Change of Control occurs, Holdings will make an Offer to Purchase all
of the outstanding notes at a Purchase Price in cash equal to:
(1) 101% of the Accreted Value of the notes, if the Purchase Date is on or
prior to August 1, 2004, or
(2) 101% of the principal amount at Stated Maturity of the notes, together
with accrued interest, if any, to the Purchase Date, if the Purchase Date is
after August 1, 2004.
For purposes of the foregoing, an Offer to Purchase shall be made if:
. within 30 days following the date of the consummation of a transaction
or series of transactions that constitutes a Change of Control, Holdings
commences an Offer to Purchase all outstanding notes at the Purchase
Price. For purposes of calculating such 30-day period, the running of
such period shall be suspended, for up to a maximum of 30 days, during
any period when the commencement of such Offer to Purchase is delayed or
suspended by reason of any court's or governmental authority's review of
or ruling on any materials being employed by Holdings to effect such
Offer to Purchase, so long as Holdings has used and continues to use its
best efforts to make and conclude such Offer to Purchase promptly, and
. all notes properly tendered are purchased on the terms of such Offer to
Purchase.
The phrase "all or substantially all," as used in the definition of "Change
of Control," has not been interpreted under New York law, which is the
governing law of the indenture, to represent a specific quantitative test.
Therefore, if the Holders of the notes elected to exercise their rights under
the indenture and Holdings elected to contest such election, there could be no
assurance how a court interpreting New York law would interpret this phrase.
The provisions of the indenture may not afford Holders protection in the
event of all highly leveraged transactions, reorganizations, restructurings,
mergers or similar transactions affecting Holdings that may adversely affect
Holders. The protections provided in the indenture will only be available if
the transaction is a Change of Control, as defined in the indenture. The
definition of Change of Control may be amended or modified with the written
consent of a majority in aggregate principal amount at Stated Maturity of
outstanding notes. See "--Amendment, Supplement and Waiver."
There can be no assurance that Holdings will have adequate resources to
refinance or fund the repurchase of the notes in the event of a Change of
Control. The failure of Holdings, following a Change of Control, to make an
Offer to Purchase or to pay when due the Purchase Price of notes tendered in
conformity with an Offer to Purchase will give the trustee and the Holders the
rights described under "--Events of Default".
Holdings will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Securities Exchange Act of 1934 and other securities laws
or regulations in connection with any repurchase of the notes as described
above.
The existence of a Holder's rights to require Holdings to repurchase notes
in connection with a Change of Control may deter a third party from acquiring
Holdings in a transaction that would constitute a "Change of Control."
Holdings will not be required to make an Offer to Purchase upon a Change of
Control if a third party makes an Offer to Purchase contemporaneously with or
upon a Change of Control in compliance with the requirements of the Indenture
and purchases all notes validly tendered and not withdrawn under its Offer to
Purchase.
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Restrictive Covenants
Set forth below are descriptions of certain restrictive covenants contained
in the indenture.
These covenants restrict our ability:
. to incur additional indebtedness;
. to make payments or distribution of cash or securities;
. to create or incur liens on our properties or assets;
. to issue or sell the capital stock of our subsidiaries;
. to sell our assets;
. to engage in transactions with our affiliates; and
. to merge or consolidate with any other entity.
Limitation on Debt
The indenture limits our ability to borrow money. In particular, Holdings
will not, and will not permit any of its Restricted Subsidiaries to, Incur any
Debt, including Acquired Debt, unless immediately after giving effect to the
Incurrence of such Debt and the receipt and contemporaneous application of the
proceeds therefrom:
(a) the Interest Coverage Ratio of Holdings and its Restricted
Subsidiaries for the last four fiscal quarters for which financial
information is available at the date of determination (the "Specified
Period"), determined on a pro forma basis as if any such Debt, and any
other Debt Incurred since the beginning of the Specified Period, had been
Incurred and the proceeds thereof had been applied at the beginning of the
Specified Period, and any other Debt repaid since the beginning of the
Specified Period had been repaid at the beginning of the Specified Period,
would be
(1) at any time prior to August 1, 2001, greater than 1.75:1 and
(2) at any time on or after August 1, 2001, greater than 2.0:1; and
(b) no Default or Event of Default shall have occurred and be continuing
at the time or as a consequence of the Incurrence of such Debt.
The calculation of such amounts is subject to the following:
If, during the Specified Period or subsequent thereto and prior to the
date of determination:
Holdings or any of its Restricted Subsidiaries engage in any Asset
Sale or acquisition or designate any Restricted Subsidiary to be an
Unrestricted Subsidiary or any Unrestricted Subsidiary to be a
Restricted Subsidiary,
then
(1) EBITDA, as defined, and Adjusted Interest Expense for the
Specified Period shall be calculated on a pro forma basis giving
effect to such Asset Sale or acquisition or designation, as the case
may be, and
(2) the application of any proceeds therefrom as if such Asset Sale
or acquisition or designation had occurred on the first day of the
Specified Period.
If the Debt which is the subject of a determination under this
provision is Acquired Debt, or Debt Incurred in connection with the
simultaneous acquisition of any person, business, property or assets, or
Debt of an Unrestricted Subsidiary being designated as a Restricted
Subsidiary, then such ratio shall be determined by giving effect on a
pro forma basis, as if the transaction had occurred at the beginning of
the Specified Period, to both the Incurrence or assumption of such
Acquired Debt or such other Debt by Holdings or any of its Restricted
Subsidiaries and the inclusion in EBITDA, as defined, of the EBITDA, as
defined, of the acquired person, business, property or assets or
redesignated Subsidiary.
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Notwithstanding the first paragraph above, Holdings and its Restricted
Subsidiaries may Incur Permitted Debt.
The Incurrence of Debt solely to develop a Stopping Center shall be
determined in accordance with the definition of "Incur." The accretion of
original issue discount on the notes, and any accruals of interest or payment
of interest or Additional notes, shall not be deemed an incurrence of Debt for
purposes of this covenant.
Limitations on Restricted Payments
The indenture limits our ability to make distributions to our partners and
engage in certain transactions with respect to our partnership interests. In
particular, Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless,
at the time of and after giving effect to the proposed Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or will occur as a consequence thereof;
(b) after giving effect to such Restricted Payment on a pro forma basis,
Holdings would be permitted to Incur at least $1.00 of additional Debt,
other than Permitted Debt, under the provisions described in the first
paragraph under the caption "Limitation on Debt" and
(c) after giving effect to such Restricted Payment on a pro forma basis,
the aggregate amount expended or declared for all Restricted Payments
made on or after the date of initial issuance of the notes shall not
exceed the sum, without duplication, of:
(1) 50% of the Adjusted Net Income, or, if Adjusted Net Income shall
be a deficit, minus 100% of such deficit, of Holdings accrued on a
cumulative basis during the period, taken as one accounting period,
beginning on the first day of the fiscal quarter in which the initial
issuance of the notes occurred and ending on the last day of the
fiscal quarter immediately preceding the date of such proposed
Restricted Payment, plus
(2) 100% of the aggregate net cash proceeds received by Holdings
after the initial issuance of the notes from the issuance and sale,
other than to a Restricted Subsidiary, of its Qualified Capital
Interests, including Qualified Capital Interests issued upon the
conversion of Debt or Redeemable Capital Interests of Holdings issued
after the initial issuance of the notes, and from the exercise of
options, warrants or other rights to purchase Qualified Capital
Interests, plus
(3) 100% of the net reduction in Investments, other than Permitted
Investments, after the date of the initial issuance of the notes, in
any person, resulting from payments of interest on Debt, dividends,
repayments of loans or advances (but only to the extent such
interest, dividends or repayments are not included in the calculation
of Adjusted Net Income), in each case to Holdings or any Restricted
Subsidiary from any person (including, without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries in accordance with the
indenture, not to exceed in the case of any person the amount of
Investments previously made by Holdings or any Restricted Subsidiary in
such person, plus
(4) $5,000,000.
Notwithstanding the foregoing, Holdings and its Restricted Subsidiaries may
take the following actions, provided that with respect to clauses (2), (3),
(4), (6) and (7) below, immediately after giving effect to such action, no
Default or Event of Default has occurred and is continuing:
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(1) the payment of any dividend on Capital Interests in Holdings or a
Restricted Subsidiary within 60 days after declaration thereof if at the
declaration date such payment would not have been prohibited by the
foregoing provisions of this covenant;
(2) the retirement of any Qualified Capital Interests of Holdings or any
Restricted Subsidiary by conversion into, or by or in exchange for,
Qualified Capital Interests, or out of net cash proceeds of the
substantially concurrent sale, other than to a Subsidiary of Holdings,
of other Qualified Capital Interests of Holdings;
(3) the redemption, defeasance, repurchase or acquisition or retirement
for value of any Debt of Holdings that is subordinate in right of
payment to the notes out of the net cash proceeds of a substantially
concurrent issue and sale, other than to a Restricted Subsidiary, of new
subordinated Debt of Holdings incurred in accordance with the indenture;
(4) payments due under the Permitted Affiliate Agreements that would
otherwise constitute Restricted Payments, other than pursuant to clause
(5) below;
(5) cash distributions by Holdings to its partners on its Capital
Interests, for so long as it is organized as a partnership or other
substantially similar pass-through entity for federal income tax
purposes, in aggregate amounts not exceeding the aggregate amount of
Permitted Tax Distributions accrued after December 31, 1997;
(6) the purchase, redemption, retirement or other acquisition for value
of Capital Interests in Holdings held by employees or former employees
of Holdings or any Restricted Subsidiary (or their estates or
beneficiaries under their estates) upon death, disability, retirement,
termination of employment or pursuant to the terms of any agreement
under which such Capital Interests were issued; provided that the
aggregate cash consideration paid for such purchase, redemption, retirement
or other acquisition of such Capital Interests does not exceed $1,000,000
in any fiscal year;
(7) payments that would otherwise constitute Restricted Payments, not to
exceed $100,000 in any fiscal year;
(8) the purchase on the Issue Date of the Chartwell Interests and the
Kirschner Interests;
(9) the purchase of any Warrants; and
(10) the conversion of employee options issued under the option plan
into rights under the phantom option plan.
The actions described in clauses (1), (2), (4), (6) and (7) of the
immediately preceding paragraph shall reduce, without duplication, the amount
that would otherwise be available for Restricted Payments under clause (c) of
the first paragraph under this "Limitations on Restricted Payments" covenant.
If Holdings makes a Restricted Payment which, at the time of the making of
such Restricted Payment, in the good faith determination of the Board of
Directors of Holdings, would be permitted under the requirements of the
indenture, such Restricted Payment shall be deemed to have been made in
compliance with the indenture notwithstanding any subsequent adjustment made
in good faith to Holdings' financial statements affecting Adjusted Net Income.
If any person in which an Investment that constitutes a Restricted Payment
is made, thereafter becomes a Restricted Subsidiary in accordance with the
indenture, all such Investments previously made in such person shall no longer
be counted as Restricted Payments for purposes of calculating the aggregate
amount of Restricted Payments pursuant to clause (c) above, in each case to
the extent such Investments would otherwise be so counted.
If Holdings or a Restricted Subsidiary transfers, conveys, sells, leases or
otherwise disposes of an Investment not in violation of the "Limitation on
Asset Sales" covenant, which Investment was originally
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included in the aggregate amount expended or declared for all Restricted
Payments pursuant to clause (c) of the definition of "Restricted Payments",
the aggregate amount expended or declared for all Restricted Payments shall be
reduced by the lesser of:
(1) the Net Cash Proceeds from the transfer, conveyance, sale, lease or
other disposition of such Investment; or
(2) the amount of the original Investment,
in each case, to the extent originally included in the aggregate amount
expended or declared for all Restricted Payments pursuant to clause (c) of the
definition of "Restricted Payments."
For purposes of the prohibition on Restricted Payments, if a particular
Restricted Payment involves a non-cash payment, including a distribution of
assets, then such Restricted Payment shall be deemed to be an amount equal to
the cash portion of such Restricted Payment, if any, plus an amount equal to
the Fair Market Value of the noncash portion of such Restricted Payment.
Limitations on Liens
Holdings will not create, incur or otherwise cause or suffer to exist or
become effective any Liens of any kind, other than Permitted Liens, upon any
property or asset of Holdings (including, without limitation, any Capital
Interest or Debt of any Restricted Subsidiary), owned by Holdings, unless:
(1) if such Lien secures Debt which is pari passu with the notes, then
the notes are secured on an equal and ratable basis with the obligations
so secured until such time as such obligation is no longer secured by a
Lien; or
(2) if such Lien secures Debt which is subordinated to the notes, any
such Lien shall be subordinated to the Lien granted to the Holders of
the notes to the same extent as such subordinated Debt is subordinated
to the notes.
Limitation on Issuance and Sale of Capital Interests in Restricted
Subsidiaries
Holdings will not permit any Restricted Subsidiary of Holdings to issue any
Capital Interest, other than any required directors' qualifying shares, to any
person other than Holdings or a Wholly-Owned Restricted Subsidiary thereof.
Holdings will not sell, and will not permit any of its Restricted Subsidiaries
to sell, any Capital Interests in any Restricted Subsidiary to any person
other than Holdings or a Wholly-Owned Restricted Subsidiary unless all such
Capital Interests owned by Holdings and its Restricted Subsidiaries are sold
in one or more contemporaneous transactions. In addition, Holdings will not
sell any Capital Interest in Petro Holdings Financial Corporation to any
person other than a Wholly-Owned Restricted Subsidiary.
Limitation on Asset Sales
Holdings will not consummate an Asset Sale unless:
(1) Holdings receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the property or assets sold or
otherwise disposed of;
(2) at least 85% of the consideration received by Holdings for such
property or assets consists of cash or Eligible Cash Equivalents. The
amount of any liabilities, as shown on Holdings' most recent balance
sheet, of Holdings (other than contingent liabilities and liabilities
that are by their terms subordinate to the notes) that are assumed or
forgiven by the transferee of any such assets will be deemed to be cash for
the purposes of this clause (2); and
(3) the Net Cash Proceeds received by Holdings are applied, to the
extent Holdings or any Restricted Subsidiary elects or is required,
either
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(A) to repay or purchase and permanently reduce outstanding Debt of a
Restricted Subsidiary, and to permanently reduce any commitments in
respect thereof,
provided, however, that such repayment and commitment reduction
occurs within 270 days following the receipt of such Net Cash
Proceeds; or
(B) to an investment in Replacement Assets,
provided, however, that such investment occurs or Holdings or
such Restricted Subsidiary enters into contractual commitments to
make such investment, subject only to customary conditions (other
than the obtaining of financing), on or prior to the 270th day
following receipt of such Net Cash Proceeds (the "Reinvestment
Date") and Net Cash Proceeds contractually committed are so
applied within 365 days following the receipt of such Net Cash
Proceeds.
Notwithstanding any provision of this "Limitation on Asset Sales" covenant,
Asset Swaps and Fuel Hedging Obligations entered into in the ordinary course
of business shall not be subject to clause (2) of the immediately preceding
sentence.
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Replacement Assets and/or repay Debt of a Restricted Subsidiary shall
constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10,000,000, Holdings
shall make an Offer to Purchase, from all Holders, notes:
(1) having an aggregate Accreted Value as of the Purchase Date, if the
Purchase Date is on or prior to August 1, 2004, or
(2) in an aggregate principal amount at Stated Maturity, if the Purchase
Date is after August 1, 2004,
in either case, equal to the Excess Proceeds,
at a Purchase Price in cash equal to:
(1) 100% of the Accreted Value thereof, if the Purchase Date is on or
prior to August 1, 2004, or
(2) 100% of the principal amount thereof, together with accrued
interest, if any, to the Purchase Date, if the Purchase Date is after
August 1, 2004.
If the aggregate Purchase Price of notes surrendered by Holders exceeds the
amount equal to the Excess Proceeds, the trustee shall select the notes to be
purchased on a pro rata basis. If any amount of Excess Proceeds remains after
completion of such Offer to Purchase, Holdings may use such remaining amount
for general corporate purposes, and the amount of Excess Proceeds shall be
reset to zero.
Holdings will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act and other securities laws or regulations in
the event that an Asset Sale Offer is required under the circumstances
described therein.
Transactions with Affiliates
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, conduct any business or enter into or permit to
exist any transaction or series of related transactions (including, but not
limited to, the purchase, sale or exchange of property, the making of any
Investment, the giving of any Guarantee or the rendering of any service) with
any Unrestricted Subsidiary or any Affiliate of Holdings or any Restricted
Subsidiary other than transactions solely among any of Holdings and its
Restricted Subsidiaries (an "Affiliate Transaction") unless:
(1) such business, transaction or series of related transactions is on
terms no less favorable to Holdings or such Restricted Subsidiary than
those that could be obtained in a comparable arm's length transaction
between unaffiliated parties; and
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(2) with respect to an Affiliate Transaction involving an amount or
having a value in excess of $500,000, Holdings delivers to the Trustee
an officers' certificate stating that such business, transaction or
series of related transactions complies with clause (i) above.
In the case of an Affiliate Transaction involving an amount or having a value
in excess of $2,000,000 but less than or equal to $5,000,000, Holdings must
obtain a resolution of the Board of Directors, including a majority of
Disinterested Directors, if any, certifying that such Affiliate Transaction
complies with clause (1) above.
In the case of an Affiliate Transaction involving an amount or having a
value in excess of $5,000,000, Holdings must obtain a written opinion of a
nationally recognized investment banking firm or other expert stating that the
transaction is fair to Holdings or such Restricted Subsidiary from a financial
point of view.
The foregoing limitation does not limit, and shall not apply to,
(1) any transaction or series of related transactions pursuant to the
terms of the Permitted Affiliate Agreements,
(2) cash distributions permitted under clause (5) of the second
paragraph of the Limitations on Restricted Payments covenant, relating
to Permitted Tax Distributions,
(3) the payment of reasonable and customary fees to members of the Board
of Directors of Holdings or a Restricted Subsidiary who are outside
directors,
(4) the payment of reasonable and customary compensation to officers and
employees of Holdings or any Restricted Subsidiary as determined by the
Board of Directors thereof in good faith,
(5) any transaction pursuant to an agreement, arrangement or
understanding existing on the Issue Date and described elsewhere in this
Offering Memorandum and any amendment to such agreements, arrangements
or understandings that is not adverse to Holdings, and
(6) any transaction, approved by the Board of Directors of Holdings,
with an officer or director of Holdings or of any Subsidiary in his or
her capacity as officer or director entered into in the ordinary course
of business.
Holdings may in addition pay advisory fees to an Affiliate of Holdings with
respect to specific transactions if, such payments would be permitted under
the first paragraph of the Limitations on Restricted Payments covenant.
For purposes of this "Transactions with Affiliates" covenant, any
transaction or series of related transactions between Holdings or any
Restricted Subsidiary and an Affiliate of Holdings that is approved by a
majority of the Disinterested Directors, if any, shall be deemed to comply
with clause (1) above.
Notwithstanding the provisions of this covenant, Holdings and its
Restricted Subsidiaries will be permitted to consummate the Transactions and
to pay fees on the closing date in connection with the consummation of the
Transactions as described in this Offering Memorandum.
Limitation on Sale and Leaseback Transactions
Holdings will not, and will not permit any Restricted Subsidiary to, enter
into any Sale and Leaseback Transaction unless:
(1) the consideration received in such Sale and Leaseback Transaction is
at least equal to the fair market value of the property sold, as
determined by a board resolution of Holdings, and
(2) immediately prior to and after giving effect to the Attributable
Debt in respect of such Sale and Leaseback Transaction, Holdings could
incur at least $1.00 of additional Debt (other than Permitted Debt) in
compliance with the covenant described under "Limitation on Debt."
Provision of Financial Information
Whether or not we are subject to Section 13(a) or 15(d) of the Exchange
Act, or any successor provision, we will, to the extent accepted by the
Commission and not prohibited under the Exchange Act, file with the
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Commission the annual reports, quarterly reports and other documents which we
would have been required to file with the Commission pursuant to such Section
13(a) or 15(d) or any successor provision if we were subject to these
sections. We will file these documents with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which we would have been
required to file them.
We will also, in any event,
(1) within 15 days of each Required Filing Date:
(a) transmit by mail to all Holders, as their names and addresses
appear in the security register, without cost to such Holders, and
(b file with the trustee copies of the annual reports, quarterly
reports and other documents which we would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act or any successor provisions if we were subject to such
sections and
(2) if filing such documents by us with the Commission is not accepted
by the Commission or is prohibited under the Exchange Act, promptly upon
written request, supply copies of such documents to any prospective
Holder.
We will, upon request, provide to any Holder of notes or any prospective
transferee of any such Holder any information concerning us, including
financial statements, necessary in order to permit such Holder to sell or
transfer notes in compliance with Rule 144A under the Securities Act;
provided, however, that we shall not be required to furnish such information
in connection with any request made on or after the date which is two years
from the later of
(1) the date such Note (or any predecessor Note) was acquired from us or
(2) the date such Note (or any predecessor Note) was last acquired from
an "affiliate" of us within the meaning of Rule 144 under the Securities
Act.
Payments for Consent
Neither Holdings nor any of its Restricted Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
indenture or the notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the notes that so consent, waive or agree
to amend in the time frame described in solicitation documents relating to
such consent, waiver or agreement.
Limitation on Creation of Unrestricted Subsidiaries
Holdings may designate any Subsidiary of Holdings to be an "Unrestricted
Subsidiary" as provided below and such Subsidiary and each other person that
is then or thereafter becomes a Subsidiary of such Subsidiary will be deemed
to be an Unrestricted Subsidiary.
"Unrestricted Subsidiary" means:
(1) any Subsidiary designated as such by the Board of Directors as
described below where;
(a) neither Holdings nor any of its Restricted Subsidiaries;
(i) provides credit support for, or Guarantee of, any Debt of
such Subsidiary or any Subsidiary of such Subsidiary including
any undertaking, agreement or instrument evidencing such Debt or
(ii) is directly or indirectly liable for any Debt of such
Subsidiary or any Subsidiary of such Subsidiary, and
(b) no default with respect to any Debt of such Subsidiary or any
Subsidiary of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any
other Debt of
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Holdings and its Restricted Subsidiaries to declare a default on
such other Debt or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity; and
(2) any Subsidiary of an Unrestricted Subsidiary.
Holdings may designate any Subsidiary (other than the Operating Partnership or
Petro Financial Corporation) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Interests of, or owns or holds any Lien on any
property of, any other Restricted Subsidiary of Holdings, provided that either:
(1) the Subsidiary to be so designated has total assets of $1,000 or
less; or
(2) immediately after giving effect to such designation, Holdings could
Incur at least $1.00 of additional Debt pursuant to the first paragraph
under "Limitation on Debt" and provided, further, that Holdings could
make a Restricted Payment in an amount equal to the greater of the fair
market value or book value of such Subsidiary pursuant to "Limitation
on Restricted Payments" and such amount is thereafter treated as a
Restricted Payment for the purpose of calculating the aggregate amount
available for Restricted Payments thereunder.
An Unrestricted Subsidiary may be designated as a Restricted Subsidiary if:
(1) all the Debt of such Unrestricted Subsidiary could be Incurred
under the "Limitation on Debt" covenant; and
(2) all the Liens on the property and assets of such Unrestricted
Subsidiary could be incurred pursuant to the "Limitations on Liens"
covenant.
Limitation on Conduct of Business of Petro Holdings Financial Corporation
Except to the extent permitted under "Consolidation, Merger, Conveyance,
Transfer or Lease," Petro Holdings Financial Corporation will not hold any
operating assets or other properties or conduct any business other than to
serve as an Issuer and co-obligor with respect to the notes and will not own
any Capital Interest of any other person.
Consolidation, Merger, Conveyance, Transfer or Lease
Holdings will not, and will not permit any Restricted Subsidiary to, in any
transaction or series of transactions, consolidate with or merge into any other
person, or transfer all or substantially all of the assets of Holdings and its
Restricted Subsidiaries, taken as a whole, to any other person, unless, in the
case of Holdings:
(1) either:
(a) Holdings shall be the continuing person; or
(b) the person (if other than Holdings) formed by such consolidation or
into which Holdings is merged, or the person that acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the property and assets of Holdings (such person,
the "Surviving Entity"),
(i) shall be a corporation, partnership, limited liability company
or similar entity organized and validly existing under the laws of
the United States, any political subdivision thereof or any state
thereof or the District of Columbia and
(ii) shall expressly assume, by a supplemental indenture, the due
and punctual payment of all amounts due in respect of the principal
of (and premium, if any) and interest on all the notes and the
performance of the covenants and obligations of Holdings under the
indenture;
provided that at any time Holdings or its successor is a limited
partnership, there shall be a co-issuer of the notes that is a
corporation;
(2) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including,
without limitation, any Debt Incurred or anticipated to be Incurred in
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connection with or in respect of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing or would result therefrom;
(3) immediately after giving effect to any such transaction or series of
transactions on a pro forma basis (including, without limitation, any Debt
Incurred or anticipated to be Incurred in connection with or in respect of
such transaction or series of transactions) as if such transaction or
series of transactions had occurred on the first day of the determination
period, Holdings (or the Surviving Entity if Holdings is not continuing)
could Incur $1.00 of additional Debt (other than Permitted Debt) under the
first paragraph of the "Limitation on Debt" covenant;
(4) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any Debt
Incurred or anticipated to be Incurred in connection with or in respect of
such transaction or series of transactions), Holdings (or the Surviving
Entity if Holdings is not continuing) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of Holdings immediately
prior to such transaction; and
(5) Holdings delivers, or causes to be delivered, to the trustee, in form
and substance reasonably satisfactory to the trustee, an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, conveyance, assignment, transfer, lease or
other disposition comply with the requirements of the indenture.
Notwithstanding the foregoing, if, in the good faith determination of the
Board of Directors of Holdings,
(1) the purpose of such transaction is:
(a) to transform Holdings into a corporation or
(b) to change the state of organization of Holdings or a Restricted
Subsidiary, and
(2) no material adverse effect on the creditworthiness of Holdings (or
the Surviving Entity if Holdings is not continuing) and its Restricted
Subsidiaries, taken as a whole, shall result as a consequence of the
transaction, then clauses (3) and (4) above shall not apply; it being
recognized that such reorganization shall not be considered to have a
material adverse effect on the creditworthiness of Holdings solely
because the Surviving Entity is subject to income taxation.
Subsidiaries of any Surviving Entity will, upon such transaction or series
of transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries
as provided pursuant to the indenture and all Debt, and all Liens on property
or assets, of the Surviving Entity and its Subsidiaries that was not Debt, or
were not Liens on property or assets, of Holdings and its Subsidiaries
immediately prior to such transaction or series of transactions shall be
deemed to have been Incurred upon such transaction or series of transactions.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, conditions described in the
immediately preceding paragraphs, the Surviving Entity shall succeed to, and
be substituted for, and may exercise every right and power of, Holdings or
Petro Holdings Financial Corporation, as the case may be, under the indenture
with the same effect as if such Surviving Entity had been named as Holdings or
Petro Holdings Financial Corporation therein; and when a Surviving Entity duly
assumes all of the obligations and covenants of Holdings or Petro Holdings
Financial Corporation, as the case may be, pursuant to the indenture and the
notes, except in the case of a lease, the predecessor person shall be relieved
of all such obligations.
The foregoing restrictions shall not prohibit a merger of a Restricted
Subsidiary into Holdings in which Holdings is the continuing person or the
merger of a Restricted Subsidiary into or with another Restricted Subsidiary
or another person that as a result of such transaction becomes a Restricted
Subsidiary.
Events of Default
Each of the following is an "Event of Default" under the indenture:
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(1) default in the payment in respect of the principal of (or premium, if
any, on) any note at its maturity (whether at Stated Maturity or upon
repurchase, acceleration, optional redemption or otherwise);
(2) default in the payment of any interest upon any note when it becomes
due and payable, and continuance of such default for a period of 30 days;
(3) default in the making of an Offer to Purchase as required by the
indenture;
(4) failure to perform or comply with the indenture provisions described
under "Consolidation, Merger, Conveyance, Lease or Transfer";
(5) default in the performance, or breach, of any covenant or agreement of
an Issuer in the indenture (other than a covenant or agreement a default in
whose performance or whose breach is specifically dealt with in (1), (2),
(3) or (4) above), and continuance of such default or breach for a period
of 30 days after written notice thereof has been given to Holdings by the
trustee or to Holdings and the trustee by the Holders of at least 25% in
aggregate principal amount at Stated Maturity of the outstanding notes;
(6) a default or defaults under any bonds, debentures, notes or other
evidences of Debt (other than the notes) by Holdings or any Restricted
Subsidiary having, individually or in the aggregate, a principal or similar
amount outstanding of at least $5,000,000, whether such Debt now exists or
shall hereafter be created, which default or defaults shall have
(a) resulted in the acceleration of the maturity of such Debt prior to
its express maturity or
(b) shall constitute a failure to pay such Debt when due and payable
after the expiration of any applicable grace period;
(7) the entry against Holdings or any Restricted Subsidiary of a final
judgment or final judgments for the payment of money in an aggregate amount
in excess of $5,000,000 by a court or courts of competent jurisdiction,
which judgments remain undischarged, unwaived, unstayed, unbonded or
unsatisfied for a period of 60 consecutive days; or
(8) certain events in bankruptcy, insolvency or reorganization affecting
Holdings or any Significant Subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(8) above) occurs and is continuing, then and in every such case the trustee or
the Holders of not less than 25% in aggregate principal amount at Stated
Maturity of the outstanding notes may declare, by a notice in writing to
Holdings (and to the trustee if given by Holders), the notes to be due and
payable immediately in an amount equal to:
(1) the Accreted Value of the notes outstanding on the date of
acceleration, if such declaration is made on or prior to August 1, 2004, or
(2) the entire principal amount at Stated Maturity of the notes
outstanding on the date of acceleration plus accrued but unpaid interest,
if any, to the date of acceleration, if such declaration is made after
August 1, 2004;
After such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of the
outstanding notes may rescind and annul such acceleration if all Events of
Default, other than the nonpayment of accelerated principal of or interest on
the notes, have been cured or waived as provided in the indenture. If an Event
of Default specified in clause (8) above occurs, the principal of and any
accrued interest on the notes then outstanding shall ipso facto become
immediately due and payable without any declaration or other act on the part of
the trustee or any Holder. For further information as to waiver of defaults,
see "--Amendment, Supplement and Waiver." The trustee may withhold from Holders
notice of any Default (except in payment of principal of, premium, if any, and
interest) if the trustee determines that withholding notice is in the best
interest of the Holders to do so.
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No Holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless
(1)such Holder shall have previously given to the trustee written notice
of a continuing Event of Default;
(2) also the Holders of at least 25% in aggregate principal amount at
Stated Maturity of the outstanding notes shall have made written request,
and offered reasonable indemnity, to the trustee to institute such
proceeding as trustee; and
(3) the trustee shall not have received from the Holders of a majority
in aggregate principal amount of the outstanding notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. Such limitations do not apply, however, to a
suit instituted by a Holder of a note for enforcement of payment of the
principal of, premium, if any, or interest on such note on or after the
respective due dates expressed in such note.
In the case of any Event of Default occurring by reason of any willful
action, or inaction, taken, or not taken, by or on behalf of Holdings with the
intention of avoiding payment of the premium that Holdings would have had to
pay if Holdings then had elected to redeem the notes pursuant to the optional
redemption provisions of the indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
Holdings will be required to furnish to the trustee annually a statement as
to the performance of certain obligations under the indenture and as to any
default in such performance. Holdings also is required to notify the trustee
upon becoming aware of the occurrence of any Default or Event of Default.
Amendment, Supplement and Waiver
Without the consent of any Holders, we and the trustee, at any time and from
time to time, may enter into one or more indentures supplemental to the
indenture for any of the following purposes:
(1) to evidence the succession of another person to us and the assumption
by any such successor of our covenants in the indenture and in the notes;
or
(2) to add to our covenants for the benefit of the Holders, or to surrender
any right or power herein conferred upon us; or
(3) to add additional Events of Default; or
(4) to provide for uncertificated notes in addition to or in place of the
certificated notes; or
(5) to evidence and provide for the acceptance of appointment under the
indenture by a successor trustee; or
(6) to secure the notes; or
(7) to cure any ambiguity, to correct or supplement any provision in the
indenture which may be defective or inconsistent with any other provision
in the indenture, or to make any other provisions with respect to matters
or questions arising under the indenture, provided that such actions
pursuant to this clause shall not adversely affect the interests of the
Holders in any material respect; or
(8) to issue additional notes or Exchange Notes; or
(9) to comply with any requirements of the Commission in order to effect
and maintain the qualification of the indenture under the Trust Indenture
Act.
With the consent of the Holders of not less than a majority in aggregate
principal amount at Stated Maturity of the outstanding notes, we and the
trustee may enter into an indenture or indentures supplemental to the indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the indenture or of modifying in any
manner the rights of the Holders under the indenture,
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including the definitions therein; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each outstanding note
affected thereby,
(1) change the Stated Maturity of any note or of any installment of
interest on any note, or reduce the amount payable in respect of the
Accreted Value or the principal thereof or the rate of interest thereon
or any premium payable thereon, or reduce the amount that would be due
and payable on acceleration of the maturity thereof, or change the
place of payment where, or the coin or currency in which, any note or
any premium or interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof, or
(2) reduce the percentage in aggregate principal amount at Stated
Maturity of the outstanding notes, the consent of whose Holders if
required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with certain
provisions of the indenture or certain defaults thereunder and their
consequences) provided for in the indenture, or
(3) modify our obligations to make Offers to Purchase upon a Change of
Control or from the Excess Proceeds of Asset Sales, or
(4) subordinate, in right of payment, the notes to any other of our
Debt, or
(5) modify any of the provisions of this paragraph or provisions
relating to waiver of defaults or certain covenants, except to increase
any such percentage required for such actions or to provide that
certain other provisions of the indenture cannot be modified or waived
without the consent of the Holder of each outstanding Note affected
thereby, or
(6) release any Guarantees required to be maintained under the
indenture.
The Holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding notes may on behalf of the Holders of all
the notes waive any past default under the indenture and its consequences,
except a default
(1) in any payment in respect of the principal of (or premium, if any)
or interest on any notes (including any Note which is required to have
been purchased pursuant to an Offer to Purchase which has been made by
us), or
(2) in respect of a covenant or provision hereof which under the
indenture cannot be modified or amended without the consent of the
Holder of each outstanding Note affected.
Satisfaction and Discharge of the Indenture; Defeasance
We may terminate the obligations under the indenture, when:
(1) either:
(a) all notes theretofore authenticated and delivered have been
delivered to the trustee for cancellation, or
(b) all such notes not theretofore delivered to the trustee for
cancellation:
(i) have become due and payable, or
(ii) will become due and payable within 60 days or are to be called
for redemption within 60 days (a "Discharge") under irrevocable
arrangements satisfactory to the trustee for the giving of notice of
redemption by the trustee in our name, and at our expense, and we
have irrevocably deposited or caused to be deposited with the trustee
funds in an amount sufficient to pay and discharge the entire
indebtedness on the notes, not theretofore delivered to the trustee
for cancellation, for
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principal of, premium, if any, on and interest to the date of deposit
or Stated Maturity or date of redemption;
(2) we have paid or caused to be paid all other sums then due and payable
hereunder by us; and
(3) we have delivered to the trustee an officers' certificate and an opinion
of counsel, each stating that all conditions precedent under the indenture
relating to the satisfaction and discharge of the indenture have been
complied with.
We may elect, at their option, to have our obligations discharged with
respect to the outstanding notes ("defeasance"). Such defeasance means that we
will be deemed to have paid and discharged the entire indebtedness represented
by the outstanding notes, except for:
(1) the rights of Holders of such notes to receive payments in respect of
the principal of and any premium and interest on such notes when payments
are due solely from the monies held in trust,
(2) Our obligations with respect to such notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes and
the maintenance of an office or agency for payment and money for security
payments held in trust,
(3) the rights, powers, trusts, duties and immunities of the trustee,
(4) our right of optional redemption, and
(5) the defeasance provisions of the indenture.
In addition, we may elect, at our option, to have our obligations released with
respect to certain covenants, including without limitation our obligation to
make Offers to Purchase in connection with Asset Sales and any Change of
Control, in the indenture ("covenant defeasance") and any omission to comply
with such obligation shall not constitute a Default or an Event of Default with
respect to the notes. In the event covenant defeasance occurs, certain events
(not including non-payment, bankruptcy and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the notes.
In order to exercise either defeasance or covenant defeasance with respect
to outstanding notes:
(1) we must irrevocably have deposited or caused to be deposited with the
trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to the
benefits of the Holders of such notes:
(a) money in an amount, or
(b) U.S. government obligations which through the scheduled payment of
principal and interest in respect thereof in accordance with their terms
will provide, not later than the due date of any payment, money in an
amount, or
(c) a combination thereof, in each case sufficient without reinvestment,
in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the trustee, to pay and discharge, and which shall be applied by the
trustee to pay and discharge, the entire indebtedness in respect of the
principal of and premium, if any, and interest on such notes on the
Stated Maturity thereof or (if we have made irrevocable arrangements
satisfactory to the trustee for the giving of notice of redemption by
the trustee in our name and at our expense) the redemption date thereof,
as the case may be, in accordance with the terms of the indenture and
such notes;
(2) in the case of defeasance, we shall have delivered to the trustee an
opinion of counsel stating that:
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(a) we have received from, or there has been published by, the Internal
Revenue Service a ruling or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law,
in either case (a) or (b) to the effect that, and based thereon such opinion
shall confirm that, the Holders of such notes will not recognize gain or loss
for federal income tax purposes as a result of the deposit, defeasance and
discharge to be effected with respect to such notes and will be subject to
federal income tax on the same amount, in the same manner and at the same
times as would be the case if such deposit, defeasance and discharge were not
to occur;
(3) in the case of covenant defeasance, we shall have delivered to the
trustee an opinion of counsel to the effect that the Holders of such
outstanding notes will not recognize gain or loss for federal income tax
purposes as a result of the deposit and covenant defeasance to be effected
with respect to such notes and will be subject to federal income tax on the
same amount, in the same manner and at the same times as would be the case if
such deposit and covenant defeasance were not to occur;
(4) no Default or Event of Default with respect to the outstanding notes
shall have occurred and be continuing at the time of such deposit or, in the
case of defeasance, either:
(a) we shall have delivered to the trustee an opinion of counsel to the
effect that, based upon existing precedents, if the matter were properly
briefed, a court should hold that the deposit of moneys and/or U.S.
government obligations as provided in clause (1) would not constitute a
preference voidable under Section 547 or 548 of the federal bankruptcy
laws; or
(b) no Default or Event of Default relating to bankruptcy or insolvency
shall have occurred and be continuing at any time on or prior to the
91st day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 91st day);
(5) such defeasance or covenant defeasance shall not cause the trustee to
have a conflicting interest within the meaning of the Trust Indenture Act
(assuming all notes are in default within the meaning of such Act);
(6) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which either of us is a party or by which we are bound;
(7) such defeasance or covenant defeasance shall not result in the trust
arising from such deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder; and
(8) we shall have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent with respect to
such defeasance or covenant defeasance have been complied with.
In connection with a Discharge, in the event either Issuer becomes
insolvent within the applicable preference period after the date of deposit,
monies held for the payment of the notes may be part of the bankruptcy estate
of such Issuer, disbursement of such monies may be subject to the automatic
stay of the bankruptcy code and monies disbursed to Holders may be subject to
disgorgement in favor of the estate of the bankrupt Issuer. Similar results
may apply upon the insolvency of an Issuer during the applicable preference
period following the deposit of monies in connection with covenant defeasance.
The Trustee
State Street Bank and Trust Company, the trustee under the indenture, will
be the initial paying agent and registrar for the notes. The trustee from time
to time may extend credit to us in the ordinary course of business. The
trustee's current address is 2 Avenue de Lafayette, Sixth Floor, Boston,
Massachusetts 02111-1724. Except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set
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forth in the indenture. During the existence of an Event of Default, the
trustee will exercise such of the rights and powers vested in it by the
indenture and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
The indenture and the Trust Indenture Act contain certain limitations on the
rights of the trustee, should it become a creditor of Holdings or Petro
Holdings Financial Corporation, to obtain payment of claims in certain cases or
to realize on certain property received in respect of any such claim as
security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any "conflicting interest" (as defined in
the Trust Indenture Act) it must eliminate such conflict within 90 days, apply
to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding notes will
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee, subject to certain exceptions. The indenture
provides that in case an Event of Default has occurred and is continuing, the
trustee shall exercise such of the rights and powers vested in it by the
indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs. Subject to such provisions, the trustee shall be under no
obligation to exercise any of the rights or powers vested in it by the
indenture at the request or direction of any of the Holders pursuant to the
indenture, unless such Holders shall have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which might
be incurred by it in compliance with such request or direction.
No Personal Liability of Stockholders, Partners, Officers or Directors
No director, officer, employee, stockholder, general or limited partner or
incorporator, past, present or future, of Holdings or any of its Subsidiaries,
as such or in such capacity, shall have any personal liability for any
obligations of either Issuer under the notes, any Guarantee or the indenture by
reason of his, her or its status as such director, officer, employee,
stockholder, general or limited partner or incorporator. This limitation of
liability does not apply to any claim under the Securities Act or the Exchange
Act, and, in purchasing the notes, a Holder is not waiving any rights under
such laws. Likewise, this limitation of liability does not apply to any partner
who is a party to an indemnity and hold harmless agreement in favor of Holdings
and the general and limited partners of Holdings.
Governing Law
The indenture and the notes are governed by, and will be construed in
accordance with, the laws of the State of New York.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any capitalized term used herein for which no definition
is provided.
"10 1/2% Notes" means the 10 1/2% Senior Notes Due 2007 issued by the
Operating Partnership and PETRO FINANCIAL CORPORATION pursuant to the 10 1/2%
notes indenture.
"10 1/2% Notes Indenture" means the indenture among the Operating
Partnership, PETRO FINANCIAL CORPORATION and the trustee, dated January 30,
1997, as amended as of the date of the Recapitalization.
"12 1/2% Notes" means the 12 1/2% Notes Due 2002 issued in 1994 by Petro PSC
Properties, L.P., a Delaware limited partnership (the predecessor of the
Operating Partnership) and Petro Financial Corporation.
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"Accreted Value" means, as of any date prior to August 1, 2004, an amount
per $1,000 principal amount at Stated Maturity of notes that is equal to the
sum of (a) $ 483.64 and (b) the portion of the excess of the principal amount
at Stated Maturity of each Note over $483.64 which shall have been amortized
on a daily basis and compounded semi-annually on each February 1 and August 1
at the rate of 15% per annum from the Issue Date through the date of
determination computed on the basis of a 360-day year of twelve 30-day months;
and, as of any date on or after August 1, 2004, the Accreted Value of each
Note shall mean the aggregate principal amount at Stated Maturity of such
Note; provided however, that the Issue Date for any Additional notes shall be
deemed to be the original Issue Date of the notes.
"Acquired Debt" means Debt of a person (including an Unrestricted
Subsidiary) existing at the time such person becomes a Restricted Subsidiary
or assumed in connection with the acquisition of assets from such person.
"Adjusted Interest Expense" means, for any period, without duplication, an
amount equal to the sum of:
(1) the aggregate amount of interest charges (excluding fees and expenses
incurred at or prior to Closing in connection with the Transactions and any
expenses or charges related to Petro Warrant Holdings Corporation, the
Warrants or the obligation or right of Holdings to purchase the Warrants),
whether expensed or capitalized, incurred or accrued by Holdings and its
Restricted Subsidiaries, determined on a consolidated basis in accordance
with GAAP for such period (including non-cash interest payments); plus
(2) to the extent not included in clause (1) above, an amount equal to the
sum of:
(A) net costs associated with Interest Swap Obligations and Currency
Hedge Obligations (including any amortization of discounts); plus
(B) all commissions, discounts and other fees and charges owed with
respect to letters of credit, bankers' acceptances or similar facilities
paid or accrued, or scheduled to be paid or accrued, during such period;
plus
(C) dividends on Preferred Interests and Redeemable Capital Interests
(if paid to a person other than Holdings or one of its Restricted
Subsidiaries) declared and payable in cash; plus
(D) the portion of any Attributable Debt in respect of any Sale and
Leaseback Transaction that is allocable to interest expense (determined
as if such Sale and Leaseback Transaction were treated as a Capital
Lease Obligation); plus
(E) to the extent any Debt of any other person is Guaranteed or secured
by Holdings or a Restricted Subsidiary in the manner described in clause
(9) of the definition of "Debt", the aggregate amount of interest
expense of such other person during such period attributable to any such
Debt determined in accordance with GAAP; minus
(F) amortization or write-off of deferred financing costs during such
period and any charge related to any premium or penalty paid in
connection with redeeming or retiring any Debt of Holdings and its
Restricted Subsidiaries prior to the Stated Maturity thereof.
For purposes of calculating Adjusted Interest Expense on a pro forma basis,
the interest on Debt bearing a floating rate of interest shall be the interest
rate in effect at the time of determination (taking into account on a pro
forma basis any Interest Swap Obligation applicable to such Debt if such
Interest Swap Obligation has a remaining term at the date of determination in
excess of twelve months).
"Adjusted Net Income" means, for any period, the consolidated net income
(or net loss) of Holdings and its Restricted Subsidiaries determined in
accordance with GAAP for such period minus (to the extent made or
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reserved) Permitted Tax Distributions, plus any Permitted Tax Distributions
repaid to Holdings; provided that there shall be excluded therefrom, without
duplication:
(1) all items classified as extraordinary, unusual or nonrecurring (including
fees and expenses incurred at or prior to Closing and write-offs, in each
case in connection with the Transactions);
(2) any net loss or net income of any person that is not a Restricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to Holdings or its Restricted Subsidiaries by
such other person during such period;
(3) the net income of any person acquired by Holdings or a Restricted
Subsidiary thereof in a pooling-of-interests transaction for any period
prior to the date of such acquisition;
(4) any gain or loss, net of taxes, realized on the termination of any
employee pension benefit plan;
(5) gains (but not losses) in respect of Asset Sales by Holdings or its
Restricted Subsidiaries;
(6) with regard to any Restricted Subsidiary all of the Capital Interests
which are not owned by Holdings or another Restricted Subsidiary, any
aggregate net income (or loss) in excess of Holdings' or such other
Restricted Subsidiary's pro rata share of such Restricted Subsidiary's net
income (or loss); and
(7) any expenses or charges related to Petro Warrant Holdings Corporation,
the Warrants or the obligation or right of Holdings to purchase the
Warrants.
In computing Adjusted Net Income under clause (c) under the "Limitations on
Restricted Payments" covenant, Holdings:
(1) shall use audited financial statements for the portion of the relevant
period for which such statements are available on the date of determination
and unaudited financial statements and other current financial data based on
the books and records of Holdings for the remaining portion of such period;
and
(2) shall be permitted to rely in good faith for the balance of the relevant
period for which audited financial statements are not available on the
financial statements and other financial data derived from the books and
records of Holdings that are available on the date of determination.
"Affiliate" of any person means any other person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such person. For the purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies of
such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings that correspond to the foregoing. For purposes of
the indenture, the term "Affiliate," as it relates to Holdings, shall include
Mobil Oil for so long as Mobil Oil is entitled to designate at least one member
of the Board of Directors of Holdings and Volvo Trucks for so long as Volvo
Trucks is entitled to designate at least one member of the Board of Directors
of Holdings, and shall not include Warrant Holdings or any holder (other than
Holdings or any partner of Holdings) of Warrants or Warrant Shares.
"Asset Sale" means any transfer, conveyance, sale, lease or other
disposition (including, without limitation, dispositions pursuant to any
consolidation or merger) by Holdings or any of its Restricted Subsidiaries to
any person (other than to Holdings or one or more of its Restricted
Subsidiaries) in any single transaction or series of transactions of:
(1) Capital Interests in another person (other than directors' qualifying
shares);
(2) any other property or assets (other than in the ordinary course of
business, including any sale or other disposition of obsolete or permanently
retired equipment);
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provided, however, that the term "Asset Sale" shall exclude:
(a) any asset disposition permitted by the provisions described under
"Consolidation, Merger, Conveyance, Lease or Transfer" that constitutes
a disposition of all or substantially all of the assets of Holdings and
its Restricted Subsidiaries taken as a whole;
(b) any transfer, conveyance, sale, lease or other disposition of
property or assets, the gross proceeds of which (exclusive of
indemnities) do not exceed $500,000;
(c) sales of Eligible Cash Equivalents;
(d) the Incurrence of any Lien, to the extent not prohibited by the terms
of the indenture;
(e) sales of Unrestricted Subsidiaries; and
(f) any of the Transactions.
For purposes of this definition, any series of related transactions that,
if effected as a single transaction, would constitute an Asset Sale, shall
be deemed to be a single Asset Sale effected when the last such transaction
which is a part thereof is effected.
"Asset Swap" means any exchange of property or assets of Holdings or any
Restricted Subsidiary of Holdings for property or assets of a third party which
consist of property or assets described in clause (4) of the definition of
"Permitted Investments."
"Attributable Debt" under the indenture in respect of a Sale and Leaseback
Transaction means, as at the time of determination, the greater of:
(1) the fair value of the property subject to such arrangement, as
determined in good faith by the Board of Directors; and
(2) the present value (discounted at the rate of interest implicit in such
transaction) of the total obligations of the lessee for rental payments
during the remaining term of the lease included in such Sale and Leaseback
Transaction (including any period for which such lease has been extended).
"Average Life" means, as of any date of determination, with respect to any
Debt, the quotient obtained by dividing:
(1) the sum of the products of:
(a) the number of years from the date of determination to the dates of
each successive scheduled principal payment (including any sinking fund
or mandatory redemption payment requirements) of such Debt multiplied by
(b) the amount of such principal payment by
(2) the sum of all such principal payments.
"Board of Directors" means:
(1) with respect to Holdings or any Restricted Subsidiary, its Board of
Directors;
(2) with respect to a corporation, the board of directors of such
corporation or any duly authorized committee thereof; and
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(3) with respect to any other entity, the board of directors or similar body
of the general partner or managers of such entity or any duly authorized
committee thereof.
"Capital Interests" in any person means any and all shares, interests
(including Preferred Interests), participations or other equivalents in the
equity interest (however designated) in such person and any rights (other than
Debt securities convertible into an equity interest), warrants or options to
acquire an equity interest in such person.
"Capital Lease Obligation" of any person means the obligation to pay rent or
other payment amounts under a lease of (or other Debt arrangement conveying the
right to use) real or personal property of such person, to the extent such
obligations are required to be classified and accounted for as a capital lease
or a liability on the face of a balance sheet of such person in accordance with
GAAP. The Stated Maturity of any Capital Lease Obligation shall be the date of
the last payment of rent or any other amount due under such lease (or other
Debt arrangement) prior to the first date upon which such lease (or other Debt
arrangement) may be terminated by the user of such real or personal property
without payment of a penalty, and the amount of any Capital Lease Obligation
shall be the capitalized amount thereof determined in accordance with GAAP.
"Cardwell Group" means J.A. Cardwell, Sr., James A. Cardwell, Jr., and their
respective spouses, lineal descendents, estates and Affiliates, including Petro
Inc. (a corporation wholly owned by J. A. Cardwell, Sr.) and JAJCO II, Inc. (a
company wholly owned by James A. Cardwell, Jr.).
"Change of Control" means the occurrence of any of the following events:
(1) prior to a Public Equity Offering, either:
(A) the Permitted Holders cease to be the "beneficial owner" (as such
term is used in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, in the aggregate of a majority of the Common Interests in
Holdings, whether as a result of issuance of securities of Holdings or
any parent company of Holdings, any merger, consolidation, liquidation
or dissolution of Holdings, any direct or indirect transfer of
securities by Holdings or otherwise, or
(B) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) other than one or more Permitted Holders
has the power or right to designate a majority of the members of
Holdings' Board of Directors;
(2) after the consummation of a Public Equity Offering,
(A) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than one or more Permitted
Holders, is or becomes the "beneficial owner" (as such term is used in
Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes
of this clause (2) such person or group shall be deemed to have
"beneficial ownership" of all shares that any such person or group has
the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than
30% of the Common Interests in Holdings and
(B) the Permitted Holders "beneficially own" (as defined in this clause
(2)), directly or indirectly, in the aggregate a lesser percentage of
the total Common Interests of Holdings than such other person or group;
(3) Holdings ceases to own directly or indirectly at least 99% of the total
voting power and economic benefit of the Capital Interests of the Operating
Partnership;
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holdings
(together with any new directors whose election by the
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Board of Directors or whose nomination for election by the stockholders of
Holdings was approved by a vote of a majority of the directors of Holdings
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute 66 2/3% of Holdings' Board of
Directors then in office; or
(5) Holdings sells, conveys, transfers or leases (either in one transaction
or a series of related transactions) all or substantially all of its assets
to a person other than a Restricted Subsidiary of Holdings or a Successor
Entity in which a majority or more of the voting power of the Voting
Interests is held by the Permitted Holders.
"Chartwell" means Chartwell Investments Inc. and its Affiliates.
"Chartwell Interests" means Capital Interests in the Operating Partnership
held by Chartwell.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Interests" of any person means Capital Interests in such person
that do not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such person, to Capital Interests of any other
class in such person.
"Consolidated Net Worth" of Holdings means, as of any date, the aggregate
of capital, surplus and retained earnings of Holdings and its Restricted
Subsidiaries as would be shown on a consolidated balance sheet of Holdings and
its Restricted Subsidiaries prepared as of such date in accordance with GAAP,
less all amounts, if any, attributable to Redeemable Capital Interests in such
person.
"Credit Agreement" means one or more secured or unsecured credit agreements
providing, inter alia, for revolving credit loans, term loans and/or letters
of credit between Holdings or any Subsidiary and one or more lenders, together
with all related notes, letters of credit, collateral documents, guarantees,
and any other related agreements and instruments executed and delivered in
connection therewith, in each case as amended, modified, supplemented,
refinanced, refunded or replaced in whole or in part from time to time.
"Currency Hedge Obligations" means the obligations of a person Incurred
pursuant to any foreign currency exchange agreement, option or futures
contract or other similar agreement or arrangement designed to protect against
or manage such person's exposure to fluctuations in foreign currency exchange
rates on Debt permitted under the indenture.
"Damage Amount" means an amount to be paid as liquidated damages by us to
each Holder of notes under certain circumstances in accordance with the terms
of the registration rights agreement.
"Debt" means at any time (without duplication), with respect to any person,
whether recourse is to all or a portion of the assets of such person, or non-
recourse, and whether or not contingent, the following:
(1) all indebtedness of such person for money borrowed, excluding any trade
payables, other current liabilities incurred in the ordinary course of
business and any liability for federal, state or local income taxes or
other taxes owed by such person;
(2) all obligations (other than interest, premium and additional payments,
if any) of such person evidenced by bonds, debentures, notes, or other
similar instruments;
(3) all obligations of such person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
person;
(4) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property or assets acquired by
such person (even if the rights and remedies of the seller or lender under
such agreement in the event of default are limited to repossession or sale
of such property or assets);
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(5) all Capital Lease Obligations of such person;
(6) the maximum fixed redemption or repurchase price of Redeemable Capital
Interests in such person at the time of determination;
(7) any Interest Swap Obligations and Currency Hedge Obligations of such
person at the time of determination;
(8) Attributable Debt with respect to any Sale and Leaseback Transaction to
which such person is a party; and
(9) all obligations of the types referred to in clauses (i) through (viii)
of this definition of another person and all dividends and other
distributions of another person, the payment of which, in either case,
(A) such person has Guaranteed or
(B) is secured by (or the holder of such Debt or the recipient of such
dividends or other distributions has an existing right, whether
contingent or otherwise, to be secured by) any Lien upon the property or
other assets of such person, even though such person has not assumed or
become liable for the payment of such Debt, dividends or other
distributions.
For purposes of the foregoing:
(1) the maximum fixed repurchase price of any Redeemable Capital
Interests that do not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital
Interests as if such Redeemable Capital Interests were repurchased
on any date on which Debt shall be required to be determined
pursuant to this indenture; provided, however, that, if such
Redeemable Capital Interests are not then permitted to be
repurchased, the repurchase price shall be the book value of such
Redeemable Capital Interests;
(2) the amount outstanding at any time of any Debt issued with
original issue discount is the principal amount of such Debt less
the remaining unamortized portion of the original issue discount of
such Debt at such time as determined in conformity with GAAP, but
such Debt shall be deemed Incurred only as of the date of original
issuance thereof;
(3) the amount of any Debt described in clause (9)(A) above shall be
the maximum liability under any such Guarantee; and
(4) the amount of any Debt described in clause (9)(B) above shall be
the lesser of:
(a) the maximum amount of the obligations so secured; and
(b) the Fair Market Value of such property or other assets.
Notwithstanding the foregoing, neither the Warrants nor any
obligation to purchase the Warrants that may arise under the Warrant
Agreement shall be Debt.
"Default" means any event that is, or after notice or passage of time, or
both, would be, any Event of Default.
"Disinterested Director" means, with respect to any proposed transaction
between:
(1) Holdings or a Restricted Subsidiary, as applicable, and
(2) an Affiliate thereof (other than Holdings or a Restricted Subsidiary), a
member of the Board of Directors of Holdings or such Restricted Subsidiary,
as applicable, who would not be a party to, or have a
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financial interest in, such transaction and is not an officer, director or
employee of, and does not have a financial interest in, such Affiliate.
For purposes of this definition, no person would be deemed not to be a
Disinterested Director solely because such person holds Capital Interests in
Holdings.
"EBITDA" means, with respect to Holdings and its Restricted Subsidiaries,
for any period, the sum of Adjusted Net Income plus, to the extent reflected
in Adjusted Net Income for such period for which Adjusted Net Income is
determined, without duplication,
(1) Adjusted Interest Expense,
(2) income tax expense (or Permitted Tax Distributions in lieu thereof),
(3) depreciation expense,
(4) amortization expense,
(5) any charge related to any premium or penalty paid in connection with
redeeming or retiring any Debt prior to its Stated Maturity and
(6) any other non-cash items reducing Adjusted Net Income; minus any non-
cash items increasing Adjusted Net Income.
"Eligible Bank" means a bank or trust company that:
(1) is organized and existing under the laws of the United States of
America or Canada, or any state, territory, province or possession thereof;
and
(2) as of the time of the making or acquisition of an Investment in such
bank or trust company, has combined capital and surplus in excess of
$500,000,000, the senior Debt of which is rated at least "A-2" by Moody's
or at least "A" by Standard & Poor's.
"Eligible Cash Equivalents" means any of the following Investments:
(1) securities issued or directly and fully guaranteed or insured by the
United States or any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support thereof)
maturing not more than one year after the date of acquisition;
(2) time deposits in and certificates of deposit of any Eligible Bank,
provided that such Investments have a maturity date not more than two years
after date of acquisition and that the Average Life of all such Investments
is one year or less from the respective dates of acquisition;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with any Eligible Bank;
(4) direct obligations issued by any state of the United States or any
political subdivision or public instrumentality thereof, provided that such
Investments mature, or are subject to tender at the option of the holder
thereof, within 90 days after the date of acquisition and, at the time of
acquisition, have a rating of at least A from Standard & Poor's or A-2 from
Moody's (or an equivalent rating by any other nationally recognized rating
agency);
(5) commercial paper of any person other than an Affiliate of Holdings,
provided that such Investments have one of the two highest ratings
obtainable from either Standard & Poor's or Moody's and mature within
90 days after the date of acquisition;
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(6) overnight and demand deposits in and bankers' acceptances of any
Eligible Bank and demand deposits in any bank or trust company to the extent
insured by the Federal Deposit Insurance Corporation against the Bank
Insurance Fund; and
(7) money market funds substantially all of the assets of which comprise
Investments of the types described in clauses (1) through (6).
"Exchange Notes" has the meaning set forth under "Exchange Offer;
Registration Rights."
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase."
"Fair Market Value" means, with respect to the consideration received or
paid in any transaction or series of transactions, the fair market value
thereof as determined in good faith by the Board of Directors.
"Franchisee Receivables" means fuel, lube, repair and other receivables
purchased by Holdings or any Restricted Subsidiary from any of their
franchisees, licensees or third party contractors operating a Stopping Center
affiliated with the Operating Partnership's network of Stopping Centers.
"Fuel Hedging Obligations" means the obligations of a person pursuant to
fuel price swap, fuel price cap, fuel price collar and fuel price floor and
similar agreements and hedging obligations and arrangements, in the ordinary
course of business, designed to protect against or manage such person's
exposure to fluctuations in fuel prices.
"GAAP" means generally accepted accounting principles in the United States,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination.
"Guarantee" means, as applied to any Debt of another person,
(1) a guarantee (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), direct or indirect, in any
manner, of any part or all of such Debt,
(2) any direct or indirect obligation, contingent or otherwise, of a person
guaranteeing or having the effect of guaranteeing the Debt of any other
person in any manner and
(3) an agreement of a person, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all
or any part of such Debt of another person (and "Guaranteed", "Guaranteeing"
and "Guarantor" shall have meanings that correspond to the foregoing).
"Holder" means a person in whose name a note is registered in the security
register.
"Incur" means, with respect to any Debt or other obligation of any person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Debt or other obligation on the balance sheet of such person; provided,
however, that a change in GAAP that results in an obligation of such person
that exists at such time becoming Debt shall not be deemed an Incurrence of
such Debt. Debt otherwise Incurred by a person before it becomes a Subsidiary
of Holdings shall be deemed to be Incurred at the time at which such person
becomes a Subsidiary of Holdings. With respect to Debt the proceeds of which
are to be used solely to develop one or more Stopping Centers and to be
borrowed pursuant to a binding commitment previously entered into in good faith
with a lending institution, Holdings or any Restricted Subsidiary shall, at its
election, be deemed to have Incurred Debt in a designated amount of up to the
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completion cost of the project, based on the good faith estimate of management
in accordance with past practices and certified and so designated to the
Trustee in an officers' certificate, including a resolution of the Board of
Directors, at the time of such designation, but only to the extent such
proceeds are actually borrowed within 365 days after such delivery date, in
which case the excess of the committed amount over the amount actually borrowed
shall not be deemed Incurred for the purposes of this definition. "Incurrence",
"Incurred", "Incurrable" and "Incurring" shall have meanings that correspond to
the foregoing. A Guarantee by Holdings or a Restricted Subsidiary of Debt
incurred by Holdings or a Restricted Subsidiary, as applicable, shall not be a
separate incurrence of Debt.
"Interest Coverage Ratio" means, at any date of determination, the ratio of:
(1) EBITDA, as defined, to
(2) Adjusted Interest Expense, in both cases for the Specified Period.
"Interest Swap Obligations" means the obligations of a person pursuant to
any interest rate swap agreement, interest rate cap, collar or floor agreement
or other similar agreement or arrangement designed to protect against or manage
such person's exposure to fluctuations in interest rates on Debt permitted
under the indenture.
"Investment" by any person means any direct or indirect loan, advance (or
other extension of credit) or capital contribution to (by means of any transfer
of cash or other property or assets to another person or any other payments for
property or services for the account or use of another person), including
without limitation the following:
(1) the purchase or acquisition of any Capital Interest or other evidence of
beneficial ownership in another person;
(2) the purchase, acquisition or Guarantee of the Debt of another person or
the issuance of a "keep well"; and
(3) the purchase or acquisition of the business or assets of another person;
but shall exclude:
(1) accounts receivable and other extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices;
(2) the acquisition of property and assets from suppliers and other vendors
in the ordinary course of business;
(3) prepaid expenses and workers' compensation, utility, lease and similar
deposits, in the ordinary course of business; and
(4) the purchase or exchange of the Warrants.
"Issue Date" means the first date of issuance of the notes under the
indenture.
"Kirschner" means Kirschner Investments and its Affiliates.
"Kirschner Interests" means Capital Interests in the Operating Partnership
held by Kirschner.
"Lien" means, with respect to any property or other asset any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or otherwise), charge, easement, encumbrance,
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such property or other
asset (including, without limitation, any conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
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"Make-Whole Premium" means, with respect to any Note on any Redemption Date,
the greater of (1) 1.0% of the Accreted Value of such Note and (2) the excess
of (A) the present value at such time of the redemption price of such Note at
August 1, 2004 (such redemption price being set forth in the table in "Optional
Redemption" above) computed using a discount rate equal to the Treasury Rate
plus 0.50% per annum, over (B) the Accreted Value of such Note on such
Redemption Date.
"Mobil Oil" means Mobil Oil Corporation and its Affiliates.
"Net Cash Proceeds" means, with respect to Asset Sales of any person, cash
and Eligible Cash Equivalents received net of:
(1) all reasonable out-of-pocket expenses of such person incurred in
connection with such a sale, including, without limitation, all legal, title
and recording tax expenses, commissions and other fees and expenses incurred
and all federal, state, foreign and local taxes arising in connection with
such an Asset Sale that are paid or required to be accrued as a liability
under GAAP by such person, and Permitted Tax Distributions;
(2) all payments made by such person on any Debt that is secured by such
Properties or other assets in accordance with the terms of any Lien upon or
with respect to such Properties or other assets or that must, by the terms
of such Lien or such Debt, or in order to obtain a necessary consent to such
transaction or by applicable law, be repaid to any other person (other than
Holdings or a Restricted Subsidiary thereof) in connection with such Asset
Sale; and
(3) all contractually required distributions and other payments made to
minority interest holders in Restricted Subsidiaries of such person as a
result of such transaction;
provided, however, that:
(1) in the event that any consideration for an Asset Sale (which would
otherwise constitute Net Cash Proceeds) is required by
(a) contract to be held in escrow pending determination of whether a
purchase price adjustment will be made or
(b) GAAP to be reserved against other liabilities in connection with such
Asset Sale,
such consideration (or any portion thereof) shall become Net Cash Proceeds
only at such time as it is released to such person from escrow or otherwise;
and
(2) any non-cash consideration received in connection with any transaction,
which is subsequently converted to cash, shall become Net Cash Proceeds only
at such time as it is so converted.
"Offer" has the meaning set forth in the definition of "Offer to Purchase".
"Offer to Purchase" means a written offer (the "Offer") sent by Holdings by
first class mail, postage prepaid, to each Holder at his address appearing in
the security register on the date of the Offer offering to purchase up to the
aggregate:
. Accreted Value of notes, if the Purchase Date is on or prior to August
1, 2004, or
. principal amount of notes at Stated Maturity, if the Purchase Date is
after August 1, 2004,
set forth in such Offer at the purchase price set forth in such Offer (as
determined pursuant to the indenture). Unless otherwise required by applicable
law, the Offer shall specify an expiration date (the "Expiration Date") of the
Offer to Purchase which shall be, subject to any contrary requirements of
applicable law, not less than
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30 days or more than 60 days after the date of mailing of such Offer and a
settlement date (the "Purchase Date") for purchase of notes within five
business days after the Expiration Date. Holdings shall notify the trustee at
least 15 days (or such shorter period as is acceptable to the trustee) prior to
the mailing of the Offer of Holdings' obligation to make an Offer to Purchase,
and the Offer shall be mailed by Holdings or, at Holdings' request, by the
trustee in the name and at the expense of Holdings. The Offer shall contain all
instructions and materials necessary to enable such Holders to tender notes
pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the indenture pursuant to which the Offer to Purchase is
being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount at Stated Maturity of the outstanding
notes offered to be purchased pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such amount has been determined
pursuant to indenture covenants requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by Holdings for each $1,000 principal
amount of notes at Stated Maturity accepted for payment (as specified
pursuant to the indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the notes registered in
the name of such Holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal amount at Stated
Maturity;
(6) the place or places where notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that, unless Holdings defaults in making such purchase, any Note
accepted for purchase pursuant to the Offer to Purchase will, after the
Purchase Date, cease
(a) to accrete value, if the Purchase Date is on or prior to August 1,
2004, or
(b) to accrue interest, if the Purchase Date is after August 1, 2004,
but that any Note not tendered or tendered but not purchased by Holdings
pursuant to the Offer to Purchase will continue to accrete value or to
accrue interest at the same rate, as the case may be;
(8) that, on the Purchase Date, the Purchase Price will become due and
payable upon each Note accepted for payment pursuant to the Offer to
Purchase;
(9) that each Holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such note at the place or places set
forth in the Offer prior to the close of business on the Expiration Date
(such Note being, if Holdings or the trustee so requires, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to
Holdings and the trustee duly executed by, the Holder thereof or his
attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of notes
tendered if Holdings (or its paying agent) receives, not later than the
close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the aggregate
principal amount of the notes the Holder tendered, the certificate number of
the Note the Holder tendered and a statement that such Holder is withdrawing
all or a portion of his tender;
(11) that:
(a) if notes having an aggregate principal amount less than or equal to
the Purchase Amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, Holdings shall purchase all such notes and
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(b) if notes having an aggregate principal amount in excess of the
Purchase Amount are tendered and not withdrawn pursuant to the Offer to
Purchase, Holdings shall purchase notes having an aggregate principal
amount equal to the Purchase Amount on a pro rata basis (with such
adjustments as may be deemed appropriate so that only notes in
denominations of $1,000 principal amount or integral multiples thereof
shall be purchased); and
(12) that, in the case of any Holder whose Note is purchased only in part,
we shall execute, and the trustee shall authenticate and deliver to the Holder
of such Note without service charge, a new Note or notes, of any authorized
denomination as requested by such Holder, in the aggregate principal amount
equal to and in exchange for the unpurchased portion of the aggregate
principal amount of the notes so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Operating Partnership" means Petro Stopping Centers, L.P.
"Permitted Affiliate Agreements" means the agreements between and among
Holdings or any Restricted Subsidiary and each of the Cardwell Group, Mobil
Oil and Volvo Trucks North America, listed in the indenture in effect
immediately after the initial issuance of the notes and as the same may be
amended from time to time subject to the provisions of the covenant described
under "Transactions with Affiliates," provided that, notwithstanding such
covenant, such agreements may be extended from time to time or otherwise
amended, to the extent the Board of Directors of Holdings has determined in
good faith that no material adverse effect on the creditworthiness of Holdings
and its Restricted Subsidiaries, taken as a whole, shall result as a
consequence thereby. See "Certain Relationships and Related Transactions"
above.
"Permitted Debt" means:
(1) Debt Incurred pursuant to Credit Agreements (other than pursuant to the
first paragraph of the Limitation on Debt covenant) in an aggregate
principal amount not to exceed $45,000,000 at any one time outstanding,
less the aggregate amount of all Net Cash Proceeds from any Asset Sale that
have been applied to permanently reduce the outstanding amount of Debt
under such Credit Agreement borrowed under this clause (1); provided that
the sum of the aggregate principal amount of Debt under this clause (1)
plus the aggregate principal amount of Debt under clauses (11), (12) and
(13) shall not exceed $45,000,000;
(2) Debt outstanding under the notes and contribution, indemnification and
reimbursement obligations owed by any Issuer to any of the other of them in
respect of amounts paid or payable on such notes;
(3) Debt of Holdings or any Restricted Subsidiary outstanding at the time
of the initial issuance of the notes;
(4) Debt owed to and held by Holdings or a Wholly-Owned Restricted
Subsidiary;
(5) Guarantees Incurred by Holdings or any Restricted Subsidiary in the
ordinary course of business;
(6) Guarantees by Holdings or any Restricted Subsidiary of Debt of Holdings
or any Restricted Subsidiary, including Guarantees by Holdings or any
Restricted Subsidiary of Debt under a Credit Agreement, provided that such
Debt (other than Debt Incurred under clauses (1) and (2) of this
definition) is Incurred in accordance with the "Limitation on Debt"
covenant;
(7) Debt in respect of performance, surety or appeal bonds provided in the
ordinary course of business;
(8) Debt under Interest Swap Obligations and Currency Hedge Obligations;
(9) Debt owed by Holdings to any Restricted Subsidiary, provided that if
for any reason such Debt ceases to be held by a Restricted Subsidiary, such
Debt shall cease to be Permitted Debt and shall be deemed Incurred as Debt
of Holdings for purposes of the indenture;
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(10) Debt Incurred to pay for any notes, any 12 1/2% notes and any 10 1/2%
notes tendered pursuant to an Offer to Purchase in connection with a Change
of Control, provided that:
(a) the principal amount of such Debt does not exceed the principal of
the notes purchased (plus the amount of reasonable expenses incurred in
connection therewith, including the applicable purchase premium, but
excluding accrued interest, if any) and
(b) such Debt:
(1) has an Average Life to Stated Maturity at least equal to or greater than
the remaining Average Life to Stated Maturity of the notes and
(2) does not mature prior to the Stated Maturity of the notes;
(11) Debt of a person:
(a) existing at the time such person becomes a Restricted Subsidiary or
(b) assumed in connection with the acquisition of assets from such
person, other than Debt Incurred in connection with, or in contemplation
of, such person becoming a Restricted Subsidiary or such acquisition, as
the case may be, provided that the sum of the aggregate principal amount
of Debt under this clause (11) plus the aggregate principal amount of
Debt under clauses (1), (12) and (13) shall not exceed $45,000,000;
(12) Debt of Holdings or any Restricted Subsidiary pursuant to Capital Lease
Obligations and Purchase Money Debt Incurred in the ordinary course of
business, provided that the aggregate principal amount of such Debt
outstanding at any time may not exceed $5,000,000 in the aggregate, provided
further that the aggregate principal amount of Debt under this clause (12)
plus the aggregate principal amount of Debt under clauses (1), (11) and (13)
shall not exceed $45,000,000;
(13) Debt of Holdings or any Restricted Subsidiary not otherwise permitted
pursuant to this definition, in an aggregate principal amount not to exceed
$15,000,000 at any time outstanding, provided that the aggregate principal
amount of Debt under this clause (13) plus the aggregate principal amount of
Debt under clauses (1), (11) and (12) shall not exceed $45,000,000;
(14) Refinancing Debt; and
(15) Debt of Holdings or any Restricted Subsidiary, the proceeds of which
are used to purchase Warrants or that is issued in exchange for Warrants.
"Permitted Holders" means (1) the Cardwell Group, (2) Mobil Oil and (3)
Volvo Trucks.
"Permitted Investments" means:
(1) Investments in existence on the date of initial issuance of the notes;
(2) Investments required pursuant to any agreement or obligation of Holdings
or a Restricted Subsidiary, in effect on the Issue Date, to make such
Investments;
(3) Eligible Cash Equivalents;
(4) Investments in property and other assets, including Stopping Centers and
Franchisee Receivables, owned or used by Holdings or any Restricted
Subsidiary in the ordinary course of business;
(5) Investments by Holdings or any of its Restricted Subsidiaries in
Holdings or any Restricted Subsidiaries;
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(6) Investments by Holdings or any Restricted Subsidiary in a person, if as
a result of such Investment:
(A) such person becomes a Restricted Subsidiary or
(B) such person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated or wound-up into, Holdings or a Restricted Subsidiary;
(7) loans and advances to employees made in the ordinary course of business
in an amount not to exceed $750,000 in the aggregate at any time
outstanding;
(8) Interest Swap Obligations and Currency Hedge Obligations;
(9) non-cash consideration received in conjunction with an Asset Sale that
is otherwise permitted under the "Limitations on Asset Sales" covenant;
(10) Fuel Hedging Obligations Incurred in the ordinary course of business;
(11) Investments received in settlement of obligations owed to Holdings or
any Restricted Subsidiary and as a result of bankruptcy or insolvency
proceedings or upon the foreclosure or enforcement of any Lien in favor of
Holdings or any Restricted Subsidiary; and
(12) Investments by Holdings or any Restricted Subsidiary not otherwise
permitted under this definition, in an aggregate amount not to exceed
$10,000,000 at any one time outstanding.
"Permitted Liens" means:
(1) Liens existing at the time of the initial issuance of the notes;
(2) Liens to secure Debt under Credit Agreements or Debt Incurred under
clause (13) of the definition of "Permitted Debt," in the aggregate, of up
to $170,000,000 aggregate principal amount;
(3) Liens on property or assets of Holdings securing Debt Incurred in
compliance with clause (12) of the definition of "Permitted Debt";
(4) any Lien for taxes or assessments or other governmental charges or
levies not then due and payable (or which, if due and payable, are being
contested in good faith and for which adequate reserves are being
maintained, to the extent required by GAAP);
(5) any statutory warehousemen's, materialmen's, landlord's or other
similar Liens for sums not then due and payable (or which, if due and
payable, are being contested in good faith and with respect to which
adequate reserves are being maintained, to the extent required by GAAP);
(6) any title exception, easement, right-of-way, lease, sub-lease or other
similar Lien that does not materially impair the use or value of the
property subject to such liens in its use in the business of Holdings or a
Restricted Subsidiary thereof;
(7) Liens on property or other assets:
(a) in connection with workers' compensation, unemployment insurance and
other types of statutory obligations or the requirements of any official
body, or
(b) to secure the performance of tenders, bids, surety or performance
bonds, leases, purchase, construction, sales or servicing contracts and
other similar obligations Incurred in the ordinary course of business
consistent with industry practice; or
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(c) to obtain or secure obligations with respect to letters of credit,
Guarantees, bonds or other sureties or assurances given in connection
with the activities described in clauses (a) and (b) above, in each case
not Incurred or made in connection with the borrowing of money, the
obtaining of advances or credit or the payment of the deferred purchase
price of property or services or imposed by ERISA or the Internal
Revenue Code in connection with a "plan" (as defined in ERISA) (other
than any Lien imposed in connection with the Holdings' 401(k) Plan) or
(d) arising in connection with any attachment or judgment unless such
Liens shall not be satisfied or discharged or stayed pending appeal
within 60 days after the entry thereof or the expiration of any such
stay;
(8) Liens on property of a person existing at the time such person is merged
with or into or consolidated with Holdings (and not Incurred in anticipation
of such transaction), provided that such Liens are not extended to the
property and assets of Holdings other than the property or assets acquired;
(9) other Liens incidental to the conduct of the business of Holdings or the
ownership of its assets that do not materially impair the use or value of
the property subject to such liens in its use in the business of Holdings;
(10) Liens securing obligations under Interest Swap Obligations, Currency
Hedge Obligations and Fuel Hedging Obligations Incurred in connection with
managing interest or currency risk resulting from or related to a Credit
Agreement; and
(11) Liens to secure any permitted extension, renewal, refinancing or
refunding (or successive extensions, renewals, refinancings or refundings),
in whole or in part, of any Debt secured by Liens referred to in the
foregoing clauses (1) through (10); provided that such Liens do not extend
to any other property or assets and the principal amount of the Debt secured
by such Liens is not increased.
"Permitted Tax Distribution" means for any fiscal year or portion thereof
(the "Tax Year") of any person in which period such person is a partnership or
other substantially similar pass-through entity for federal income tax
purposes, distributions to enable the partners or members of such person to
make payments of federal, state and local income taxes (including estimates
thereof) in respect of the Taxable Income of such partner or member with
respect to each such Tax Year in an aggregate amount equal to the product of:
(1) the excess of:
(A) the sum of the highest marginal federal income tax rate applicable
during such Tax Year to either corporations or individuals and the State
Income Tax Rate over;
(B) the product of such federal rate and the State Income Tax Rate; and
(2) such partner's or member's Taxable Income for such Tax Year.
"person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Interests," as applied to the Capital Interests in any person,
means Capital Interests in such person of any class or classes (however
designated) that rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such person, to shares of Common Interests in such
person.
"Public Equity Offering" means any underwritten public offering of Capital
Interests of Holdings or a Successor Entity pursuant to an effective
registration statement (other than a registration statement on Form S-4 or Form
S-8 or any successor or similar form) under the Securities Act.
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase."
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"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase."
"Purchase Money Debt" means Debt:
(1) Incurred to finance the purchase or construction of any assets of such
person or any Restricted Subsidiary; and
(2) that is secured by a Lien on such assets where the lender's sole
security is to the assets so purchased or constructed, in either case that
does not exceed 100% of the cost and to the extent the purchase or
construction prices for such assets are or should be included in "addition
to property, plant or equipment" in accordance with GAAP.
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase."
"Qualified Capital Interests" in any person means a class of Capital
Interests other than Redeemable Capital Interests.
"Redeemable Capital Interests" in any person means any equity security of
such person that by its terms (or by terms of any security into which it is
convertible or for which it is exchangeable), or otherwise (including the
passage of time or the happening of an event), is required to be redeemed, is
redeemable at the option of the holder thereof in whole or in part (including
by operation of a sinking fund), or is convertible or exchangeable for Debt of
such person at the option of the holder thereof, in whole or in part, at any
time prior to the Stated Maturity of the notes. Notwithstanding the foregoing,
(1) Preferred Interests of Holdings or any Restricted Subsidiary thereof that
are issued with the benefit of provisions requiring a change of control offer
to be made for such Preferred Interests in the event of a change of control of
Holdings or any Restricted Subsidiary, which provisions have substantially the
same effect as the provisions of the indenture described under "Change of
Control," shall not be deemed to be Redeemable Capital Interests solely by
virtue of such provisions and (2) none of the Warrants, the partnership
interest held by Warrant Holdings, or the obligation to purchase the Warrants
shall be Redeemable Capital Interests.
"Redemption Price," when used with respect to any note to be redeemed,
means the price at which it is to be redeemed pursuant to the indenture.
"Redemption Date," when used with respect to any note to be redeemed, means
the date on which it is to be redeemed pursuant to the indenture.
"Refinancing Debt" means Debt that refunds, refinances, renews, replaces or
extends any Debt permitted to be incurred by Holdings or any Restricted
Subsidiary pursuant to the terms of the indenture, whether involving the same
or any other lender or creditor or group of lenders or creditors, but only to
the extent that:
(1) the Refinancing Debt is subordinated to the notes to at least the same
extent as the Debt being refunded, refinanced or extended, if at all,
(2) the Refinancing Debt is scheduled to mature either:
(a) no earlier than the Debt being refunded, refinanced or extended, or
(b) at least 91 days after the maturity date of the notes,
(3) the Refinancing Debt has a weighted average life to maturity at the
time such Refinancing Debt is incurred that is equal to or greater than the
weighted average life to maturity of the Debt being refunded, refinanced,
renewed, replaced or extended,
(4) such Refinancing Debt is in an aggregate principal amount that is less
than or equal to the sum of:
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(a) the aggregate principal or accreted amount (in the case of any Debt
issued with original issue discount, as such) then outstanding under the
Debt being refunded, refinanced, renewed, replaced or extended,
(b) the amount of accrued and unpaid interest, if any, and premiums
owed, if any, not in excess of preexisting prepayment provisions on such
Debt being refunded, refinanced or extended and
(c) the amount of customary fees, expenses and costs related to the
incurrence of such Refinancing Debt, and
(5) such Refinancing Debt is incurred by the same Person (or its successor)
that initially incurred the Debt being refunded, refinanced, renewed,
replaced or extended, except that Holdings may incur Refinancing Debt to
refund, refinance, renew, replace or extend Debt of any Wholly-Owned
Restricted Subsidiary of Holdings.
"Replacement Asset" means, with respect to any Asset Sale, a property or
asset that consists of a Stopping Center or that, as determined by the Board of
Directors as evidenced by a board resolution, is used or will be used in the
Stopping Center business of Holdings or a Restricted Subsidiary or a related
business.
"Restricted Payment" is defined to mean any of the following:
(1) any dividend or other distribution declared and paid on the Capital
Interests in Holdings or on the Capital Interests in any Restricted
Subsidiary of Holdings that are held by, or declared and paid to, any Person
other than Holdings or a Wholly-Owned Restricted Subsidiary of Holdings
(other than dividends, distributions or payments made solely in Qualified
Capital Interests in Holdings);
(2) any payment made by Holdings or any of its Restricted Subsidiaries to
purchase, redeem, acquire or retire any Capital Interests in Holdings
(including the conversion into, or exchange for, Debt, of any Capital
Interests);
(3) any payment made by any Restricted Subsidiary of Holdings, other than to
Holdings or another Restricted Subsidiary of Holdings, to purchase, redeem,
acquire or retire any Capital Interests in a Restricted Subsidiary (other
than payments made with Qualified Capital Interests in Holdings);
(4) any payment made by Holdings or any of its Restricted Subsidiaries
(other than a payment made solely in Qualified Capital Interests in
Holdings) to redeem, repurchase, defease (including an in substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Debt of either of us that is
subordinate (whether pursuant to its terms or by operation of law) in right
of payment to the notes and which was scheduled to mature on or after the
maturity of the notes;
(5) any Investment by Holdings or a Restricted Subsidiary in any Person,
other than a Permitted Investment;
(6) any designation of a Restricted Subsidiary as an Unrestricted Subsidiary
on the basis of the greater of the fair market or book value of such
Subsidiary; and
(7) any advisory fee paid to an Affiliate with respect to a specific
transaction (other than fees that were payable on the Closing Date upon
consummation of the Transactions).
"Restricted Subsidiary" means any Subsidiary, at least 75% of the
outstanding Common Interests of which are owned and controlled, directly or
indirectly, by Holdings that has not been designated as an "Unrestricted
Subsidiary" in accordance with the indenture.
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"Sale and Leaseback Transaction" means any direct or indirect arrangement
pursuant to which property is sold or transferred by Holdings or a Restricted
Subsidiary and is thereafter leased back from the purchaser or transferee
thereof by Holdings or a Restricted Subsidiary.
"Significant Subsidiary" has the meaning set forth in Rule 1-02 of
Regulation S-X under the Securities Act and Exchange Act but shall include any
direct or indirect Restricted Subsidiary of Holdings owning one or more
Stopping Centers, but shall not include any Unrestricted Subsidiary.
"State Income Tax Rate" means, with respect to any person, the weighted
average highest marginal state and local income tax (inclusive of franchise or
other taxes in the nature of income taxes) rates applicable to corporations or
to individuals in any state in which such person does business. The highest
applicable marginal state and local income tax rates of the states from which
the person derives net income shall be weighted by the ratio of the person's
net income apportioned to a state by that state to the sum of the person's net
income apportioned to all states in which such person is doing business.
"Stated Maturity," when used with respect to:
(1) any note or any installment of interest thereon, means the date
specified in such note as the fixed date on which the principal amount of
such note or such installment of interest is due and payable; and
(2) any other Debt or any installment of interest thereon, means the date
specified in the instrument governing such Debt as the fixed date on which
the principal of such Debt or such installment of interest is due and
payable.
"Stopping Centers" means multi-service truck stops or travel plaza
facilities, including "full-sized" and "Petro:2" units and Petro:Lube
maintenance facilities, which provide services and amenities to commercial
truck drivers as well as to other highway motorists and local residents,
including without limitation, facilities currently operated by Holdings and its
Restricted Subsidiaries and related businesses.
"Subsidiary" means, with respect to any person, any corporation, limited or
general partnership, trust, association or other business entity of which an
aggregate of at least a majority of the outstanding Capital Interests therein
is, at the time, directly or indirectly, owned by such person and/or one or
more Subsidiaries of such person.
"Successor Entity" means a corporation or other entity that succeeds to and
continues the business of Holdings.
"Taxable Income" means, with respect to any partner or member of a person
that is a partnership or substantially similar pass-through entity for federal
income tax purposes, such partner's allocation of taxable income from such
person for federal income tax purposes inclusive of each item of taxable gain,
loss, income, and deduction required to be taken into account separately by the
partners or members of such person and taking into account allocations pursuant
to Section 704(c) of the Code. The character of each separately stated item
shall be disregarded for purposes of determining Taxable Income; provided, that
net capital loss, as defined in Section 1222(10) of the Code, shall not be
taken into account in determining Taxable Income.
"Transactions" means:
(1) the investment in Holdings of equity capital by Volvo Trucks and Mobil
Oil;
(2) the purchase of the Chartwell Interests and the Kirschner Interests by
Holdings;
(3) the execution of, and consummation of borrowings under, a Credit
Agreement to be entered into by the Operating Partnership and Holdings with
BankBoston and a syndicate of lenders;
(4) the amendment of the 10 1/2% notes indenture; and
(5) the consummation of the sale of the old notes and warrants exchangeable
into all of the common stock of Petro Warrant Holdings Corporation.
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"Treasury Rate" means the yield to maturity at the time of computation of
U.S. Treasury securities with a constant maturity (as compiled and published in
the most recent Federal Reserve Release H.15 (519) which has become publicly
available at least two business days prior to the Redemption Date (or, if such
statistical release is no longer published, any publicly available source of
similar market data)) closest to the period from the Redemption Date to August
1, 2004; provided, however, that if the period from the Redemption Date to
August 1, 2004, is not equal to the constant maturity of a U.S. Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of one
year) from the weekly average yields of U.S. Treasury securities for which such
yields are given, except that if the period from the Redemption Date to August
1, 2004, is less than one year, the weekly average yield on actually traded
U.S. Treasury securities adjusted to a constant maturity of one year shall be
used.
"Volvo Trucks" means Volvo Trucks of North America, Inc. and its Affiliates.
"Voting Interests" means, with respect to any Person, securities of any
class or classes of Capital Interests in such person entitling the holders
thereof generally to vote on the election of members of the board of directors
or comparable body of such person.
"Warrant Agreement" means that certain warrant agreement among Warrant
Holdings, Holdings, Sixty Eighty, LLC, First Union Capital Markets Corp., CIBC
World Markets Corp. and State Street Bank and Trust Company.
"Warrant Holdings" means Petro Warrant Holdings Corporation, a Delaware
corporation.
"Warrants" means the exchangeable warrants issued by Warrant Holdings
pursuant to the Warrant Agreement.
"Wholly-Owned" means, with respect to a Subsidiary, any Subsidiary, at least
99% of the outstanding voting securities (other than directors' qualifying
shares) of which are owned, directly or indirectly, by Holdings.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of material anticipated federal income
tax consequences with respect to the exchange of old notes for new notes and
the ownership and disposition of the new notes by holders acquiring the old
notes on original issuance at the issue price (the old notes and new notes are
collectively referred to herein as the "notes"), and, where specifically
indicated, constitutes the opinion of Gibson, Dunn & Crutcher LLP, our counsel
regarding such material consequences. This discussion is general in nature, and
does not discuss all aspects of federal income taxation that may be relevant to
a particular investor in light of the investor's particular circumstances, or
to certain types of investors subject to special treatment under federal tax
laws including, without limitation dealers in securities or currencies, banks,
insurance companies, regulated investment companies, S corporations,
nonresident aliens, foreign corporations, tax-exempt entities, holders owning
notes as part of a straddle, hedge, conversion transaction or any other
integrated transaction, traders in securities electing to mark-to-market,
holders with a functional currency other than a United States dollar and
holders subject to the alternative minimum tax. In addition, this discussion
does not consider the effect of any foreign, state, local, or other tax laws,
or any United States tax consequences other than income tax consequences, that
may be applicable to particular investors. This summary is based upon the
Internal Revenue Code of 1986 and applicable Treasury Regulations, including
proposed regulations, rulings, administrative pronouncements and decisions as
of the date hereof, all of which are subject to change or differing
interpretations at any time and in some circumstances with retroactive effect.
This discussion assumes the holders are U.S. holders that hold their notes
as "capital assets" within the meaning of Section 1221 of the Code. A "U.S.
holder" is a holder of a note who is a United States citizen or resident, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is subject to U.S. federal income taxation regardless of its
source, a trust if a United States court exercises primary jurisdiction over
its administration and one or more United States persons have the authority to
control all of its substantial decisions, or certain electing trusts that were
in existence on August 19, 1996, and treated as domestic trusts on such date.
No rulings from the Internal Revenue Service have been or will be requested
with respect to any of the tax issues discussed herein. Accordingly, there can
be no assurance that the IRS will not challenge one or more of the tax
consequences described herein.
We urge each holder to consult its own tax advisor to determine the federal,
state, local, foreign, and other tax consequences to it of the exchange,
ownership and disposition of the notes.
The Notes
Exchange of Old Notes for New Notes. In the opinion of counsel, the exchange
of old notes for new notes with terms substantially identical to those of the
old notes will not be a taxable event to holders of the old notes.
Consequently, as a result of such exchange, no gain or loss will be recognized
by a holder, and each holder will continue to be required to include original
issue discount in its gross income as discussed below, and will continue to
have the same adjusted issue price, adjusted basis and holding period in the
new notes as it had immediately before the exchange.
Allocation of Purchase Price Between Old Notes and Warrants. For federal
income tax purposes, an old note and any accompanying warrant will be treated
as an investment unit. The issue price of a unit for federal income tax
purposes will be the first price at which a substantial amount of units is sold
for money, excluding sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers. The issue price of a unit must be allocated between the old note
and the warrant based on the relative fair market values of each such component
of the unit on the issue date. For this purpose, Holdings intends to allocate
$366.36 to each old note and $117.28 to each warrant. Although Holdings'
allocation is not binding on the IRS, a holder of a unit must use Holdings'
allocation unless the
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holder discloses on its federal income tax return for the year in which it
acquired the unit that it plans to use an allocation that is inconsistent with
Holdings' allocation. No assurance can be given that the IRS will accept
Holdings' allocation. If the IRS successfully challenged Holdings' allocation,
the issue price of the old notes, the original issue discount accrual on all
old notes and any gain or loss on the sale or disposition of an old note or
warrant would be different from that resulting under the allocation determined
by Holdings.
Old Notes are Part of One Issue. Holdings issued for money $82.7 million of
principal amount at stated maturity of old notes accompanied by warrants
exchangeable into all of the common stock of Petro Warrant Holdings
Corporation. It further issued $30.7 million of principal amount at stated
maturity of old notes to Chartwell without accompanying warrants as partial
payment for all of Chartwell's direct and indirect interests in the operating
partnership. The $82.7 million and $30.7 million of old notes have the same
credit and payment terms and both were issued on the same date under a common
plan as part of a series of related transactions. Accordingly, all old notes
will be considered to be issued as part of the same debt issue for federal
income tax purposes.
Issue Price of Old Notes. For federal income tax purposes, the issue price
of each debt instrument in a debt issue where a substantial amount of the issue
is issued for money will be the first price at which a substantial amount of
the debt instruments is sold for money, excluding sales to bond houses, brokers
or similar persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers. Since a substantial amount of the old notes,
which were the old notes issued with warrants, were issued for money, the
investment unit rules described above under "Allocation of Purchase Price
between Old Notes and Warrants" cause each old note in the investment unit to
have an issue price of $366.36. Accordingly, all old notes, including the old
notes issued to Chartwell, will have an issue price for tax purposes of
$366.36.
Original Issue Discount. In general, subject to a de minimis rule, a debt
obligation will be treated as being issued with original issue discount ("OID")
if the "stated redemption price at maturity" of the instrument exceeds such
instrument's "issue price."
Stated Redemption Price at Maturity. The stated redemption price at
maturity of a debt obligation is the aggregate of all payments due to the
holder under such debt obligation at or prior to its maturity date, other than
interest payments that, among other things, are actually and unconditionally
payable at least annually ("QSIP"). Because interest will not be payable on the
notes until February 1, 2005, none of the payments on the notes will qualify as
QSIP, so the stated redemption price at maturity of the notes will include all
payments of principal and interest required under the notes. The stated
redemption price of maturity of each note will equal $1,600, which is the sum
of the payment of $1,000 of principal due upon maturity of each note and the
total interest payments of $600 due under the terms of each note.
Issue Price of New Note. The issue price of a new note, which for tax
purposes is treated as a continuation of the old note, will be $366.36, which
is the same as the issue price of an old note, as described for an old note
above under "Issue Price of Old Notes."
OID Amount. Each old note and new note, which for tax purposes is treated
as a continuation of an old note, will have $1,233.64 of OID for federal income
tax purposes, which is the amount by which each note's stated redemption price
at maturity exceeds its issue price. The notes have a total aggregate OID of
$139.9 million, which is the difference between the aggregate stated redemption
price at maturity of the notes of $181.4 million and the aggregate issue price
of the notes for tax purposes of $41.5 million. Accordingly, a holder of a note
must include in gross income for federal income tax purposes the sum of the
daily portions of the OID with respect to the note for each day during the
taxable year or portion of a taxable year on which such holder holds the note.
The daily portion is determined by allocating to each day of each accrual
period a pro rata portion of an amount equal to the adjusted issue price of the
notes at the beginning of the accrual period multiplied by the yield to
maturity (generally, the discount rate that, when used in computing the present
value of all principal and stated interest payments to be made on the note,
produces an amount equal to its issue price) of the note (determined by
compounding at the close of each accrual period and adjusting for the length
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of the accrual period). The adjusted issue price of a note at the start of any
accrual period will be the issue price of the note increased by the accrued OID
for each prior accrual period. Under these rules, holders will have to include
in gross income increasingly greater amounts of OID in each successive accrual
period. The amount of OID for each holder for any period will differ
significantly from the amount of interest payments on the notes during that
period, since each holder will accrue a total amount of OID on each note over
the term of the note of $1,233.64, yet only $600 of total interest payments are
due under the terms of the note, none of which is payable prior to February 1,
2005. A holder's original tax basis for determining gain or loss on the sale or
other disposition of a Note will be increased by any accrued OID includible in
such holder's gross income, and reduced by the payments previously received by
the holder with respect to the note.
There are several circumstances under which Holdings could make a payment on
a note that would affect the yield to maturity of the note, including the
redemption or repurchase of notes (as described under "Description of Notes").
According to Treasury Regulations, the possibility of a change in the yield
will not affect the amount of OID required to be realized by a holder (or the
timing of such recognition) if the likelihood of change, as of the date the
debt obligations were issued, is remote. Holdings intends to report on the
basis that the likelihood of any change in the yield on the notes is remote.
Sale or Retirement of Notes. Upon the sale, redemption, retirement at
maturity or other disposition of a note, other than as discussed in "Exchange
of Old Notes for New Notes," a holder will generally recognize taxable gain or
loss equal to the difference between the sum of the cash and the fair market
value of all other property received on such disposition of a note and such
holder's adjusted federal income tax basis in the note. The adjusted basis of
the note generally will equal the holder's cost, increased by any OID
includible in income by the holder with respect to such note, and reduced by
the payments previously received by the holder with respect to the instrument.
Any gain or loss recognized on the sale, exchange, redemption, retirement at
maturity or other disposition of a note will generally be capital gain or loss,
and will be long-term capital gain or loss if, at the time of such disposition,
the holder's holding period for the note is more than one year. In the case of
individuals, the maximum federal income tax rate that would apply to such
capital gain is 20% if the holder has held the note for more than twelve months
at the time of disposition. The deductibility of capital losses is subject to
limitations as described in the Code.
Applicable High Yield Discount Rules. The deduction for interest, including
OID, is limited in the case of "applicable high yield discount obligations"
issued by a corporation. In the situation where a partnership with a corporate
partner issues the obligation, the applicable high yield discount obligation
rules are applied to each corporate partner, but are not applied to non-
corporate partners. An applicable high yield discount obligation is a debt
obligation whose yield to maturity exceeds the applicable federal rate in
effect at the time of their issuance plus 500 basis points and certain other
requirements are met. For notes with semiannual compounding issued in July
1999, the applicable federal rate equals 5.74%.
The terms of the notes meet the requirements of an applicable high yield
discount obligation. Accordingly, each corporate partner of Holdings, including
Warrant Holdings, will not be able to deduct its allocable share of interest
deductions, including OID, attributable to the notes until such amounts are
actually paid, and the "disqualified portion" of such interest, including OID,
which is defined as the portion that is attributable to the yield on the notes
in excess of the applicable federal rate plus 600 basis points, will be
permanently nondeductible. Although the corporate partners may not deduct a
portion of their allocable share of interest deductions until such amounts are
actually paid, the holders of the notes will still be required to include in
income the OID amount as described under "Original Issue Discount."
Additionally, the holders of the notes will be required to treat the
"disqualified portion" of such interest as a dividend from each of the
corporate partners of Holdings to the extent of the current or accumulated
earnings and profits of each such corporate partner, subject to the dividends
received deduction allowed to corporate holders. Holders of the notes may
contact the office of Holdings' Chief Financial Officer at 915-779-4711 to
obtain more information as to the percentage of each note that will be subject
to the applicable high yield discount obligation rules discussed above.
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While Petro Holdings Financial Corporation, a wholly-owned corporate
subsidiary of Holdings, is jointly and severally liability for the amounts due
under the notes, Holdings believes the notes are being issued by Holdings and
not Petro Holdings Financial Corporation for federal income tax purposes; thus,
only the portion of the notes attributable to Holdings' corporate partners will
be subject to the applicable high yield discount obligation rules. This is
based on the fact that:
. Petro Holdings Financial Corporation was recently incorporated to act as co-
obligor solely to allow certain institutional investors to invest in the
units;
. Petro Holdings Financial Corporation has nominal assets and will not conduct
any operations; and
. it is anticipated that Petro Holdings Financial Corporation will not make
any payment and will not deduct any interest with respect to the notes.
Backup Withholding
In general, a holder of a note will be subject to backup withholding at the
rate of 31% with respect to interest, OID, principal and premium, if any, paid
on a note, and the proceeds of a sale of a note unless such holder.
. is an entity that is exempt from withholding, including corporations, tax-
exempt organizations and certain qualified nominees, and, when required,
demonstrates this fact, or
. provides the payor with its taxpayer identification number, which for an
individual would be the holder's social security number, certifies that the
taxpayer identification number provided to the payor is correct and that the
holder has not been notified by the IRS that it is subject to backup
withholding due to underreporting of interest, and otherwise complies with
applicable requirements of the backup withholding rules.
In addition, such payments of principal, OID, premium and interest to, and
the proceeds of, a sale of a note by holders that are not exempt entities will
generally be subject to information reporting requirements. A holder who does
not provide the payor with his correct taxpayer identification number may be
subject to penalties imposed by the IRS.
We will report to the holders and to the IRS the amount of any "reportable
payments" (including any interest paid) and any amounts withheld with respect
to the notes during the calendar year. The amount of any backup withholding
from a payment to a holder will be allowed as a credit against such holder's
federal income tax liability and may entitle such holder to a refund, provided
that the required information is furnished to the IRS.
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DESCRIPTION OF HOLDINGS PARTNERSHIP AGREEMENT
The Holdings partnership agreement and the fourth amended and restated
limited partnership agreement of the Operating Partnership provide that each
partnership will be managed by a seven member Board of Directors and a three
member Executive Committee. Membership of the Boards of Directors and Executive
Committees of both partnerships will be identical. The Boards of Directors
consists of two designees each appointed by each of the Cardwells or their
affiliates, Mobil and Volvo Trucks. The seventh director is Larry J. Zine. The
Executive Committees consists of one designee appointed by each of the
Cardwells or their affiliates, Mobil, and Volvo Trucks. See "Management." Each
of the Cardwells or their affiliates, Mobil and Volvo Trucks have veto rights
over certain major partnership decisions.
The Holdings partnership agreement provides for the issuance of preferred
partnership interests. The Class A preferred partnership interests held by the
Cardwells or their affiliates will accrue cumulative preferred returns at a
rate of 8% per annum. The Class A preferred partnership interests held by Mobil
accrue cumulative preferred returns at a rate of 9 1/2% per annum. The
preferred returns accrue, but are only payable in cash if permitted by the
Operating Partnership's then existing debt instruments. Accrued but unpaid
returns compound semiannually. The Class A preferred partnership interests are
mandatorily redeemable by Holdings on October 27, 2008. The Class A preferred
partnership interests are not convertible into common partnership interests.
The Class A preferred partnership interests as well as the Class B preferred
partnership interests described below have liquidation preferences equal to all
their accrued and unpaid preferred return plus all their unrecovered capital.
The Class B preferred partnership interests owned by Mobil accrue cumulative
preferred returns at a rate of 12% per annum and are convertible into 3.9% of
the common partnership interests in Holdings at any time prior to mandatory
redemption on the tenth anniversary date of the closing of the
Recapitalization. Upon conversion into a common partnership interest (or as
soon thereafter as cash may be available) the accrued preferred return on the
Class B preferred partnership interest will be paid.
The Holdings partnership agreement requires Holdings to make distributions
to each of its partners in an amount sufficient to allow each partner to pay
federal, state and local income taxes with respect to allocations of taxable
income to such partner by Holdings. Tax distributions to partners will be based
on the taxable income of Holdings.
Other material provisions of the Holdings partnership agreement are
summarized below.
Term
Holdings commenced operations in July 1999 and will continue in existence
until December 31, 2025, unless earlier dissolved by operation of law or by one
of the events set forth in Article X of the partnership agreement, principally
the unanimous approval of Holdings' Executive Committee or the written
agreement of all partners.
Allocations of Profits and Losses
After giving effect to special allocations set forth in the partnership
agreement, including "Minimum Gain Chargebacks" and "Qualified Income Offsets",
as those terms are defined in the Regulations to the Internal Revenue Code,
remaining profits are allocated to our partners to the extent that losses have
been allocated to partners, but in reverse order, and in proportion to their
common limited partnership interest ownership percentages. Losses are allocated
in the following order:
(1) to partners according to their common limited partnership interest
ownership percentages up to the amount of profits allocated;
(2) to partners according to their common limited partnership interest
ownership percentages up to the amount of their unrecovered capital, which is
the amount by which their capital contributions exceed distributions made by
Holdings;
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(3) to partners holding preferred partnership interests according to their
to their preferred partnership interest ownership percentages up to the amount
of their unrecovered capital; and
(4) to partners according to their to their common limited partnership
interest ownership percentages.
Delegation of the General Partner's Rights and Powers
Under the partnership agreement, the general partner has vested all of its
management power and authority, as permitted by Delaware law, in a committee
known as the "Board of Directors." To the extent any such right or authority
may not be vested in the Board of Directors under Delaware law, the general
partner, to the fullest extent allowed by law, irrevocably delegates such right
or authority to the Board of Directors. Any purported revocation of such
delegation may be made, if at all, only upon 90 days prior written notice from
the general partner to each other partner. The intent of these provisions is to
allow the Board of Directors to exercise all of the rights, powers and
authority otherwise vested in a general partner under Delaware limited
partnership law.
Composition of the Executive Committee
The partnership agreement establishes a three member Executive Committee. So
long as the Cardwells or their affiliates, Mobil and Volvo are entitled to
appoint the members of the Board of Directors, each one of them shall be
allowed to appoint one member to the Executive Committee, and they have
initially appointed J.A. Cardwell, Sr., Kevin T. Weir, and Robert Grussing, IV,
respectively.
Partner Veto Rights
Each major decision requires the consent of each of the Cardwells or their
affiliates, Mobil and Volvo. The partnership agreement defines "major
decisions" of the partnership's operation principally, as:
. allowing the tax matters partner to take any position or make any
decision that could materially adversely affect the partnership or any partner;
. amending the partnership agreement;
. amending the limited partnership agreement of the Operating Partnership;
. admitting a new partner to the partnership;
. requesting the holders of common limited partnership interests to make
additional capital contributions; and
. the sale of additional partnership interests to third parties.
Amendments
The partnership agreement may be amended only if approved by each of the
Cardwells or their affiliates, Mobil and Volvo. In addition, any amendment that
would alter or change the powers, preferences or special rights of the
partnership interests of a partner so as to adversely affect the rights of the
holder of those partnership interests or that partner, must be approved by that
partner.
Transfer Restrictions
Partners may not sell, assign, transfer or dispose of any part of a
partnership interest except in accordance with the provisions of the
partnership agreement. No owner of securities issued by Petro Warrant Holdings
Corporation may become a partner or have any direct ownership interest in a
partnership interest as a result of being such a security holder. The Cardwells
and their affiliates, Mobil and Volvo each have the right to transfer all or
part of its partnership interests to a majority beneficially owned affiliate,
to an affiliate that owns a majority of such partner, or to an immediate family
member. In the event of a transfer to an immediate family
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member, voting rights remain with the transferring partner unless such
immediate family member is admitted to the partnership as a partner. If the
Cardwells or their affiliates, Mobil or Volvo desire to transfer any portion of
its partnership interests, a right of first refusal arises in favor of those
other partners.
Cardwell Buy-Sell.
The Cardwells or their affiliates may, at any time, give notice to the
members of the Board of Directors appointed by Mobil and Volvo, and to the
board of directors of Petro Warrant Holdings Corporation, stating that they
desire to purchase from or sell to Mobil and Volvo, all of their partnership
interests. The purchase price shall be based on the gross fair market value of
the assets of Holdings and the Operating Partnership as designated by the
Cardwells or their affiliates. Petro Warrant Holdings Corporation and any
employee of Holdings or of the Operating Partnership who owns a partnership
interest may elect to join as a seller in such buy-sell transaction. If the
notice is given as a result of the termination of J.A. Cardwell, Sr. as
Chairman or Chief Executive Officer of Holdings, Mobil and Volvo shall have
thirty days to respond, and in all other circumstances shall have sixty days to
respond. Failure to respond shall be deemed an election to sell.
Sale of the Business
At any time after January 1, 2002, or upon the termination of J.A. Cardwell,
Sr. as Chairman or Chief Executive Officer of Holdings, J.A. Cardwell, Sr. may
solicit the sale or other disposition of all of the business and assets of
Holdings and of the Operating Partnership. Upon presentation of this offer to
all of the partners, Mobil and Volvo shall have sixty days to elect to sell
their partnership interests to the Cardwells or their affiliates or elect to
purchase all of the partnership interests of the Cardwells and their
affiliates. If either Mobil or Volvo elects to purchase the Cardwells and their
affiliates partnership interests, then both of them must join in the purchase.
IPO Rights
At any time, the Cardwells or their affiliates may request the Board of
Directors to incorporate Holdings and proceed with an initial public offering
of that corporation's capital stock. This request shall be accompanied by an
opinion from a nationally recognized investment banking firm as to the
feasibility of the IPO, and by a proposed plan of reorganization. Within sixty
days after receiving the IPO request, Mobil and Volvo shall give notice that
either both of them agree to the IPO plan or that one or both of them will
purchase all of the partnership interests of the Cardwells and their
affiliates.
120
<PAGE>
DESCRIPTION OF PETRO WARRANT HOLDINGS CORPORATION
Petro Warrant Holdings Corporation is a limited partner in Holdings,
currently owning 10% of the common limited partnership interests. Petro Warrant
Holdings Corporation has no right to appoint representatives to the Board of
Directors of Holdings. In addition, certain actions of Holdings, including
amendment of the Holdings partnership agreement and the admission of new
limited partners, require the unanimous approval of the Cardwells or their
affiliates, Mobil, and Volvo Trucks.
As a limited partner holding a common partnership interest, Petro Warrant
Holdings Corporation will be allocated partnership profits and losses in
accordance with the terms of the Holdings partnership agreement. Holdings'
available cash will be distributed first to each limited partner (including
Petro Warrant Holdings Corporation) on a quarterly basis in an amount equal to
each limited partner's estimated federal and state income tax liability related
to that partner's investment in Holdings; next, to the Class A preferred
partnership interests unless the Class B preferred partnership interests have
been converted, in which case distributions will be made first to Class B
preferred partnership interests and then to Class A preferred partnership
interests; next, pro rata, to partners who have distribution shortfalls; then,
to the preferred and then common partnership interests to the extent of
unrecovered capital; and lastly, to the partners in accordance with their
positive capital account balances.
The common limited partnership interest in Holdings that is owned by Petro
Warrant Holdings Corporation is transferable only in very limited
circumstances.
As a limited partner, Petro Warrant Holdings Corporation is not liable for
the obligations of Holdings, and under the terms of the Holdings partnership
agreement, Petro Warrant Holdings Corporation may, but is not required to, make
capital contributions to Holdings.
121
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the new notes initially will be issued in the
form of one or more permanent global certificates in definitive, fully
registered form without interest coupons. The global notes will be deposited
with the trustee as custodian for The Depository Trust Company and registered
in the name of a nominee of such depositary.
The Global Notes. We expect that pursuant to procedures established by DTC:
. upon the issuance of the global notes, DTC or its custodian will
credit, on its internal system, the principal amount of notes of the
individual beneficial interests represented by such global notes to
the respective accounts of persons who have accounts with such
depositary and
. ownership of beneficial interests in the global notes will be shown
on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee, with respect to
interests of participants, and the records of participants, with
respect to interests of persons other than participants.
So long as DTC, or its nominee, is the registered owner or holder of the
notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the notes represented by such global notes for all purposes
under the indenture. No beneficial owner of an interest in the global notes
will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the indenture with respect
to the notes.
Payments of the principal of, premium, if any, and interest on the global
notes will be made to DTC or its nominee, as the case may be, as the registered
owner of the notes. Neither we, the trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of principal,
premium, if any, and interest on the global notes, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the global notes as shown on the records
of DTC or its nominee. We also expect that payments by participants to owners
of beneficial interests in the global notes held through such participants will
be governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
certificated security for any reason, including to sell notes to persons in
states that require physical delivery of the notes, or to pledge such
securities, such holder must transfer its interest in the global notes, in
accordance with the normal procedures of DTC and with the procedures set forth
in the indenture.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below, only at the direction of one or more participants to whose account the
DTC interests in the global notes are credited and only in respect of such
portion of the aggregate principal amount of notes as to which such participant
or participants has or have given such direction. However, if there is an event
of default under the indenture, DTC will exchange the global notes for
certificated securities, which it will distribute to its participants.
DTC has advised us as follows:
. DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act;
122
<PAGE>
. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions
between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for
physical movement of certificates;
. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations;
. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among participants of DTC, it is
under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither we nor the trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the global notes and we do not appoint a successor
depositary within 90 days, certificated securities will be issued in exchange
for the global notes.
123
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, starting on the expiration date of the
exchange offer and ending on the close of business one year after the
expiration date of the exchange offer, we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until . , 1999, all dealers effecting transactions
in the new notes may be required to deliver a prospectus.
We will not receive any proceeds from any sales of new notes by broker-
dealers. New notes received by broker-dealers for their own account pursuant to
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit of any such resale of new notes and any commissions or concessions
received by such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of one year after the expiration date of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the exchange offer, including the expenses of one counsel for the holders of
the notes, other than commissions or concessions of any brokers or dealers and
will indemnify the holders of the notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act.
EXPERTS
The financial statements of Holdings included in this prospectus and
elsewhere in the registration statement, to the extent and for the periods
indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The balance sheet of Petro, Inc. and subsidiary included in this prospectus
and elsewhere in the registration statement, to the extent and for the date
indicated in their report, has been audited by Lauterbach, Borschow & Company,
independent public accountants, and is included herein in reliance upon the
authority of said firm as experts in giving said report.
LEGAL MATTERS
The validity of the new notes will be passed upon for us by Gibson Dunn &
Crutcher LLP, a limited liability partnership including professional
corporations.
124
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
PETRO STOPPING CENTERS HOLDINGS, L.P.
Unaudited Condensed Consolidated Balance Sheets as of December 31,
1998 and September 30, 1999....................................... F-2
Unaudited Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 1998 and 1999..................... F-3
Unaudited Condensed Consolidated Statement of Changes in Partners'
Capital (Deficit) for the Nine Months Ended September 30, 1999.... F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1999..................... F-5
Notes to Unaudited Condensed Consolidated Financial Statements..... F-6
Consolidated Balance Sheets as of December 31, 1997 and 1998....... F-14
Consolidated Statements of Operations for the Years Ended December
31, 1996, 1997 and 1998........................................... F-15
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the Years Ended December 31, 1996, 1997 and 1998.............. F-16
Consolidated Statements of Cash Flows for the Years Ended December
31, 1996, 1997 and 1998........................................... F-17
Notes to Consolidated Financial Statements......................... F-19
Report of Independent Public Accountants........................... F-44
PETRO HOLDINGS FINANCIAL CORPORATION
Unaudited Balance Sheet as of September 30, 1999................... F-45
Unaudited Statement of Cash Flows from Inception (July 6, 1999) to
September 30, 1999................................................ F-46
Notes to Unaudited Financial Statements............................ F-47
FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts..................... F-48
PETRO, INC. AND SUBSIDIARY
Consolidated Balance Sheet as of December 31, 1998 and Unaudited
Consolidated Balance Sheet as of September 30, 1999............... F-49
Notes to Consolidated Balance Sheet as of December 31, 1998 and
Unaudited Consolidated Balance Sheet as of September 30, 1999..... F-50
Independent Auditor's Report....................................... F-60
</TABLE>
F-1
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(As
Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 13,183 $ 15,789
Trade accounts receivable, net.................... 10,631 16,853
Inventories, net.................................. 16,459 19,224
Other current assets.............................. 2,892 2,380
Due from affiliates............................... 1,163 1,875
--------- ---------
Total current assets............................ 44,328 56,121
Property and equipment, net......................... 158,765 180,845
Deferred debt issuance costs, net................... 11,229 13,764
Other assets........................................ 9,168 11,941
Goodwill, net....................................... -- 36,047
--------- ---------
Total assets.................................... $ 223,490 $ 298,718
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Current portion of long-term debt................. $ 4,967 $ 743
Trade accounts payable............................ 4,214 8,572
Accrued expenses and other liabilities............ 21,439 21,663
Due to affiliates................................. 16,768 23,193
--------- ---------
Total current liabilities....................... 47,388 54,171
Long-term debt, excluding current portion........... 176,361 223,653
--------- ---------
Total liabilities............................... 223,749 277,824
--------- ---------
Commitments and contingencies
Minority interest in consolidated subsidiaries...... 21,290 --
Mandatorily redeemable preferred partnership
interests.......................................... 23,172 29,858
Contingently redeemable warrants.................... -- 9,700
Partners' capital (deficit):
General partners.................................. (860) (997)
Limited partners.................................. (43,294) (17,110)
Negative capital accounts of minority partners in
consolidated subsidiaries........................ (567) (557)
--------- ---------
Total partners' capital (deficit)............... (44,721) (18,664)
--------- ---------
Total liabilities and partners' capital
(deficit)...................................... $ 223,490 $ 298,718
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-2
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Net revenues:
Fuel (including motor fuel taxes)....................... $353,572 $357,154
Nonfuel................................................. 141,805 148,607
-------- --------
Total net revenues.................................... 495,377 505,761
Costs and expenses:
Cost of sales
Fuel (including motor fuel taxes)..................... 322,922 328,427
Nonfuel............................................... 57,374 59,817
Operating expenses...................................... 69,136 73,630
General and administrative.............................. 14,378 14,423
Depreciation and amortization........................... 11,413 10,401
(Gain) loss on disposition of assets.................... 13 (849)
-------- --------
Total costs and expenses.............................. 475,236 485,849
-------- --------
Operating income...................................... 20,141 19,912
Recapitalization costs.................................... -- (1,450)
Equity in earnings (loss) of affiliate.................... -- (451)
Interest income........................................... 542 379
Interest expense.......................................... (15,588) (17,177)
-------- --------
Income (loss) before extraordinary item and minority
interest................................................. 5,095 1,213
Extraordinary item--write off of deferred financing costs
associated with retired debt............................. -- (2,016)
-------- --------
Income (loss) before minority interest.................... 5,095 (803)
Minority interest in earnings of consolidated
subsidiaries............................................. 2,637 1,438
-------- --------
Net income (loss)......................................... 2,458 (2,241)
Accrual of preferred return on mandatorily redeemable
preferred partnership interests.......................... (680) (1,013)
-------- --------
Net income (loss) available to common partners............ $ 1,778 $ (3,254)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-3
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN PARTNERS' CAPITAL (DEFICIT)
For the Nine Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
General Limited Negative Capital
Partners' Partners' Accounts of Minority Total Partners'
Capital Capital Partners in Consolidated Capital
(Deficit) (Deficit) Subsidiaries (Deficit)
--------- --------- ------------------------ ---------------
<S> <C> <C> <C> <C>
Balances, December 31,
1998 (As Restated)..... $(860) $(43,294) $(567) $(44,721)
Accrual of preferred
return on mandatorily
redeemable preferred
partnership interests.. (19) (1,041) -- (1,060)
Partners' minimum tax
distributions.......... -- (642) -- (642)
Cash contributions...... -- 39,700 -- 39,700
Net loss ............... (11) (2,240) 10 (2,241)
Assignment of fair value
of contingently
redeemable warrants.... (107) (9,593) -- (9,700)
----- -------- ----- --------
Balances, September 30,
1999................... $(997) $(17,110) $(557) $(18,664)
===== ======== ===== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-4
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss)......................................... $ 2,458 $ (2,241)
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in earnings of consolidated
subsidiaries........................................... 2,637 1,438
Depreciation and amortization........................... 11,413 10,401
Extraordinary item-write off of deferred financing costs
associated with retired debt........................... -- 2,016
Deferred debt issuance cost amortization................ 1,205 1,523
Accretion of original issue discount.................... -- 1,495
Bad debt expense........................................ 174 185
Equity in loss of affiliate............................. -- 451
Loss (gain) on disposition of assets.................... 13 (849)
Increase (decrease) from changes in:
Trade accounts receivable............................... (3,477) (6,407)
Inventories............................................. (410) (2,765)
Other current assets.................................... 119 512
Due from affiliates..................................... 198 (712)
Due to affiliates....................................... 4,078 7,579
Trade accounts payable ................................. (3,882) 4,358
Accrued expenses and other liabilities.................. (3,899) 224
-------- --------
Net cash provided by operating activities............. 10,627 17,208
-------- --------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of assets....................... 2,165 1,394
Purchases of property and equipment....................... (12,978) (22,123)
Purchase of minority interests in consolidated
subsidiary............................................... -- (57,756)
Increase in other assets, net............................. (1,123) (3,291)
-------- --------
Net cash used in investing activities................. (11,936) (81,776)
-------- --------
Cash flows provided by (used in) financing activities:
Repayment of expansion loan............................... -- (1,400)
Proceeds from expansion loan.............................. -- 1,400
Repayments of long-term debt and capital lease............ (2,344) (39,254)
Proceeds from long-term debt issuance..................... -- 70,300
Purchase of warrants from Warrant Holdings................ -- (9,700)
Proceeds from the sale of warrants........................ -- 9,700
Minimum tax distributions to partners..................... -- (2,100)
Cash contributions--preferred............................. -- 5,000
Cash contributions--common................................ -- 39,700
Payment of debt issuance and consent costs................ -- (6,472)
-------- --------
Net cash provided by (used in) financing activities... (2,344) 67,174
Net (decrease) increase in cash and cash equivalents....... (3,653) 2,606
Cash and cash equivalents, beginning of period............. 24,796 13,183
-------- --------
Cash and cash equivalents, end of period .................. $ 21,143 $ 15,789
-------- --------
Supplemental cash flow information--
Interest paid during the period, net of capitalized
interest of $0 and $114 in 1998 and 1999 ................ $ 17,363 $ 17,082
Non-cash financing activities:
Preferred return from minority partners of consolidated
subsidiaries on mandatorily redeemable preferred
partnership interests.................................. 794 673
Issuance of accreted value of 15.0% New Senior Discount
Notes due 2008, without Warrants to Chartwell.......... -- 11,248
Accrual of fair value of contingently redeemable
warrants............................................... -- 9,700
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-5
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Company Formation and Description of Business
Company Formation
Petro Stopping Centers Holdings, L.P. ("Holdings"), a Delaware limited
partnership, was formed on July 23, 1999 as a holding partnership and conducts
substantially all of its operations through Petro Stopping Centers, L.P. (the
"Operating Partnership"), which holds the operating assets of Holdings. As a
result of the Recapitalization (described below), the partners of Holdings are
as follows:
General Partners
Petro, Inc.
Limited Partners
Various individuals and entities affiliated with the Cardwell Group
Mobil Long Haul, Inc., an affiliate of Mobil Oil Corporation
Volvo Petro Holdings, L.L.C., an affiliate of Volvo Trucks North
America, Inc.
Petro Warrant Holdings Corporation
Petro, Inc. and various individuals and entities affiliated with Petro, Inc.
are controlled by the president of Holdings and are collectively referred to as
the Cardwell Group. Petro, Inc. is a retailer of truck and passenger car tires
and also holds investments that include the general partner interest and a
limited partner interest in Holdings, a general partner interest in the
Operating Partnership, and a portion of Holdings' mandatorily redeemable
preferred partnership interests. Prior to the Recapitalization, Petro, Inc. and
an affiliate of Chartwell (described below) were the general partners of the
Operating Partnership.
Recapitalization
On July 23, 1999, the Operating Partnership, certain of its partners and
Volvo Trucks North America, Inc. ("Volvo") consummated a transaction pursuant
to which Holdings was formed, and all of the present owners in the Operating
Partnership (other than Petro Holdings GP Corp. and Petro Holdings LP Corp.,
each of which were affiliates of Chartwell Investments, Inc. (collectively,
"Chartwell"); Kirschner Investments ("Kirschner"), a company franchisee)
exchanged their interests in the Operating Partnership for identical interests
in Holdings and became owners of Holdings. Petro Holdings Financial Corporation
("Financial Holdings") was formed for the purpose of serving as co-issuer of
New Senior Discount Notes (as defined below). Financial Holdings, the Operating
Partnership and its subsidiary, Petro Financial Corporation, became
subsidiaries of Holdings. Petro Warrant Holdings Corporation ("Warrant
Holdings") was formed for the purpose of owning a common limited partnership
interest in Holdings and issuing the Warrants (see below). In addition, Volvo
Petro Holdings L.L.C. ("Volvo Trucks"), an affiliate of Volvo, invested
$30,000,000 to acquire a 28.7% limited common partnership interests in Holdings
while Mobil Long Haul, Inc. ("Mobil"), an affiliate of Mobil Corporation,
invested an additional $5,000,000 in Class B convertible preferred partnership
interests of Holdings. Holdings purchased the 50.8% common interest in the
Operating Partnership owned by affiliates of Chartwell for aggregate
consideration of approximately $69,800,000, which consisted of a $55,000,000
cash payment and the issuance to Chartwell of approximately $14,800,000 in
accreted value ($11,248,000 net of an imputed market rate of interest) of 15.0%
New Senior Discount Notes (as defined below) due 2008, without Warrants.
Holdings also purchased the 2% common interests in the Operating Partnership
owned by Kirschner for cash consideration of $2,800,000. The foregoing is
referred to as the "Recapitalization." The acquisition of Chartwell's and
Kirschner's interests was accounted for under the purchase method, which
resulted in adjustments to the recorded value of land of $2,239,000, buildings
of
F-6
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Company Formation and Description of Business--(Continued)
$5,807,000, equipment of $1,525,000, and furniture and fixtures of $1,525,000,
and in the recording of goodwill in the amount of $36,382,000 that is being
amortized over a period of 20 years.
As part of the Recapitalization, Holdings issued 82,707 Units each
consisting of $1,000 principal amount at stated maturity of Holdings 15.0%
Senior Discount Notes due 2008 and 82,707 exchangeable Warrant Holdings'
Warrants ("New Senior Discount Notes"). As consideration for issuance of the
Units, Holdings received $40,000,000 cash ($30,300,000 was allocated to the
Senior Discount Notes and $9,700,000 was allocated to the Warrants). Holdings
had acquired the Warrants from Warrant Holdings for $9,700,000. Warrant
Holdings in turn, invested the $9,700,000 to acquire a 10.0% common limited
partnership interest in Holdings. The amount allocated to the Warrants is based
on Warrant Holdings' 10.0% interest in Holdings and on Holdings' common equity
value (net of an estimate of Recapitalization costs not borne by Warrant
Holdings) established in conjunction with the admission of Volvo Trucks and the
purchase of Chartwell's and Kirschner's interests in the Operating Partnership.
Upon an exchange event (change in control, IPO or bankruptcy of Holdings), the
Warrants will be exchanged, for no additional consideration, for 100% of the
common stock of Warrant Holdings, whose sole asset is currently 10.0% of the
common limited partnership interests in Holdings. As a result of this
contingent repurchase obligation, the Warrants have been reflected outside
partners' deficit as contingently redeemable warrants in the accompanying
consolidated balance sheet. The Warrants are callable by Holdings prior to
August 1, 2002 at increasing amounts over time from approximately $11,150,000
to $14,750,000. If not exchanged by August 1, 2004 the Warrants must be
repurchased by Holdings at their then fair value. Future changes (determined
each balance sheet date in a manner consistent with the determination of market
price of partnership interests described in Note 12 in the audited consolidated
financial statements of Holdings included elsewhere herein), if any, in value
of the Warrants will be charged directly to partners' capital (deficit). Based
on the facts and circumstances at September 30, 1999, the Company concluded
that $9,700,000 represented the fair value of the Warrants.
As a result of the Recapitalization, Holdings is the owner of approximately
99.5% of the common interests of the Operating Partnership. The common limited
partnership interests of Holdings are owned by the Cardwell Group
(approximately 51.6%), Volvo Trucks (approximately 28.7%), Mobil (approximately
9.7%) and Warrant Holdings (approximately 10.0%) and the mandatorily redeemable
preferred partnership interests of Holdings are owned by Mobil ($17,000,000)
and the Cardwell Group ($7,600,000). Petro, Inc. and another affiliate of the
Cardwell Group own the remaining 0.5% of the Operating Partnership. Generally
accepted accounting principles require negative capital accounts of minority
partners in consolidated subsidiaries to be recorded in partners' capital
(deficit).
The formation of Holdings (whereby certain of the Operating Partnership's
partners exchanged their interests in the Operating Partnership for identical
interests in Holdings) was recorded at predecessor basis and has been reflected
in the accompanying consolidated financial statements in a manner similar to a
pooling-of-interests. Accordingly, the accompanying consolidated financial
statements reflect the historical amounts and results of operations of
Holdings' consolidated subsidiaries as if the exchange referred to above had
occurred on the first day of the first period presented.
The Operating Partnership also amended its senior collateralized credit
facility (the "Existing Senior Credit Facility" and, as amended, the "New
Senior Credit Facility") as part of the Recapitalization. The New Senior Credit
Facility consists of an $85,000,000 revolving credit facility and a $40,000,000
Term Loan B. The proceeds of the New Term Loan B were used to repay amounts due
under the Term A and B Loans and the Expansion Facility of the Existing Senior
Credit Facility of approximately $38,271,000, plus accrued interest. The New
Senior Credit Facility is collateralized by substantially all of the Operating
Partnership's assets and contains certain covenants similar to those described
in Note 6 of the Company's Consolidated Financial Statements for the years
ended December 31, 1996, 1997 and 1998.
F-7
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Company Formation and Description of Business--(Continued)
In connection with the Recapitalization, Holdings capitalized debt issuance
and other costs of approximately $5,797,000 as of September 30, 1999. In
addition, legal and accounting fees of $1,450,000 incurred in conjunction with
the formation of Holdings were expensed in the nine month period ended
September 30, 1999.
As further discussed above, Holdings funded a portion of its purchase of
Chartwell's and Kirschner's interests in the Operating Partnership with debt.
Holdings currently has no operations of its own and is, therefore, dependent
upon the earnings and cash flows of the Operating Partnership to satisfy its
obligations under the New Senior Discount Notes.
Unless otherwise noted, Holdings and its subsidiaries are hereinafter
referred to as the "Company."
(2) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
the Company and its subsidiaries have been prepared in accordance with the
instructions to Form 10-Q and, therefore, certain financial information has
been condensed and certain footnote disclosures have been omitted. Such
information and disclosures are normally included in the financial statements
prepared in accordance with generally accepted accounting principles.
These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto in the audited
consolidated financial statements of the Company for the year ended December
31, 1998, included elsewhere herein. Capitalized terms used in this report and
not defined herein have the meaning ascribed to such terms in the Company's
December 31, 1998 financial statements. In the opinion of management of the
Company, the accompanying financial statements contain all adjustments
necessary to present fairly the financial position of the Company at December
31, 1998 and September 30, 1999, the results of operations and cash flows for
the nine months ended September 30, 1998 and 1999. The results of operations
for the nine months ended September 30, 1999 are not necessarily indicative of
the results to be expected for the full calendar year.
The Company's revenues and cost of sales include significant amounts of
federal and state motor fuel taxes. Such taxes were $155,118,000 and
$152,562,000 for the nine-month periods ended September 30, 1998 and 1999,
respectively.
(3) (Gain) Loss on Disposition of Assets
In June 1999, the Operating Partnership consummated a transaction to sell
its weighing scale equipment located at twenty-seven of its locations. The
carrying amount of these assets at the date of disposal was $528,000 and the
net revenues generated from these assets from January 1, 1999 through the date
of disposal was approximately $1,000,000. These revenues are included in the
truck stop operations segment. The Operating Partnership realized a gain of
$866,000, on the sale of these assets, which is included in (gain) loss on
disposition of assets in the accompanying unaudited condensed consolidated
statements of operations.
(4) Notes Payable
At December 31, 1998, the Company had available a five-year revolving credit
facility and a three-year expansion facility under which up to $25,000,000 and
$40,000,000 were available, respectively. At December 31, 1998, the balance
available on the credit facility, net of letters of credit outstanding, was
22,587,000 and the Company did not have a balance outstanding on the expansion
facility.
F-8
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Notes Payable--(Continued)
As discussed in Note (1), as part of the Recapitalization, the Company
amended its Existing Senior Credit Facility. Under the New Senior Credit
Facility, the Company, subject to certain covenants, has available an
$85,000,000 revolving credit facility that may be used for working capital and
to fund the acquisition and development of new Stopping Centers. Any principal
amount up to $60,000,000 outstanding at July 23, 2002 will automatically
convert to a Term Loan A. Following this conversion, $25,000,000 will continue
to be available on a revolving basis until maturity at July 23, 2004. The Term
Loan A, if any, will amortize in eight equal quarterly installments following
the conversion. Interest on drawn funds is paid monthly at 1.5% above the
bank's base rate or 2.75% over the Eurodollar rate (the rate is determined at
time of borrowing at Holdings' option). Commitment fees of .5% on undrawn funds
are paid quarterly. At September 30, 1999, the Company did not have a balance
outstanding on the revolving credit facility.
The Company did have standby letters of credit outstanding under the
respective revolving credit facilities at December 31, 1998 and September 30,
1999. At December 31, 1998, and September 30, 1999, the standby letters of
credit, principally related to unfunded issuance claims, were $2,413,000 and
$2,463,000 respectively.
Any funds drawn on the revolving credit facility are secured by
substantially all of the Operating Partnerships assets and the partnership
interests of Mobil, Cardwell and Volvo and guaranteed by each of the Company's
subsidiaries, whose guarantees in turn are collateralized by substantially all
of such subsidiaries' assets.
(5) Long-Term Debt
Long-term debt at December 31, 1998 and September 30, 1999 is presented
below.
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(in thousands)
<S> <C> <C>
Four-year term note to a bank in an original amount
of $20,000,000 maturing September 30, 2001. The
note was payable in 18 consecutive quarterly
installments commencing September 30, 1997.
Interest at either the bank's prime rate plus 1.5%
or the Eurodollar rate plus 2.75% was payable
monthly. The rate was 7.75% at December 31, 1998.
This note was repaid July 23, 1999. .............. $9,973 $ --
Six-year term note to a bank in an original amount
of $30,000,000 maturing September 30, 2003. The
note was payable in 26 consecutive quarterly
installments commencing September 30, 1997.
Interest at either the bank's prime rate plus 2%
or the Eurodollar rate plus 3.25% was payable
monthly. The effective rate was 8.3125% at
December 31, 1998, as a result of an interest swap
agreement (the "Swap") with the lender as required
under the loan agreement. This note was repaid
July 23, 1999 and the Swap was transferred to the
New Senior Credit Facility. ...................... 28,933 --
Seven-year term note to a bank in an original
amount of $40,000,000 maturing July 23, 2006. The
note is payable in 24 consecutive quarterly
installments varying from $250,000 to $600,000
commencing September 30, 2000. Interest at either
the bank's prime rate plus 1.5% or the Eurodollar
rate plus 3.0% is payable monthly. The effective
rate was 9.0488% at September 30, 1999, as a
result of the Swap with the lender as required
under the loan agreement. The Swap expires on
January 1, 2000. The note is collateralized by
substantially all of the Company's assets. ...... -- 40,000
</TABLE>
F-9
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Long-Term Debt--(Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(in thousands)
<S> <C> <C>
12 1/2% Senior Notes due 2002 (the "12 1/2 Notes")
in an original aggregate principal amount of
$100,000,000, net of original issue discount. As
part of the 1997 Recapitalization, approximately
94% of the Notes were retired. Interest on the
Notes is payable on June 1 and December 1 of each
year beginning December 1, 1994 .................. 6,190 6,190
10 1/2% Senior Notes due 2007 (the "10 1/2 Notes")
in an original aggregate principal amount of
$135,000,000, net of an unamortized discount of
$656,000. Interest on the 10 1/2 Notes is payable
on February 1 and August 1 of each year, beginning
August 1, 1997. The 10 1/2 Notes are effectively
subordinated to the loans outstanding under the
New Senior Credit Facility to the extent of the
value of the assets securing such loans .......... 135,000 134,344
15% Senior Discount Notes ("Discount Notes"), due
2008, net of an unamortized discount of
$70,393,000 to yield an effective rate of 18.2%.
Interest on the Discount Notes is payable on
February 1 and August 1 of each year, beginning
August 1, 2004. The Discount Notes will be
effectively subordinated to the loans outstanding
under the New Senior Credit Facility, the 10 1/2%
Notes and the 12 1/2% Notes ...................... -- 42,977
Obligation under equipment capital lease........... 1,232 885
-------- --------
Total long-term debt............................... 181,328 224,396
Less current portion............................... 4,967 743
-------- --------
Long-term debt, excluding current portion.......... $176,361 $223,653
======== ========
</TABLE>
The 12 1/2 Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after June 1, 1999, upon not less than 30 and no
more than 60 days notice at the following redemption prices (expressed as
percentages of the principal amount to be redeemed) as set forth below, plus
accrued interest:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1999.......................................................... 103.57%
2000.......................................................... 101.79%
2001.......................................................... 100%
The 10 1/2 Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after February 1, 2002, upon not less than 30 and no
more than 60 days notice at the following prices (expressed as percentages of
the principal amount to be redeemed) as set forth below, plus accrued interest:
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2002.......................................................... 105.2%
2003.......................................................... 103.5%
2004.......................................................... 101.7%
2005 and thereafter........................................... 100%
</TABLE>
F-10
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Long-Term Debt--(Continued)
In addition, prior to February 1, 2000, the Company may, with the net
proceeds of one or more public equity offerings of qualified capital interest
in the Company, redeem up to 35% of aggregate principal amount of the
outstanding 10 1/2 Notes at a redemption price of 110.5%, plus accrued
interest.
The Discount Notes may be redeemed at the option of the Company, in whole
or in part, at any time on or after August 1, 2004, upon not less than 30 and
no more than 60 days notice at the following prices (expressed as percentages
of the principal amount to be redeemed) as set forth below, plus accrued
interest:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2004.......................................................... 107.5%
2005.......................................................... 105.0%
2006.......................................................... 102.5%
2007 and thereafter........................................... 100%
</TABLE>
In addition, prior to February 1, 2000, the Company may, with the net
proceeds of one or more public equity offerings of qualified capital interest
in the Company, redeem 100% of the notes at the accreted value of the
outstanding Discount Notes at a redemption price of 115%, plus accrued
interest.
The Indentures for the Long-Term Debt and the Credit Facility agreement
each contain certain covenants, including without limitation, covenants with
respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on sales of
restricted subsidiary stock; (iv) limitation on transactions with affiliates;
(v) limitation on liens; (vi) limitation on disposition of proceeds of asset
sales; (vii) limitation on distributions and other payment restrictions
affecting restricted subsidiaries; (viii) restrictions on mergers and certain
transfers of assets and (ix) in the case of the Credit Facility financial
covenants covering leverage, cash flows, capital expenditures, EBITDA (as
defined), interest coverage, and minimum net worth. At December 31, 1997 and
1998, the Company was in compliance with all debt covenants.
Estimated principal payment requirements on long-term debt and a capital
lease obligation are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending (in thousands)
<S> <C>
1999............................................................. $ 120
2000............................................................. 1,001
2001............................................................. 1,263
2002............................................................. 7,190
2003............................................................. 1,000
Thereafter....................................................... 284,871
Less unamortized discount........................................ (71,049)
--------
Total........................................................ $224,396
========
</TABLE>
(6) Related Party Transactions
For a full discussion of the Company's related party transactions, see Note
9 of Notes to Consolidated Financial Statements included elsewhere in this
Registration Statement. Subsequent to December 31, 1998, the following changes
have occurred in the Company's related party relationships.
As part of the Recapitalization, the Company terminated its existing fuel
and lubricant supply agreements and entered into new ten-year supply
agreements with Mobil Oil Corporation under which Mobil Oil Corporation will
supply the company-operated Petro Stopping Centers' diesel fuel requirements
as well as
F-11
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Related Party Transactions--(Continued)
gasoline requirements in those markets in which Mobil branded gasoline is
available for sale. Under the lubricant supply agreement, the Company is
allowed to purchase such quantities of lubricants as it requires at the prices
set forth in the agreement. The diesel fuel sold at all company-operated and
some franchise operated Petro Stopping Centers is branded Mobil Diesel, and all
company-operated Petro Lubes feature Mobil Delvac lubricants. Under the new
fuel supply agreement and the agreement for the resale of oils and greases with
Mobil Oil Corporation, both dated July 23, 1999, the Company agreed to purchase
Mobil branded lubricant products and Mobil branded diesel fuel for sale and
distribution under Mobil's trademarks at all company-operated and 12 franchise
operated truck stops and Mobil branded gasoline for sites as selected by Mobil,
as limited however, by existing contractual obligations to purchase gasoline
from other suppliers. The Mobil Supply Agreements require that the Company
purchase from Mobil-specified distribution terminals, a minimum number of
gallons of diesel fuel on an annual basis, depending on product availability
and reductions by Mobil Oil Corporation under described circumstances. For
1999, the annual volume commitment is 172.3 million gallons of Mobil diesel
under the fuel supply agreement and 1.2 million gallons of Mobil lubricants
under the lubricant supply agreement. This constitutes approximately 42% of the
Company's current diesel fuel requirements and approximately 52% of the
Company's lubricant requirements. If the Company does not purchase any diesel
fuel from Mobil Oil Corporation under the Mobil Supply Agreements, the maximum
penalty in any year would be $0.0035 per gallon multiplied by the annual volume
commitment as provided for in the Mobil Supply Agreements plus additional
amounts for each new Petro Stopping Center opened and which Mobil Oil
Corporation agrees to supply. As a result of the Mobil Supply Agreements and to
comply with the laws governing the branding of diesel fuel, if Mobil Oil
Corporation is unable to supply 100% of the Company's diesel fuel demands due
to limited product availability, Mobil Diesel Supply Corporation, a wholly-
owned subsidiary of Mobil Oil Corporation, purchases additional diesel fuel
from third-party suppliers and then sells it to the Company. Under the terms of
the Mobil Supply Agreements, the Company negotiates with third parties
regarding price and other terms, and then designates them to Mobil Diesel
Supply Corporation. Third party suppliers are approved by Mobil if the fuel to
be supplied by the third party meets all federal, state and local diesel
requirements. The fuel purchase arrangement with Mobil Diesel Supply
Corporation enables the Company to meet its diesel fuel needs and to comply
with branding laws, which require Mobil to first take possession of the fuel
before it can be branded as Mobil diesel.
The Mobil Supply Agreements allows the Company to continue to negotiate for
the purchase of diesel fuel with third-party suppliers approved by Mobil Diesel
Supply Corporation. If the Company is able to obtain a lower diesel fuel price
from a third-party supplier in a particular market area, the Company may
request that Mobil meet the lower price or allow a portion of the Company's
diesel fuel requirements to be supplied from the Mobil Diesel Supply
Corporation-approved third-party supplier, in which case Mobil Diesel Supply
Corporation would purchase the diesel fuel from the supplier and resell the
product to the Company. Any change in supply source, other than a change
resulting from Mobil's inability to supply, does not affect the Company's
requirement to purchase the annual minimum number of gallons from Mobil-
specified distribution terminals fixed by the Mobil Supply Agreements. The
Mobil Supply Agreements also place a monthly limit on the maximum number of
gallons of diesel fuel and gasoline that the Company may lift from Mobil-
specified distribution terminals. Prices to be charged for fuel sold to the
Company under the Mobil Supply Agreements are based on referenced prices minus
discounts and plus delivery costs. Upon the expiration of the ten year initial
term, the Mobil Supply Agreements are renewable for another five year term at
the option of Mobil; however, the Company has the ability to terminate the
agreements at the end of the ten year term at a price based on a formula
discussed in the Mobil Supply Agreements.
The Company purchases diesel fuel for each company-operated Petro Stopping
Centers on a daily basis. Each location typically maintains a one to three day
inventory of fuel. During the 1998 and 1999 interim
F-12
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Related Party Transactions--(Continued)
periods, the Company purchased 100% of its diesel fuel through Mobil Diesel
Supply Corporation, approximately 64.4% of which was third-party fuel purchased
through this arrangement. The approximate aggregate amount paid under the Mobil
Supply Agreements since July 23, 1999 is $186.0 million.
Also, as part of the Recapitalization, Volvo and the Company entered into an
Operating Agreement related to the warranty, maintenance and service work the
Company will provide to Volvo managed vehicles, the sale by the Company of the
related truck parts, on a preferred basis, joint advertising and marketing
initiatives and the co-development of Stopping Centers by Volvo and the Company
to utilize truckstop space for Volvo truck sales and marketing. Since July 23,
1999, no transactions have occurred under this agreement.
Management fees of $225,000 and $168,500 were earned by Mobil Oil, in
accordance with the terms of the Operating Partnership's Partnership Agreement
for the periods ended September 30, 1998 and 1999, respectively. Subsequent to
the Recapitalization discussed in Note 1, these fees were discontinued.
The Company entered into a management consulting agreement with Chartwell
Investments, commencing January 30, 1997, pursuant to which Chartwell
Investments provided the Company with certain management advisory and
consulting services for a fee of $600,000 for each fiscal year during the term
of the agreement. During the nine months ended September 30, 1998 and 1999
Chartwell Investments earned $450,000 and $337,000, respectively, under this
agreement. Subsequent to the Recapitalization discussed in Note 1, these fees
were discontinued.
(7) Restatement of December 31, 1998 Balance Sheet
Subsequent to the original issuance of its December 31, 1998 consolidated
financial statements, the Company discovered an error in the recorded
predecessor basis amount of Mobil's limited partnership capital account. The
accompanying December 31, 1998 balance sheet has been restated to correct this
error, the effect of which increased limited partners' deficit from $39,777,000
to $43,294,000.
F-13
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
(As Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 24,796 $ 13,183
Trade accounts receivable, net.................... 12,548 10,631
Inventories, net.................................. 16,362 16,459
Other current assets.............................. 2,551 2,892
Due from affiliates............................... 980 1,163
Land held for sale................................ 4,442 --
-------- --------
Total current assets............................ 61,679 44,328
Property and equipment, net....................... 149,650 158,765
Deferred debt issuance and organization costs,
net.............................................. 16,353 11,229
Other assets...................................... 8,271 9,168
-------- --------
Total assets.................................... $235,953 $223,490
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Current portion of long-term debt................. $ 3,000 $ 4,967
Trade accounts payable............................ 9,350 4,214
Accrued expenses and other liabilities............ 26,491 21,439
Due to affiliates................................. 18,988 16,768
-------- --------
Total current liabilities....................... 57,829 47,388
Long-term debt, excluding current portion......... 180,190 176,361
-------- --------
Total liabilities............................... 238,019 223,749
Commitments and contingencies
Minority interest in consolidated subsidiaries...... 21,051 21,290
Mandatorily redeemable preferred partnership
interests.......................................... 21,202 23,172
Partners' capital (deficit):
General partners'................................. (851) (860)
Limited partners'................................. (42,889) (43,294)
Negative capital accounts of minority partners
in consolidated subsidiaries..................... (579) (567)
-------- --------
Total partners' capital (deficit)............... (44,319) (44,721)
-------- --------
Total liabilities and partners' capital
(deficit)...................................... $235,953 $223,490
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-14
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
(As (As
Restated) Restated)
<S> <C> <C> <C>
Net revenues:
Fuel (including motor fuel taxes).... $478,312 $513,571 $464,025
Nonfuel.............................. 158,745 172,158 189,391
-------- -------- --------
Total net revenues................. 637,057 685,729 653,416
Costs and expenses:
Cost of sales
Fuel (including motor fuel taxes).. 443,967 476,033 422,945
Nonfuel............................ 67,464 70,548 76,451
Operating expenses................... 81,522 85,560 93,012
General and administrative........... 13,925 17,035 19,335
Employee severance, benefit and
placement expenses.................. 2,534 -- --
Depreciation and amortization........ 12,204 14,315 15,749
-------- -------- --------
Total costs and expenses........... 621,616 663,491 627,492
-------- -------- --------
Operating income................... 15,441 22,238 25,924
Recapitalization costs................. 2,938 -- --
Interest income........................ (14) (956) (729)
Interest expense....................... 21,277 21,248 20,771
-------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle ... (8,760) 1,946 5,882
Extraordinary item--write off of debt
restructuring costs associated with
retired debt ......................... -- (12,745) --
Cumulative effect of a change in
accounting principle.................. -- (1,579) (3,250)
-------- -------- --------
Income (loss) before minority
interest.............................. (8,760) (12,378) 2,632
Minority interest in income (loss) of
consolidated subsidiaries............. (3,969) (6,642) 1,286
-------- -------- --------
Accrual of preferred return on
mandatorily redeemable preferred
partnership interests................. -- (760) (935)
-------- -------- --------
Net income (loss)...................... (4,791) (5,736) 1,346
Net income (loss) available to common
partners.............................. $ (4,791) $ (6,496) $ 411
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-15
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
General Limited Negative Capital
Partners' Partners' Accounts of Minority Total Partners'
Capital Capital Partners in Consolidated Capital
(Deficit) (Deficit) Subsidiaries (Deficit)
--------- --------- ------------------------ ---------------
<S> <C> <C> <C> <C>
Balance, December 29,
1995................... $(7,902) $(19,387) $(471) $(27,760)
Net loss.............. (783) (3,964) (44) (4,791)
------- -------- ----- --------
Balance, December 31,
1996................... (8,685) (23,351) (515) (32,551)
Conversion of Cardwell
interests in
connection with the
1997
Recapitalization..... 8,021 (8,021) -- --
Direct purchase of its
share of Operating
Partnership interests
formerly owned by
Fremont Partners by
Mobil in connection
with the 1997
Recapitalization..... -- 10,110 -- 10,110
Capital contribution
by Mobil in
connection with the
1997
Recapitalization..... -- 4,218 -- 4,218
Assignment of
mandatorily
redeemable preferred
partnership interests
in connection with
the 1997
Recapitalization..... -- (19,600) -- (19,600)
Accrual of preferred
return on mandatorily
redeemable preferred
partnership
interests............ (15) (745) (760)
Net loss.............. (172) (5,500) (64) (5,736)
------- -------- ----- --------
Balance, December 31,
1997 (As Restated)..... (851) (42,889) (579) (44,319)
Accrual of preferred
return on mandatorily
redeemable preferred
partnership
interests............ (18) (917) -- (935)
Accrual of partner
minimum tax
distributions........ (18) (795) -- (813)
Net income............ 27 1,307 12 1,346
------- -------- ----- --------
Balance, December 31,
1998 (As Restated)..... $ (860) $(43,294) $(567) $(44,721)
======= ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-16
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
(As (As
Restated) Restated)
<S> <C> <C> <C>
Net income (loss).................... $ (4,791) $ (5,736) $ 1,346
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in income
(loss) of consolidated
subsidiaries.................... (3,969) (6,642) 1,286
Depreciation and amortization.... 12,204 14,315 15,749
Extraordinary item--write-off of
debt restructuring costs
associated with retired debt.... -- 12,745 --
Cumulative effect of a change in
accounting principle............ -- 1,579 3,250
Deferred debt issuance cost
amortization.................... 1,485 1,749 1,637
Accretion of original issue
discount........................ 978 47 --
Bad debt expense................. 215 271 236
Increase (decrease) from changes
in:
Accounts receivable.............. 852 (2,418) 1,681
Inventories...................... 1,124 (1,167) (97)
Other current assets............. 324 (1,147) (341)
Due from affiliates.............. (571) 1,111 114
Due to affiliates................ 297 16,663 (3,340)
Trade accounts payable........... 1,535 (6,373) (5,136)
Accrued expenses and other
liabilities..................... 4,985 5,331 (5,052)
-------- --------- --------
Net cash provided by operating
activities.................... 14,668 30,328 11,333
-------- --------- --------
Cash flows used in investing
activities:
Purchase of property and
equipment....................... (5,523) (15,870) (20,309)
Proceeds from disposition of
assets.......................... -- 3,102 2,165
Decrease (increase) in other
assets, net..................... 186 (3,011) (1,515)
-------- --------- --------
Net cash used in investing
activities.................... (5,337) (15,779) (19,659)
-------- --------- --------
Cash flows (used in) provided by
financing activities:
Repayments of notes payable...... (25,000) (23,639) --
Proceeds from notes payable...... 26,061 2,000 --
Repayments of long-term debt and
capital lease................... (3,704) (152,800) (3,287)
Proceeds from issuance of long-
term debt....................... -- 185,190 --
Capital contributions............ -- 4,218 --
Capital contributions from
minority partners of
consolidated subsidiaries........ -- 6,829 --
Payment of debt issuance costs... (203) (14,733) --
Decrease in cash overdrafts...... (8,991) -- --
-------- --------- --------
Net cash (used in) provided by
financing activities.......... (11,837) 7,065 (3,287)
-------- --------- --------
Net (decrease) increase in cash and
cash equivalents.................... (2,506) 21,614 (11,613)
Cash and cash equivalents, beginning
of period........................... 5,688 3,182 24,796
-------- --------- --------
Cash and cash equivalents, end of
period.............................. $ 3,182 $ 24,796 $ 13,183
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
(As (As
Restated) Restated)
<S> <C> <C> <C>
Supplemental cash flow information--
Interest paid during the period, net
of capitalized interest of $80, $0
and $0 in 1996, 1997 and 1998........ $18,364 $14,028 $20,771
Non-cash transactions--
Acquisition of property and equipment
through capital lease................ -- -- 1,425
Preferred return on mandatorily
redeemable preferred partnership
interests............................ -- 760 935
Partner minimum tax distributions..... -- -- 813
Preferred return from minority
partners of consolidated subsidiaries
on manditorily redeemable preferred
partnership interests................ -- 875 1,037
Partner minimum tax distributions to
minority partners of consolidated
subsidiaries......................... -- -- 10
Assignment of mandatorily redeemable
preferred partnership interests in
connection with the 1997
Recapitalization..................... -- 19,600 --
Conversion of Cardwell general and
limited partner interest in
connection with the 1997
Recapitalization..................... -- 8,021 --
Direct purchase of its share of
Operating Partnership interests
formally owned by Fremont Partners by
Mobil in connection with the 1997
Recapitalization..................... -- 10,110 --
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Company Formation and Description of Business
Company Formation
Petro Stopping Centers Holdings, L.P. ("Holdings"), a Delaware limited
partnership, was formed on July 23, 1999 as a holding partnership and conducts
substantially all of its operations through Petro Stopping Centers, L.P. (the
"Operating Partnership"), which holds the operating assets of Holdings. As a
result of the Recapitalization (described below), the partners of Holdings are
as follows:
General Partner
Petro, Inc.
Limited Partners
Various individuals and entities affiliated with the Cardwell Group
Mobil Long Haul, Inc., an affiliate of Mobil Oil Corporation
Volvo Petro Holdings, L.L.C., an affiliate of Volvo Trucks North
America, Inc.
Petro Warrant Holdings Corporation
Petro, Inc. and various individuals and entities affiliated with Petro, Inc.
are controlled by the president of Holdings and are collectively referred to as
the Cardwell Group. Petro, Inc. is a retailer of truck and passenger car tires
and also holds investments that include the general partner interest and a
limited partner interest in Holdings, a general partner interest in the
Operating Partnership, and a portion of Holdings' mandatorily redeemable
preferred partnership interests. For the period from January 30, 1997 to July
23, 1999, the general partners of the Operating Partnership were Petro, Inc.
and an affiliate of Chartwell (described below). Prior to January 30, 1997, the
general partners of the Operating Partnership were Petro, Inc. and Roadside,
Inc., an entity owned by Freemont Partners.
Recapitalization
On July 23, 1999, the Operating Partnership, certain of its partners and
Volvo Trucks North America, Inc. ("Volvo") consummated a transaction pursuant
to which Holdings was formed, and all of the present owners in the Operating
Partnership (other than Petro Holdings GP Corp. and Petro Holdings LP Corp.,
each of which were affiliates of Chartwell Investments, Inc. (collectively,
"Chartwell"); Kirschner Investments ("Kirschner"), a company franchisee)
exchanged their interests in the Operating Partnership for identical interests
in Holdings and became owners of Holdings. Petro, Inc. and an affiliate of the
Cardwell Group exchanged substantially all their interests in the Operating
Partnership for identical interests in Holdings and become owners of Holdings.
Petro Holdings Financial Corporation ("Financial Holdings") was formed for the
purpose of serving as co-issuer of New Senior Discount Notes (as defined
below). Financial Holdings, the Operating Partnership and its subsidiary, Petro
Financial Corporation, became subsidiaries of Holdings. Petro Warrant Holdings
Corporation ("Warrant Holdings") was formed for the purpose of owning a common
limited partnership interest in Holdings and issuing the Warrants (see below).
In addition, Volvo Petro Holdings L.L.C. ("Volvo Trucks"), an affiliate of
Volvo, invested $30,000,000 to acquire a 28.7% limited common partnership
interest in Holdings while Mobil Long Haul, Inc. ("Mobil"), an affiliate of
Mobil Corporation, invested an additional $5,000,000 in Class B convertible
preferred partnership interests of Holdings. Holdings purchased the 50.8%
common interest in the Operating Partnership owned by affiliates of Chartwell
for aggregate consideration of approximately $69,800,000, which consisted of a
$55,000,000 cash payment and the issuance to Chartwell of approximately
$14,800,000 in accreted value ($11,248,000 net of an imputed market rate of
interest) of 15.0% New Senior Discount Notes (as defined below) due 2008,
without Warrants. Holdings also purchased the 2% common interests in the
Operating Partnership owned by Kirschner for cash consideration of $2,800,000.
The foregoing is referred to as the "Recapitalization." The acquisition of
F-19
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Company Formation and Description of Business--(Continued)
Chartwell's and Kirschner's interests was accounted for under the purchase
method during the third quarter of 1999.
As part of the Recapitalization, Holdings issued 82,707 Units each
consisting of $1,000 principal amount at stated maturity of Holdings 15.0%
Senior Discount Notes due 2008 and 82,707 exchangeable Warrant Holdings'
Warrants ("New Senior Discount Notes"). As consideration for the Units,
Holdings received $40,000,000 cash ($30,300,000 was allocated to the Senior
Discount Notes and $9,700,000 was allocated to the Warrants). Holdings had
acquired the Warrants from Warrant Holdings for $9,700,000. Warrant Holdings,
in turn, invested the $9,700,000 to acquire a 10.0% common limited partnership
interest in Holdings. The amount allocated to the warrants is based on Warrants
Holdings' 10.0% interest in Holdings and on Holdings' common equity value, net
of an estimate of Recapitalization costs not borne by Warrant Holdings,
established in conjunction with the admission of Volvo Trucks and the purchase
of Chartwell's and Kirschner's interests in the Operating Partnership. Upon an
exchange event (change in control, IPO, or bankruptcy of Holdings), the
Warrants will be exchanged, for no additional consideration, for 100% of the
common stock of Warrant Holdings, whose sole asset is currently approximately
10.0% of the common limited partnership interests in Holdings. As a result of
this contingent repurchase obligation, the Warrants will be reflected outside
partners' deficit as contingently redeemable warrants in the consolidated
balance sheet. The Warrants are callable by Holdings prior to August 1, 2002 at
increasing amounts over time from $11,150,000 to $14,750,000. If not exchanged
by August 1, 2004, the Warrants must be repurchased by Holdings at their then
fair value. Future changes (determined each balance sheet date in a manner
consistent with the determination of market price of partnership interests
described in Note 12), if any, in value of the Warrants will be charged
directly to partners' capital (deficit).
As a result of the Recapitalization, Holdings is the owner of approximately
99.5% of the common interests of the Operating Partnership. The common limited
partnership interests of Holdings are owned by the Cardwell Group
(approximately 51.6%), Volvo Trucks (approximately 28.7%), Mobil (approximately
9.7%) and Warrant Holdings (approximately 10.0%) and the mandatorily redeemable
preferred partnership interests of Holdings are owned by Mobil ($17,000,000)
and the Cardwell Group ($7,600,000). Petro, Inc. and another affiliate of the
Cardwell Group own the remaining 0.5% of the Operating Partnership. Generally
accepted accounting principles require negative capital accounts of minority
partners in consolidated subsidiaries to be recorded in partners' capital
(deficit).
The formation of Holdings (whereby certain of the Operating Partnership's
partners exchanged their interests in the Operating Partnership for identical
interests in Holdings) was recorded at predecessor basis and has been reflected
in the accompanying consolidated financial statements in a manner similar to a
pooling-of-interests. Accordingly, the accompanying consolidated financial
statements reflect the historical amounts and results of operations of
Holdings' consolidated subsidiaries as if the exchange referred to above had
occurred on the first day of the first period presented.
The Operating Partnership also amended its senior collateralized credit
facility (the "Existing Senior Credit Facility" and, as amended, the "New
Senior Credit Facility") as part of the Recapitalization. The New Senior Credit
Facility consists of an $85,000,000 revolving credit facility and a $40,000,000
Term Loan B. The proceeds of the New Term Loan B were used to repay amounts due
under the Term A and B Loans and the Expansion Facility of the Existing Senior
Credit Facility of approximately $38,271,000, plus accrued interest. The New
Senior Credit Facility is collateralized by substantially all of the Operating
Partnership's assets and contains certain covenants similar to those described
in Note 6.
As further discussed above, Holdings funded a portion of its purchase of
Chartwell's and Kirschner's interests in the Operating Partnership with debt.
Holdings currently has no operations of its own and is,
F-20
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Company Formation and Description of Business--(Continued)
therefore, dependent upon the earnings and cash flows of the Operating
Partnership to satisfy its obligations under the New Senior Discount Notes.
Unless otherwise noted, Holdings and its subsidiaries are hereinafter
referred to as the "Company."
1997 Recapitalization
On January 30, 1997, the Operating Partnership consummated a transaction
entered into in October 1996, under which Chartwell and Mobil Long Haul
invested $20,700,000 and $15,000,000, respectively (the "Equity Investment"),
to directly acquire the 40% common partnership interests of the Operating
Partnership owned by the Fremont Partners for approximately $25,600,000 and
invest approximately $10,100,000 in the Operating Partnership. The respective
Mobil Long Haul and Chartwell investments in the Operating Partnership were
$4,218,000 and $5,829,000. Mobil Long Haul's $10,110,000 share of the direct
cost of acquiring Fremont Partners' interest in the Operating Partnership has
been reflected in the accompanying consolidated financial statements as an
increase in partners' capital and a corresponding decrease in minority interest
in consolidated subsidiaries. The Cardwell Group maintained its capital
investment in the Operating Partnership. Kirschner Investment ("Kirschner"), a
Company franchisee, invested $1,000,000 in the Operating Partnership in
exchange for a 2% common partnership interest (the "Kirschner Investment").
Immediately thereafter, the Cardwell Group and Mobil Long Haul agreed to assign
$19,600,000 of their capital balances to mandatorily redeemable preferred
partnership interests. Following the Equity Investment and the Kirschner
Investment, the common partnership interests of the Operating Partnership were
owned by Chartwell (approximately 50.8%), the Cardwell Group (approximately
39.9%). Mobil Long Haul (approximately 7.3%), and Kirschner (approximately
2.0%), and the manditorily redeemable preferred partnership interests were
owned by Mobil Long Haul ($12,000,000) and the Cardwell Group ($7,600,000).
Chartwell and the Cardwell Group owned both general and limited partnership
interests and Mobil Long Haul and Kirschner owned only limited partnership
interests. Additionally, Petro, Inc. and other Cardwell affiliates agreed to
convert certain of their limited partner interests to general partner interests
and vice versa. These non-cash conversions totaling $8,021,000 are reflected in
the accompanying consolidated statements of changes in partners' capital
(deficit). Mobil Oil Company and the Operating Partnership also entered into
certain supply and marketing agreements.
As part of the 1997 Recapitalization, the Company issued $135,000,000 of 10
1/2% senior unsecured notes due 2007 (the "New Notes"), and repurchased
approximately 94% of the existing 12 1/2% Senior Notes due 2002 and
approximately 100% of outstanding Debt Warrants. In connection with the
issuance of the New Notes, the Company capitalized approximately $14,500,000 of
debt issuance costs and wrote off, as an extraordinary item, $12,745,000 of
debt restructuring costs. These costs included the write-off of deferred
financing costs relating to the replacement of the old credit agreement, the
retirement of Term A & B Loans, the 12.5% Senior Notes, and the Debt Warrants.
At December 31, 1996, the Company had incurred and accrued for $2.5 million
of one-time costs related to the 1997 Recapitalization. These severance and
hiring costs are attributable to the removal and replacement of the Company's
pre-1997 Recapitalization management. In connection with the partnership sale,
the new partners required that old management be replaced, and the Company
incurred costs and expenses with regard to their termination as well as costs
associated with their replacement with new management. The termination costs,
which were incurred during 1996, approximated $1.2 million, were paid in
January 1997, and related to four executive officers and other members of
management. The remaining costs were primarily related to hiring of new
management, which occurred in 1996 and were expensed accordingly.
Additionally, during 1996 the Operating Partnership recognized $2.9 million
of legal, accounting and other professional fees which were incurred in
connection with the 1997 recapitalization.
F-21
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Company Formation and Description of Business--(Continued)
The Company also amended its senior collateralized credit facility (the "Old
Credit Agreement" and, as amended, the "New Credit Agreement"). The New Credit
Agreement consisted of a $25,000,000 revolving credit facility (the "Revolving
Credit Facility"), a $14,000,000 Term Loan A, a $30,000,000 Term Loan B and a
$40,000,000 Expansion Facility (the "Expansion Facility").
The 1997 Recapitalization has been reflected in the accompanying
consolidated financial statements using recapitalization accounting, which
results in the carryforward of historical book values of assets and
liabilities.
Description of Business
The Company, through the Operating Partnership, operates large, multi-
service truck stops known as "Petro Stopping Centers" (the "Stopping Centers"),
that are located along interstate highways and typically offer diesel fuel,
gasoline, home-style restaurants, truck preventative maintenance centers,
travel and convenience stores and a range of other products, services and
amenities to commercial truck drivers, as well as other highway motorists and
local residents. At December 31, 1998, the Company's network consisted of 49
Stopping Centers located in 29 states, of which 28 were operated by the
Operating Partnership and 21 were franchised.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant intercompany
balances have been eliminated in consolidation. Minority interest in
consolidated subsidiaries represents (i) the interests in the Operating
Partnership owned by Chartwell (50.8%) and Kirschner (2.0%), and (ii) prior to
January 30, 1997, the interests in the Operating Partnership owned by the
Fremont Partners (40.0%). Petro, Inc. and another affiliate of the Cardwell
Group own the remaining 0.5% of the Operating Partnership. Generally accepted
accounting principles require negative capital accounts of minority partners in
consolidated subsidiaries to be recorded in partners' capital (deficit).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. Accounts receivable are primarily due from national and regional
commercial trucking companies, and include accounts receivable purchased at a
discount from franchisees. The receivables are not collateralized. The risk,
however, is limited due to the large number of entities comprising the customer
base and their dispersion across geographic regions. At December 31, 1998, the
Company had no significant concentrations of credit risk.
Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid investments with
an original maturity of three months or less.
F-22
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Summary of Significant Accounting Policies--(Continued)
Allowance for Uncollectible Accounts
Accounts receivable are reviewed on a regular basis and the allowance for
uncollectible accounts is established to reserve for specific accounts believed
to be uncollectible. In addition, the allowance provides a reserve for the
remaining accounts not specifically identified. At December 31, 1997 and 1998,
the allowance for uncollectible accounts totaled $330,000 and $627,000,
respectively. The allowance for doubtful accounts was increased during 1998
principally to reserve for a specific customer who filed for bankruptcy
protection. This specific reserve approximated $180,000.
Inventories
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out method.
Land Held for Sale
In the fourth quarter of 1997, management committed to a plan to dispose of
certain real estate holdings. Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" requires that long-lived assets held for
sale be reported at the lower of carrying amount or fair value less cost to
sell. At December 31, 1997 and 1998, the Company reported land held for sale at
its net book value of $8,102,000 and $6,078,000, respectively. The land held
for sale consists of several parcels of undeveloped land considered by
management as excess and no longer necessary for the operations of the Company.
A portion of the 1997 balance is included in current assets and the remainder,
as well as all of the 1998 balance, is included in other assets in the
accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are recorded at historical cost. Depreciation and
amortization are generally provided using the straight-line method over the
estimated useful lives of the respective assets. Repairs and maintenance are
charged to expense as incurred, and amounted to $2,785,000, $3,486,000 and
$4,469,000 for 1996, 1997 and 1998, respectively. Renewals and betterments are
capitalized. Gains or losses on disposal of property and equipment are credited
or charged to income.
Leased equipment meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability. Amortization of
capitalized leased assets are computed on the straight line method over the
term of the lease.
Facilities under development are recorded at cost, and include capitalized
interest costs associated with the development of a project. These costs are
classified as facilities under development until the project is completed, at
which time the costs are transferred to the appropriate property and equipment
accounts.
Debt Issuance Costs
Costs incurred in obtaining long-term financing are amortized over the life
of the related debt using a method that approximates the interest method. As of
December 31, 1997 and 1998, accumulated amortization of debt issuance costs
were $5,489,000 and $3,147,000, respectively.
Self Insurance
The Company is self-insured for employment practices, general liability,
workers' compensation, and group health benefit claims, up to stop-loss amounts
ranging from $50,000 to $250,000 on a per-occurrence basis. During 1996, 1997,
and 1998, the Company paid $3,499,000, $4,146,000, and $6,781,000,
respectively, on claims related to these self-insurance programs. Provisions
for these self-insurance programs are made for
F-23
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Summary of Significant Accounting Policies--(Continued)
both estimated losses on known claims and claims incurred but not reported,
based on claims history. At December 31, 1996, 1997, and 1998, such aggregated
provisions amounted to approximately $4,620,000, $4,937,000, and $6,020,000,
respectively. At December 31, 1996, 1997, and 1998, the aggregated accrual
amounted to approximately $4,597,000, $5,388,000, and $4,627,000, respectively.
The Company believes it provides an accrual adequate to cover both reported and
incurred but not reported claims.
Advertising and Promotion
Costs incurred in connection with advertising and promotion are expensed as
incurred, net of reimbursements from franchisees. Net advertising and promotion
expenses of $2,156,000, $2,479,000 and $2,789,000 were incurred for 1996, 1997
and 1998, respectively, and are included in operating expenses in the
accompanying consolidated statements of operations. Advertising and promotion
reimbursements from franchisees totaled $292,000, $334,000 and $401,000 for
1996, 1997 and 1998, respectively.
Motor Fuel Taxes
Certain motor fuel taxes are collected from consumers and remitted to
governmental agencies by the Company. Such taxes were $175,873,000,
$192,650,000 and $203,274,000 for 1996, 1997 and 1998, respectively, and are
included in net revenues and cost of sales in the accompanying consolidated
statements of operations.
Environmental Liabilities and Expenditures
Accruals for environmental matters are recorded in operating expenses when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. The measurement of environmental
liabilities is based on an evaluation of currently available facts with respect
to each individual site and considers factors such as existing technology,
presently enacted laws and regulations and prior experience in remediation of
contaminated sites. Such liabilities are exclusive of claims against third
parties and are not discounted.
Franchise Revenues
The Company recognizes net revenue from individual franchises and initial
training fees when substantially all significant services to be provided by the
Company have been performed. Continuing franchise fees, which are based
generally upon a percentage of the franchisees' sales, are recognized monthly
as earned. Given the insignificance of initial franchise fees and other revenue
types, the Company reports a total combined revenue amount. Fees earned from
franchises aggregated $3,397,000, $3,954,000 and $4,497,000 during the years
ended December 31, 1996, 1997 and 1998, respectively. There were 16, 18 and 21
franchise locations in operation during the years ended December 31, 1996, 1997
and 1998, respectively. The Company does not allocate any expenses or assets in
measuring its franchise segment's profit and loss, nor does it believe there
are any significant commitments or obligations resulting from these franchise
agreements.
Financial Instruments with Off-Balance Sheet Risk
The Company occasionally utilizes futures and options contracts with the
objective of minimizing fuel cost risk due to market fluctuations. Gains and
losses resulting from changes in the market value of these contracts are
recognized when the related inventory is sold. The Company also may
occasionally enter into futures and options contracts that are not specific
hedges and gains or losses resulting from changes in market value of
F-24
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Summary of Significant Accounting Policies--(Continued)
these types of futures contracts are recognized in income currently. At
December 31, 1998, the Company was not a party to any futures or options
contracts. Interest rate swap agreements are utilized from time to time to
manage interest rate exposures. The amount to be paid or received on these
agreements is accrued as interest rates change and is recognized over the
lives of the respective agreements. At December 31, 1998, the Company was
party to an interest rate swap agreement with an aggregate notional principal
amount of $30,000,000, which effectively changes a portion of Holdings'
interest rate exposure from a floating rate to a fixed rate basis. The effect
of the swap was to increase the fixed rate of 6.15% by 0.4%, which resulted in
additional interest expense of approximately $153,000 during 1998.
Income Taxes
The Company is not subject to federal or state income taxes. Results of
operations are allocated to the partners in accordance with the provisions of
Holdings' Partnership Agreement and reported by each partner on their
respective federal and state income tax returns. The taxable income or loss
allocated to the partners in any one year generally varies substantially from
income or loss for financial reporting purposes due to differences between the
periods in which such items are reported for financial reporting and income
tax purposes.
Change in Accounting Principles
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP 98-5"), "Reporting the Costs of Start-up
Activities". SOP 98-5 requires the costs of start-up activities (including,
among other things, pre-opening costs related to the development of new sites
and organization costs) be expensed as incurred and that previously
capitalizable costs expensed in the initial adoption be reported as a
cumulative effect of a change in accounting principle. The adoption of SOP 98-
5 resulted in a charge to income of $3,250,000 and is presented as a
cumulative effect of a change in accounting principle, as required.
In the fourth quarter of 1997 the Financial Accounting Standards Board
issued, and the Company adopted, Emerging Issues Task Force Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation" ("EITF No. 97-13"). EITF No. 97-13 required the immediate
write off, during the Company's fourth quarter, of cumulative costs related to
process reengineering activities that were previously allowed to be
capitalized. Prospective costs of a similar nature are also required to be
expensed as incurred. The adoption of EITF No. 97-13 resulted in a charge to
income of $1,579,000 and is presented as a cumulative effect of a change in
accounting principle, as required.
(3) Inventories
The following is a summary of inventories at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Motor fuels and lubricants................................. $ 5,207 $ 3,704
Tires and tubes............................................ 3,387 4,141
Merchandise and accessories................................ 7,476 7,827
Restaurant and other....................................... 1,420 1,244
Less reserve for obsolescence.............................. (1,128) (457)
------- -------
Inventories, net......................................... $16,362 $16,459
======= =======
</TABLE>
During 1998, the Company wrote off a majority of its inventories that had
been deemed to be obsolete.
F-25
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment is summarized at December 31, 1997 and 1998 as
follows:
<TABLE>
<CAPTION>
Estimated
Useful
Lives
(years) 1997 1998
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Land and improvements........................ 10 $ 25,863 $ 27,707
Buildings and improvements................... 30 97,176 104,232
Furniture and equipment under capital lease.. 3-10 47,298 60,018
Leasehold improvements....................... 7-30 20,234 20,234
Facilities under development................. -- 148 --
-------- --------
190,719 212,191
Less accumulated depreciation and
amortization................................ (41,069) (53,426)
-------- --------
Property and equipment, net................. $149,650 $158,765
======== ========
</TABLE>
The Company currently has equipment under a Capital Lease. Facilities under
development includes costs associated with new facilities and major renovations
of existing facilities. There were no future construction commitments at
December 31, 1998.
(5) Operating Leases
The Company has entered into various operating leases. The operating leases
are for the leases on two Stopping Center locations, an office building, truck
leases and various equipment leases. The leases contain renewal options varying
from automatic annual renewals to multiple five-year options.
A summary of future minimum rental payments on operating leases which have
initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Related Third
Fiscal Year Ending Party Party Total
------------------ ------- ------- -------
(in thousands)
<S> <C> <C> <C>
1999................................................ $ 1,494 $ 896 $ 2,390
2000................................................ 1,482 896 2,378
2001................................................ 1,422 858 2,280
2002................................................ 1,422 858 2,280
2003................................................ 1,422 858 2,280
Later years......................................... 3,241 9,823 13,064
------- ------- -------
Total minimum lease payments........................ $10,483 $14,189 $24,672
======= ======= =======
</TABLE>
Rent expense under all operating leases was $2,201,000, $2,034,000 and
$2,639,000 for 1996, 1997 and 1998, respectively. Of these rentals, $1,487,000,
$1,481,000 and $2,330,000 were paid to related parties for 1996, 1997 and 1998,
respectively.
F-26
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Operating Leases--(Continued)
The related party operating leases, which are more fully described in Note
9, are:
. The Company leases a facility in El Paso, Texas, from a trust in which J.A.
Cardwell, Sr. is a 50% beneficiary, to operate the Company's retread plant
and made lease payments of $72,000 for the fiscal years ended December 31,
1996, 1997 and 1998.
. The office building in which the Company's principal executive offices are
located is owned by J.A. Cardwell, Sr. The Company made annual rent payments
of $336,000 for each of the fiscal years ended December 31, 1996, 1997 and
1998.
. The Stopping Center located in Effingham, Illinois is leased by the Company
from Truck Stop Property Owners, Inc., which is partially owned by Travis
Roberts, a current officer of the Operating Partnership. The Company made
rental payments of $1.1 million in each of 1996, 1997 and 1998.
(6) Notes Payable
Notes payable at December 31, 1996, consisted of a five-year revolving
credit facility under which up to $35,000,000 was available. The balance
outstanding on the credit facility was $21,639,000 as of December 31, 1996 and
was paid-off as part of the Recapitalization in January 1997 and a new credit
facility was established.
At December 31, 1998, the Company has available a $25,000,000 five-year
revolving credit facility (the "Credit Facility") that may be used for working
capital and other corporate uses. The Credit Facility matures in January 2002
and interest on drawn funds is paid monthly at 1.5% above the bank's base rate
or 2.75% over the Eurodollar rate (the rate is determined at time of borrowing
at Holdings' option). Fees of 2.75% on drawn funds and commitment fees of .5%
on undrawn funds are paid quarterly. At December 31, 1998, the Company did not
have a balance outstanding on the Credit Facility.
The Company did have standby letters of credit outstanding under the
respective revolving credit facilities at December 31, 1997 and 1998. At
December 31, 1997 and 1998, the standby letters of credit principally related
to unfunded insurance claims were $3,150,000 and $1,986,000, respectively.
Various other standby letters of credit at December 31, 1997 and 1998 total
$777,000 and $427,000, respectively.
Also as part of the Recapitalization, subject to certain covenants, the
Company has available a $40,000,000 three-year Expansion Facility which may be
used to fund the acquisition and development of new Stopping Centers and stand-
alone Petro:Lubes. The Expansion Facility matures in January 2000 and interest
on drawn funds is paid monthly at 1.5% above the bank's base rate or 2.75% over
the Eurodollar rate (the rate is determined at time of borrowing at the
Company's option). Fees of 2.75% on drawn funds and commitment fees of .5% on
undrawn funds are paid quarterly. At December 31, 1998, the Company did not
have a balance outstanding on the Expansion Facility.
Any funds drawn on both the Credit Facility or Expansion Facility are
secured by substantially all of the Company's assets and the partnership
interests of Mobil and Chartwell and guaranteed by each of the Company's
subsidiaries, whose guarantees in turn are collateralized by substantially all
of such subsidiaries' assets.
F-27
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Long-Term Debt
Long-term debt at December 31, 1997 and 1998 is presented below.
<TABLE>
<CAPTION>
1997 1998
-------- --------
(in thousands)
<S> <C> <C>
Four-year term note to a bank in an original amount of
$20,000,000 maturing September 30, 2001. The note is
payable in 18 consecutive quarterly installments varying
from $625,000 to $3,500,000 commencing September 30, 1997.
In accordance with the debt agreements entered into as part
of the Recapitalization, proceeds not used to retire the 12
1/2% Senior Notes were to be used to paydown this term
note. Accordingly, the Company retired approximately
$6,000,000 of this note in addition to the quarterly
installments due during 1997. Interest at either the bank's
prime rate plus 1.5% or the Eurodollar rate plus 2.75% is
payable monthly. The rate was 7.75% at December 31, 1998.
The note is collateralized by substantially all of the
Company's assets. ......................................... $ 12,500 $ 9,973
Six-year term note to a bank in an original amount of
$30,000,000 maturing September 30, 2003. The note is
payable in 26 consecutive quarterly installments varying
from $125,000 to $3,500,000 commencing September 30, 1997.
Interest at either the bank's prime rate plus 2% or the
Eurodollar rate plus 3.25% is payable monthly. The
effective rate was 8.3125% at December 31, 1998, as a
result of an interest swap agreement (the "Swap") with the
lender as required under the loan agreement. The Swap
expires on February 12, 2000. The note is collateralized by
substantially all of the Company's assets. ................ 29,500 28,933
12 1/2% Senior Notes due 2002 (the "12 1/2 Notes") in an
original aggregate principal amount of $100,000,000, net of
original issue discount. As part of the Recapitalization,
approximately 94% of the Notes were retired during 1997.
Interest on the Notes is payable on June 1 and December 1
of each year beginning December 1, 1994. .................. 6,190 6,190
10 1/2% Senior Notes due 2007 (the "10 1/2 Notes") in an
original aggregate principal amount of $135,000,000.
Interest on the New Notes is payable on February 1 and
August 1 of each year, beginning August 1, 1997. The 10 1/2
Notes will be effectively subordinated to the loans
outstanding under the New Credit Agreement to the extent of
the value of the assets securing such loans. .............. 135,000 135,000
Total long-term debt........................................ 183,190 181,328
Less current portion........................................ 3,000 4,967
-------- --------
Long-term debt, excluding current portion................... $180,190 $176,361
======== ========
</TABLE>
Obligation under equipment capital lease.................... -- 1,232
-------- --------
The 12 1/2 Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after June 1, 1999, upon not less than 30 and no
more than 60 days notice at the following redemption prices (expressed as
percentages of the principal amount to be redeemed) as set forth below, plus
accrued interest:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1999.......................................................... 103.57%
2000.......................................................... 101.79%
2001.......................................................... 100%
</TABLE>
F-28
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Long-Term Debt--(Continued)
The 10 1/2 Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after February 1, 2002, upon not less than 30 and
no more than 60 days notice at the following prices (expressed as percentages
of the principal amount to be redeemed) as set forth below, plus accrued
interest:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2002.......................................................... 105.2%
2003.......................................................... 103.5%
2004.......................................................... 101.7%
2005 and therafter............................................ 100%
</TABLE>
In addition, prior to February 1, 2000, the Company may, with the net
proceeds of one or more public equity offerings of qualified capital interest
in the Company, redeem up to 35% of aggregate principal amount of the
outstanding 10 1/2 Notes at a redemption price of 110.5%, plus accrued
interest.
The Indentures for the Long-Term Debt and the Credit Facility agreement
each contain certain covenants, including without limitation, covenants with
respect to the following matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on sales of
restricted subsidiary stock; (iv) limitation on transactions with affiliates;
(v) limitation on liens; (vi) limitation on disposition of proceeds of asset
sales; (vii) limitation on distributions and other payment restrictions
affecting restricted subsidiaries; (viii) restrictions on mergers and certain
transfers of assets and (ix) in the case of the Credit Facility financial
covenants covering leverage, cash flows, capital expenditures, EBITDA (as
defined), interest coverage, and minimum net worth. At December 31, 1997 and
1998, the Company was in compliance with all debt covenants.
Estimated principal payment requirements on long-term debt and a capital
lease obligation are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending (in thousands)
<S> <C>
1999............................................................. $ 4,967
2000............................................................. 6,001
2001............................................................. 1,737
2002............................................................. 19,690
2003............................................................. 13,933
Thereafter....................................................... 135,000
--------
Total........................................................ $181,328
========
</TABLE>
(8) Accrued Expenses and Other Liabilities
The following is a summary of accrued expenses and other liabilities at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Accrued expenses:
Employee related expenses................................. $10,071 $ 9,794
Taxes payable-sales, fuel and property.................... 2,935 2,594
Other..................................................... 8,424 6,934
Due to franchisees........................................ 5,061 2,117
------- -------
Total................................................... $26,491 $21,439
======= =======
</TABLE>
F-29
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Related Party Transactions
Related party transactions are handled on an "arm's-length" basis. Amounts
due to and from affiliates as of December 31, 1997 and 1998, consist of the
following:
<TABLE>
<CAPTION>
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Due from affiliates:
C&R Distributing, Inc..................................... $ 105 $ 39
Petro Truckstops, Inc..................................... 196 181
Highway Service Ventures, Inc............................. 114 39
J.A. Cardwell, Sr......................................... 412 412
Cardwell Group............................................ -- 235
Other..................................................... 153 257
------- -------
Total................................................... $ 980 $ 1,163
======= =======
Due to affiliates:
El Paso Amusement Company................................. $ 221 $ 189
Highway Service Ventures, Inc. ........................... 1,471 481
C&R Distributing, Inc..................................... 167 83
Mobil Diesel Supply Corp.................................. 13,792 13,177
Mobil Oil Corp............................................ 3,337 1,718
Cardwell Group............................................ -- 1,058
Other..................................................... -- 62
------- -------
Total................................................... $18,988 $16,768
======= =======
</TABLE>
In connection with the Recapitalization, the Company has entered into 10-
year supply agreements with Mobil Oil Corp. ("Mobil") under which Mobil will
supply the Company-operated Stopping Centers' diesel fuel requirements as well
as a portion of their lubricant and gasoline requirements. The diesel fuel sold
at all Company-operated Stopping Centers is branded Mobil Diesel, and the
Company-operated Petro:Lubes feature Mobil Delvac lubricants. Under the diesel
fuel and gasoline supply agreement dated January 30, 1997 (the "Supply
Agreement"), the Company has agreed to purchase a minimum of 172,318,000 and
181,000,000 gallons of diesel fuel and gasoline for the years 1999 and 2000,
respectively, from Mobil specified distribution terminals subject to product
availability and reductions by Mobil under certain described circumstances. The
Company is liable for penalties on a per gallon basis if the company purchases
less than the contractual commitment. If the Company does not purchase any
diesel fuel or gasoline under the agreement, the maximum penalties the Company
would be liable for are approximately $431,000 and $633,500 for the years 1999
and 2000, respectively. As a result of the Supply Agreement and in order to
comply with the laws governing the branding of diesel fuel, Mobil Diesel Supply
Corp. ("MDS"), a wholly-owned subsidiary of Mobil, was formed. MDS purchases
diesel fuel from third party suppliers and then sells it back to the Company at
cost, given that Mobil cannot supply 100% of the Company's diesel fuel demand
because of product availability. The Company's fuel purchase arrangement with
MDS enables the Company to meet its diesel fuel demand and to comply with
branding laws, which require Mobil to first take possession of the fuel before
it can be branded as Mobil Diesel.
The Supply Agreement allows the Company to continue to negotiate for the
purchase of diesel fuel with third-party suppliers approved by MDS. In such
cases, MDS purchases the diesel fuel from the third-party supplier and resells
the product to the Company. Any change in supply source, however, does not
affect the Company's requirement to purchase the annual minimum number of
gallons from Mobil. The Supply Agreement also places a monthly limit on the
maximum number of gallons of diesel fuel and gasoline that the Company may lift
from Mobil specified distribution terminals.
F-30
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Related Party Transactions--(Continued)
The Company purchases diesel fuel for each of its Company-operated Stopping
Centers on a daily basis. Each location typically maintains a one to three day
inventory of fuel. During 1998, the Company purchased 100% of diesel fuel from
MDS.
Pursuant to these agreements, the Company purchased diesel fuel, gasoline,
oil and lubricants totaling $181.6 million and $219.9 million in 1997 and 1998,
respectively.
The office building in which the Company's principal executive offices are
located is owned by J.A. Cardwell, Sr., the Chief Executive Officer and a
Director of the Company. The Company leases the entire building under a lease
expiring on December 31, 2005, paying monthly rent totaling $336,000 per year,
as well as taxes, maintenance and other operating expenses. For each of the
fiscal years ended December 31, 1996, December 31, 1997 and December 31, 1998,
the Company made annual rental payments of $336,000.
The Stopping Center located in Effingham, Illinois is owned by Truck Stop
Property Owners, Inc. ("Truck Stop"), a corporation owned by Travis Roberts and
five former employees of the Operating Partnership. Mr. Roberts is a current
officer of the Operating Partnership and owns 22% of the stock of Truck Stop.
The Company leases the Effingham Center under a lease expiring in May 2006,
which provides for basic rent payments, plus taxes and operating expenses. The
Company has three consecutive options to renew the lease for terms of five
years each at rental rates equal to the base rent, plus certain adjustments at
the time of renewal. The Company also has the right of first refusal to
purchase the Petro Stopping Center at any purchase price agreed upon between
Truck Stop and a third party. The Company made rental payments to Truck Stop of
$1.1 million on this property in each of 1996, 1997 and 1998.
The Company entered into an agreement with Chartwell Investments, Inc.,
providing for the payment of fees and reimbursement of certain expenses to
Chartwell Investments, Inc. for acting as financial advisor with respect to the
1997 Recapitalization, including soliciting, structuring and arranging the
financing of the 1997 Recapitalization. The fees, totaling approximately
$3,000,000, equal to 1% of the total capitalization of the Company, plus .5% of
the Expansion Facility and the reimbursement of certain expenses, were paid at
the closing. These costs were deferred and are being amortized over the terms
of the respective debt instruments to which they relate.
Under the terms of an agreement with C&R Distributing, Inc., the Company
currently purchases Chevron branded gasoline and motor oils at cost for three
of its facilities from C&R. The sole shareholder of C&R Distributing is Nevada
Trio, Inc., a Nevada Corporation, which is 100% owned by the Cardwell Group.
The C&R fuel agreement requires the Company to keep Chevron unleaded gasoline,
regular gasoline and motor oils continuously stocked and offered for sale in
quantities sufficient to meet demand. In 1997, the Company entered into a
product services agreement with C&R which terminates in December 2004, under
which C&R provides the Company with fuel hauling and fuel pump maintenance and
services within the El Paso, Texas metropolitan area. The C&R agreement
provides that C&R will charge the Company for these services at the lowest
rates charged by C&R for similar services and, in any event, at rates that will
not exceed rates available from unrelated parties providing similar services.
The C&R Fuel Agreement is exclusive but allows us to cancel the agreement with
30 days prior notice. The C&R Services Agreement is non-exclusive and allows
the Company to enter into similar agreements with other parties. Fuel sales
aggregating $4,567,000, $3,315,000 and $169,000 for 1996, 1997 and 1998,
respectively, were made to C&R Distributing, Inc. ("C&R") at the Company's
cost. C&R sales of fuel and lubricants and truck hauling fees, aggregating
$11,432,000, $5,079,000 and $3,995,000 for 1996, 1997 and 1998, respectively,
were charged to the Company.
At the time of the Recapitalization, Volvo and the Company entered into an
Operating Agreement related to the warranty, maintenance and service work the
Company will provide to Volvo managed vehicles, the sale
F-31
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Related Party Transactions--(Continued)
by the Company of all the truck parts, on a preferred basis, joint advertising
and marketing initiatives and the co-development of Stopping Centers by Volvo
and the Company to utilize truckstop space for Volvo truck sales and marketing.
Highway Service Ventures, Inc. ("HSV"), a corporation in which J.A.
Cardwell, Sr. owns a 32.5% interest, operates four franchised Stopping Centers
located in Elkton, Maryland; Ruther Glen, Virginia; Florence, South Carolina;
and Carnesville, Georgia pursuant to franchise agreements with Holdings. None
of these franchise agreements contain terms that are any more favorable to the
franchisee than the terms in any of the Company's other franchise agreements.
In May 1992, the Company leased a facility in El Paso, Texas, from a trust
in which J.A. Cardwell, Sr. is a 50% beneficiary, to operate the Company's
retread plant, which produces retread tires for sale at Stopping Centers
(including franchisees) and to others. The Company made lease payments of
$72,000 for the fiscal years ended December 31, 1996, 1997 and 1998,
respectively. In addition, the Company sells retread tires to El Paso Tire
Center, Inc., a corporation in which J.A. Cardwell, Sr. owns 100%. Such sales
amounted to $153,000, $47,000 and $60,000 in 1996, 1997 and 1998, respectively.
In connection with the formation of the Operating Partnership in May 1992
under an Option and Right of First Refusal Agreement, J.A. Cardwell, Sr. and
James A. Cardwell, Jr., officers and Directors of the Company, granted to the
Company and Roadside, options which expire in December 2006, to purchase
certain properties owned by the Cardwells that are located near or adjacent to
certain of the Company's Stopping Centers, and a right of first refusal on
these properties. At the closing of the 1997 Recapitalization, Roadside
assigned all of its rights under the Option and Right of First Refusal
Agreement to Mobil Long Haul, Petro Holdings GP Corp. and Petro Holdings LP
Corp. The price at which an Option Property may be purchased will be equal to
the fair market value of the property when the option is exercised as
determined by an appraisal.
J.A. Cardwell, Sr., James A. Cardwell, Jr. and Mrs. J.A. Cardwell, Sr. own
60%, 30% and 10%, respectively, of the stock of C&PPR, Inc. ("C&PPR"). J.A.
Cardwell, Sr. is the sole shareholder of CYMA Development Corporation ("CYMA")
and James A. Cardwell, Jr. is the sole shareholder of Petro Truckstops, Inc.
("Petro Truckstops") and Petro Beverage, Inc. The Company entered into
agreements with CYMA, C&PPR, Petro Truckstops, Inc., and Petro Beverage, Inc.
to engage in retail sales of beer, wine or wine coolers at a limited number of
its facilities. The agreements continue in effect until terminated by either
party. Under the agreements with CYMA, C&PPR, Petro Truckstops, Inc. and Petro
Beverage, Inc., the Company agreed to operate the alcohol sales business at
these locations in exchange for 15% of the gross receipts generated from
alcoholic beverage sales of which 5% is the Company's reimbursement of all
related operating expenses as defined under the agreements. In each of the
agreements, the net payments to the Company are approximately equal to the
gross profit received by the above entities. The Company's revenues in
connection with its agreement with C&PPR were $47,000, $47,000 and $59,000 for
the years ended December 31, 1996, December 31, 1997 and December 31, 1998,
respectively. The Company's revenues relating to the CYMA agreement were
$2,300, $1,200 and $1,000 for the years ended December 31, 1996, December 31,
1997 and December 31, 1998 respectively. The Company's revenues in connection
with its agreement with Petro Beverage, Inc. were $5,000, $4,600 and $5,900 for
the years ended December 31, 1996, December 31, 1997 and December 31, 1998,
respectively. The Company's revenues in connection with the Petro Truckstops
agreement were $17,000, $16,000 and $36,000 for the years ended December 31,
1996, December 31, 1997 and December 31, 1998, respectively.
F-32
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Related Party Transactions--(Continued)
In connection with the formation of the Operating Partnership in May 1992,
Motor Media, Inc., a company owned 100% by James A. Cardwell, Jr. ("Motor
Media"), entered into a five-year agreement with the Company (the "Motor Media
Agreement"), under which Motor Media leases floor and wall space at all
Stopping Centers operated by the Company and sells space for in-store
advertising to third parties. Under the agreement, the Company and Motor Media
are entitled to 25% and 75%, respectively, of the gross revenues generated.
Motor Media received $214,000, $234,000 and $215,000, respectively, before its
selling, maintenance and administrative expenses for the fiscal years ended
December 31, 1996, December 31, 1997 and December 31, 1998, representing its
share of the gross receipts generated. Motor Media has entered into similar
floor and wall space leases with other truck stops nationwide. The Company and
Motor Media have extended the term of the Motor Media Agreement through April
2002.
Under an existing agreement (the "Amusement Agreement") between El Paso
Vending and Amusement Company ("EPAC"), of which J.A. Cardwell, Sr. and James
A. Cardwell, Jr. own 99% and 1%, respectively, and the Company, EPAC furnishes
video and other games to four of the Company's Stopping Centers and services
these games. Pursuant to the Amusement Agreement, which expires in May 2002 or
until earlier terminated by either party, The Company paid 60% of the revenues
generated by the games to EPAC and retained the remaining 40%. Beginning
November 1994, the arrangement was modified to pay 50% of the revenue generated
by the games to EPAC and 50% to the Company. The Company amended the Amusement
Agreement to cause EPAC to contract directly with the Company to furnish and
service video and other games at an additional 12 Stopping Centers. Subsequent
thereto, EPAC began furnishing and servicing games at an additional five
Stopping Centers under the terms of the Amusement Agreement of which one site
agreement guarantees a minimum annual revenue to Holdings of $180,000.
Effective December 1, 1998, EPAC began furnishing and servicing video and other
games to an additional Stopping Center under the terms of the Amusement
Agreement, of which the Company pays 40% of the revenues generated by the games
to EPAC and retains the remaining 60%. EPAC received $2,021,000, $2,421,000 and
$2,634,000 in revenues, respectively, generated from the furnishing and
servicing games located at the Stopping Centers for the fiscal years ended
December 31, 1996, December 31, 1997 and December 31, 1998.
Since June 1993, the two Stopping Centers located in Louisiana have featured
video poker games housed in a separate on-site facility and operated by a third
party, Petro Truckstops, Inc., an affiliate who, under terms of a contract,
turns over 20%-70% of the revenue generated from the machines. Petro
Truckstops, Inc. pays 95% of revenue collected to the Company and retains 5%
for operating expenses in accordance with a lease agreement. The Amusement
Agreement has been amended to extend its term through May 2002. Payments to the
Company under this arrangement aggregated $1,979,000 during 1996, $2,103,000
during 1997 and $2,231,000 during 1998. During 1996, the State of Louisiana
enacted a statute requiring the cessation of video poker operations unless the
parish in which the operations were conducted voted to allow the continued
operation of video poker machines. On November 5, 1996, the parish in which the
Shreveport facility is located voted to continue to allow video poker
operations, while the parish in which the Hammond facility is located voted to
disallow video poker operations. The video poker operations at the Hammond
facility were required to be, and were, phased out by the end of June 1999.
During the year ended December 31, 1998, the Hammond location generated
approximately $1,067,000 of revenue from video poker.
Management fees of $250,000 were earned by The Fremont Group for the year
ended December 31, 1996. Management fees of $300,000 were earned by Mobil Oil,
in accordance with the terms of the Operating Partnership's Partnership
Agreement for each of the years ended December 31, 1997 and 1998. Subsequent to
the Recapitalization discussed in Note 1, those fees were discontinued.
F-33
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Related Party Transactions--(Continued)
The Company entered into a management consulting agreement with Chartwell
Investments, commencing January 30, 1997, pursuant to which Chartwell
Investments provided the Company with certain management, advisory and
consulting services for a fee of $600,000 for each fiscal year of the Company
during the term of the agreement, with up to an additional $100,000 payable for
each fiscal year, provided that EBITDA is at least $45 million, plus
reimbursement of certain expenses. During 1997 and 1998, the Company paid
Chartwell Investments $600,000 and $714,000, respectively, under this
agreement. Subsequently to the Recapitalization discussed in Note 1, those fees
were discontinued.
Each of the affiliates, with the exception of Mobil Diesel Supply
Corporation, Mobil Oil Corporation and Chartwell, is owned or controlled to
some degree by a member or members of the Cardwell Group. Related party
transactions, other than those specifically discussed above, generally arise in
the ordinary course of business as a result of the Company's purchase of trade
accounts receivable or receipt of franchisee fees from Highway Service
Ventures, Inc., a corporation in which J.A. Cardwell, Sr. owns an interest,
which owns properties that are part of the Company's truck stop network. For
the years ended December 31, 1997 and 1998, the Company purchased receivables
from affiliated franchises in the amounts of $18,200,000 and $16,900,000,
respectively and received franchise fees from related parties in the amounts of
$987,000 and $1,000,000, respectively.
In order to comply with applicable Internal Revenue Service Code and
Treasury Regulation provisions dealing with recourse debt, certain Cardwell
entities and Arcadian Management Corporation each entered into an indemnity
agreement under which each has agreed to indemnify the Company, the general
partners and certain limited partners in the event that the indemnified party
is required to pay certain of the Company's indebtedness after a default,
acceleration by the creditor and exhaustion of any collateral securing the
credit facility. In May 1994, certain Cardwell entities and Arcadian Management
Corporation amended their original indemnity agreements in connection with the
May 1994 financing. No payments have been made under these agreements.
(10) Partners' Capital (Deficit)
Ownership
As a result of the Recapitalization and purchase of Chartwell's and
Kirschner's interests, discussed in Note 1, Holdings is the owner of
approximately 99.5% of the common interests of the Operating Partnership. The
common limited partnership interests of Holdings are owned by the Cardwell
Group (approximately 51.6%), Volvo Trucks (approximately 28.7%), Mobil
(approximately 9.7%) and Warrant Holdings (approximately 10.0%) and the
mandatorily redeemable preferred partnership interests of Holdings are owned by
Mobil ($17,000,000) and the Cardwell Group ($7,600,000).
Under Holdings' Partnership Agreement ("the Agreement"), the partners
delegated management authority to a seven member Board of Directors. The
Cardwell Group, Volvo Trucks, and Mobil Long Haul have the right to appoint two
persons each to the Board of Directors. The seventh member is Mr. Larry Zine,
who served as the Company's executive vice president and chief financial
officer for December 1996 to July 1999, and also as its president from January
1999 to July 1999. Additionally, these three partners also have the right to
veto certain major partnership decisions.
F-34
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Partners' Capital (Deficit)--(Continued)
Mandatorily Redeemable Preferred Partnership Interests
The Company's Partnership Agreement provides for a class of preferred
partnership interests. The Class A preferred partnership interests held by the
Cardwell Group will accrue cumulative preferred returns at a rate of 8% per
annum. The Class A preferred partnership interests held by Mobil will accrue
cumulative preferred returns at a rate of 9 1/2% per annum. The preferred
returns will accrue, but are not only payable in cash if permitted by the
Operating Partnership's then existing debt instruments. Accrued but unpaid
returns compound semiannually. The Class A preferred partnership interests will
be mandatorily redeemable by the Company on October 27, 2008. The Class A
preferred partnership interests will not be convertible into common partnership
interests. The Class A preferred partnership interests as well as the Class B
preferred partnership interests described below have liquidation preferences
equal all their accrued and unpaid preferred return plus all their unrecovered
capital
The Class B preferred partnership interests to be owned by Mobil will accrue
cumulative preferred returns at a rate of 12% per annum and will be convertible
into 3.9% of the common partnership interests in the Company at any time prior
to mandatory redemption on the tenth anniversary date of the closing of the
Recapitalization. Upon conversion into a common partnership interest (or as
soon thereafter as cash may be available) the accrued preferred return on the
Class B preferred partnership interest will be paid.
The Company has accrued and unpaid preferred returns on the mandatorily
redeemable preferred partnership interest totaling to $1,635,000 and $3,607,000
at December 31, 1997 and 1998, respectively.
Distributions
Under the terms of the Agreement, Holdings is required to make distributions
to each of its partners in an amount sufficient to allow each partner to pay
federal, state and local taxes with respect to allocation of taxable income to
such partner by Holdings. Tax distributions to partners will be based on the
taxable income of Holdings. Distributions in 1996, 1997 and 1998 were $0, $0
and $823,000 respectively.
As of December 31, 1998, the historical net book value of assets and
liabilities was approximately $36,000,000 greater than the associated net tax
basis of those assets and liabilities.
Allocations of Income
In any fiscal year, Holdings' profits shall be allocated among the preferred
limited partners according to their preferred sharing percentages until the
cumulative amount of cash distributed equals the cumulative amount of cash
distributed in payment of unpaid preferred return to the preferred limited
partners. Profits for any fiscal year are allocated first to those partners to
which losses have previously been allocated, then pro rata to the common
limited partners. Losses for any fiscal year shall be allocated first to common
partners then to preferred partners.
Upon liquidation of Holdings, the proceeds will be distributed first to
creditors; next to Class A and Class B preferred interests, next, pro rata, to
partners who have distribution shortfalls; then to common partnership interests
to the extent of unrecovered capital, and lastly, pro rata, to the partners in
accordance with their positive capital account balances.
F-35
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Employee Benefits
The Company sponsors a defined contribution retirement plan under Internal
Revenue Code Section 401(k) covering substantially all of its employees ("the
Plan"). Company contributions equal 50% of the participants' contributions up
to 4% of the participants' annual salary and aggregated approximately $138,000,
$189,000 and $318,000 for 1996, 1997 and 1998, respectively. At December 31,
1997 and 1998 there were no other post employment or retirement plans.
The Plan failed to correctly perform the requirements under Section
401(k)(3)(ii) of the Internal Revenue Code of 1986, as amended (the "Code"),
Section 401(m) of the Code and the underlying Treasury Regulations (hereinafter
referred to as the ADP/ACP Test) for the Plan years 1990-1996. In addition, the
Plan failed to allocate forfeitures of employee contributions in accordance
with the terms of the Plan since its inception. Management of the Company
believes it has identified all operational defects of the Plan, and has taken
corrective actions to ensure future compliance. The Plan administrator
submitted a request for a compliance statement to the IRS on December 19, 1996,
under the IRS Voluntary Compliance Resolution Program (VCR). On August 20,
1998, the IRS notified the Plan that due to certain technical legal issues
under the Plan, the submission could not be accepted under the VCR Program, and
should be redirected to the Walk in Closing Agreement Program (Walk in CAP).
Under the Walk in CAP, the Plan will be permitted to take corrective actions
with respect to the operational defects and receive a compliance statement from
the IRS acknowledging such action. In April 1999, the Internal Revenue Service
issued a ruling allowing the Company to take corrective action with regards to
the Plan pursuant to the Walk in Cap. Under the approved Walk in Cap
settlement, the Company will pay $250,000 in contributions and $35,000 in
penalties. The Company expects to complete this settlement by mid-November
1999. The Company's liability is reflected in the accompanying consolidated
balance sheet as of December 31, 1998.
During 1998, the Company established the "Petro Stopping Centers Deferred
Compensation Plan" (the "Comp Plan") for key employees. Under the Comp Plan,
the participants may defer base compensation and earn interest on their
deferred amounts. The program is not qualified under Section 401 of the
Internal Revenue Code. Participants may defer no more than 20% of their
compensation per year. The Company will credit matching deferrals for each
participant equal to 50% of the first 4% of the participant's compensation up
to $9,500 per year. Company matched deferrals will vest at 20% after one year
of service and an additional 20% for each year thereafter. The Plan Trustee
will invest each participant's account balance in a separate account. The
participants are general creditors of the Company with respect to these
benefits. The total of participant deferrals, which is reflected in accrued
expenses and other liabilities, was $160,000 at December 31, 1998. The
Company's matched deferral expenses for the year ended December 31, 1998 was
$9,900.
(12) Partnership Interests Option Plan
The Company has established an equity incentive plan to attract and retain
key personnel, including senior management, and to enhance their interest in
the Company's continued success. The Company applies Accounting Principles
Board Opinion No. 25 in accounting for its plan. Accordingly, compensation
costs for partnership interests options are measured as the excess, if any, of
the market price of the partnership interests at the date of grant over the
amount an employee must pay to exercise the option. The Company provides the
disclosures required by SFAS No. 123.
Options are granted at an exercise price not less than market price at the
date of grant. As an entity without publicly traded equity securities, the
Board of Directors must determine in good faith the market price of the option
at the date of grant. In the event of very recent transactions involving the
Company's partnership interests, the market price of the option is based on the
value of the interests determined in those transactions. In the absence of very
recent transactions, the plan provides a formula for determining an
approximation of
F-36
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Partnership Interests Option Plan--(Continued)
market price based on a multiple of the Company's latest four quarters of
EBITDA, less indebtedness and the mandatorily redeemable preferred partnership
interests. The 1997 grants were made at or about the time of the 1997
Recapitalization and, therefore, the market price ($4,000 per .01% interest)
was based on the valuation of the Company's common partners' capital determined
in connection with the 1997 Recapitalization. The 1998 market price ($6,000 per
.01% interest) was determined by the provisions of the plan since there were no
very recent transactions. Based on facts and circumstances at the time, the
Board of Directors concluded the amount as determined by the provisions of the
plan was a reasonable determination of market price.
Vesting occurs over four years at 25% per year. At December 31, 1997, no
partnership interests were exercisable and at December 31, 1998, approximately
2.3% of the partnership interests were exercisable, all at an exercise price of
$4,000, and all of which expire in 2007. Participants become fully vested upon
the occurrence of a Change in Control (as defined in the plan), upon a sale of
substantially all of the assets of the Company, upon the liquidation of the
Company, or upon the Company's consummation or adoption of a plan to make an
Extraordinary Distribution or Redemption (as defined in the plan). Options may
be exercised at any time, to the extent that such options are exercisable. All
options expire on the earlier to occur of (i) the tenth anniversary of the date
the option was granted, (ii) one year after the participant ceases to be an
employee of the Company due to retirement, death or disability, (iii)
immediately, if the participant ceases to be an employee of the Company for
cause, or (iv) ninety days after the occurrence of the termination of the
participant's employment with the Partnership, for any reason other than (ii)
or (iii) above. A participant, as defined in the plan, shall have no rights as
a limited partner until the date the participant is duly admitted into the
partnership. In general, a Class B Common Limited Partner may not participate
in partnership profits, losses or gains, or participate in distributions from
operations or receive tax distributions; however, a participant may participate
in liquidating distributions. Additionally, a Class B Limited Partner shall not
have any voting rights.
The Company has also awarded options to Larry Zine to purchase 2.75% of the
common limited partnership interests of the Operating Partnership at a price of
$4,000 per each 0.01 (one hundredth) percent granted pursuant to the terms of
Mr. Zine's employment agreement; 25% of the options become exercisable on each
of December 31, 1997, 1998, 1999 and 2000. As a result of the purchase of
Chartwell's interests described in Note 1, these options became fully
exercisable.
The Company anticipates that the aggregate equity issued pursuant to any
current and future arrangements will be between 5% and 10% of the fully diluted
equity of the Company. A summary of the status of the Company's outstanding
partnership interests options as of December 31, 1996, 1997, and 1998, and
changes during the years then ended is as follows:
<TABLE>
<CAPTION>
Percentage Exercise
Interests Price (1)
---------- ---------
<S> <C> <C>
Options outstanding at December 31, 1995............. -- --
Granted............................................ -- --
Exercised.......................................... -- --
Expired/Cancelled/Forfeited........................ -- --
---- ------
Options outstanding at December 31, 1996............. -- --
Granted............................................ 8.90 $4,000
Exercised.......................................... -- --
Expired/Cancelled/Forfeited........................ (.15) $4,000
---- ------
Options outstanding at December 31, 1997............. 8.75 $4,000
Granted............................................ 1.33 $6,000
Exercised.......................................... -- --
Expired/Cancelled/Forfeited........................ (.53) $4,000
---- ------
Options outstanding at December 31, 1998............. 9.55 $4,279
==== ======
</TABLE>
- --------
(1) Weighted average per .01% interest
F-37
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Partnership Interests Option Plan--(Continued)
Had compensation expense been determined consistent with SFAS No. 123, the
Company's net income for 1997 and 1998 (no option plans existed prior to 1997)
would have been recorded in the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1998
------- ------
(in thousands)
<S> <C> <C>
Net income (loss)--as
reported................. $(5,736) $1,346
Net income (loss)--pro
forma.................... $(6,478) $1,180
</TABLE>
The fair value of each option grant ($1,774 per .01% interest in 1997 and
$2,661 in 1998) for purposes of the pro forma disclosures is estimated using
the minimum value method with the following assumptions used for grants in 1997
and 1998 (no option plans existed prior to 1997) of all options:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Risk free interest rate....... 5.86% 5.86%
Dividend yield ............... -- --
Expected lives in years....... 10 10
</TABLE>
Effective upon the consummation of the Recapitalization, the Option Plan,
pursuant to its terms, became sponsored by Holdings, and all then outstanding
options granted under the Option Plan were converted on an equivalent economic
basis to options for equity interests in Holdings on the same terms and
conditions, including their vesting schedules.
(13) Commitments and Contingencies
The Company is involved in various litigation incidental to the business for
which estimates of losses have been accrued, when appropriate. In the opinion
of management, such proceedings will not have a material adverse effect on the
consolidated financial position or results of operations.
The Company has entered into a joint venture agreement with Tejon
Development Corporation ("Tejon") to build and operate a Petro branded location
in Southern California. Pursuant to the terms of the Limited Liability Company
Operating Agreement of Petro Travel Plaza LLC, dated as of December 5, 1997,
among the Company, Tejon and Tejon Ranch Company, as guarantor (the
"Agreement"), the Company made an initial capital contribution of $2,000,000
for working capital and inventory. The joint venture financed construction of
the location with a non-recourse credit facility. Under the Agreement, the
Company will receive a management fee of $250,000 per annum and will receive
40% of the location's operating earnings which will be accounted for using the
equity method. At December 31, 1998, this Petro branded location was under
construction, and it began operations in June 1999.
(14) Financial Instruments
As of December 31, 1997 and 1998, the carrying amounts of certain financial
instruments employed by the Company, including cash and cash equivalents,
accounts receivable, trade accounts payable and amounts due from/to affiliates
are representative of fair value because of the short-term maturity of these
instruments. The carrying amounts of notes payable approximate fair value due
to the floating nature of the interest rate. The Company's principal market
risk as it relates to long term debt is exposed to changes in interest rates.
The fair value of both series of Senior Notes has been estimated based on
quoted market prices for the same or similar issues or by discounting the
future cash flows using rates currently available for debt of similar terms and
maturity. The fair value of all derivative financial instruments is the amount
at which they could be settled, based on quoted market prices or estimates
obtained from dealers.
F-38
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Financial Instruments--(Continued)
The following table reflects the carrying amount and estimated fair value of
the Company's financial instruments, as of December 31,
<TABLE>
<CAPTION>
1997 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Balance sheet financial instruments
Long-term debt........................... $183,190 $191,088 $181,328 $188,416
Other financial instruments
Interest rate swap agreements............ -- (154) -- (153)
</TABLE>
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company uses
derivatives to manage well-defined interest rate risks. At December 31, 1998,
the Company was party to an interest rate swap agreement with an aggregate
principal amount of $30,000,000. Under the agreement, the Company pays a fixed
rate of 6.15% and receives a floating rate based on LIBOR on the aggregate
principal amount as determined in three-month intervals. The transaction
effectively changes a portion of the Company's interest rate exposure from a
floating rate to a fixed rate basis. The effect of the swap was to increase the
rate by 0.4%, which resulted in additional interest expense of approximately
$153,000.
The primary risks associated with swaps are the exposure to movements in
interest rates and the ability of the counterparties to meet the terms of the
contracts. Based on review and assessment of counterparty risk, the Company
does not anticipate non-performance by the other party. The Company does not
obtain collateral or other security to support financial instruments subject to
credit risk, but monitors the credit standing of counterparties.
(15) Environmental Matters
The Company operations and property are subject to extensive federal and
state legislation and regulations relating to environmental matters. The
Company uses underground and above ground storage tanks (each a "UST") to store
petroleum products and waste oils. Statutory and regulatory requirements for
UST systems include requirements for tank construction, integrity testing, leak
detection and monitoring, overfill and spill control, and mandate corrective
action in case of a release from a UST into the environment. The Company is
also subject to regulation in certain locations relating to vapor recovery and
discharges into the water. Management believes that all of its USTs are
currently in compliance in all material respects with applicable environmental
laws, regulations and requirements. During 1998 the Company continued the
installation of cathodic protection and overfill equipment and devices in its
older USTs, as required by federal and state law, and all such work was
completed in December 1998, except in the Corning, California location, where
completion of the state required upgrades is ongoing pursuant to an agreement
between the State of California and the Company. The Corning, California work
is contemplated to be completed during the third quarter of 1999, and the
Company expects to expend $940,000 during 1999 in connection with such work.
Some site remediation may be required in Corning, California as a result of
completion of the 1998 upgrade work. During 1996, 1997, and 1998, the Company's
expenditures for environmental matters were $180,000, $154,000, and $385,000,
respectively. See Note 2 for a discussion of its accounting policies relating
to environmental matters.
F-39
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Environmental Matters--(Continued)
In connection with its ownership of the properties and operation of its
business, the Company may be subject to liability under various federal, state,
and local environmental laws, ordinances and regulations relating to cleanup
and removal of hazardous substances (which may include petroleum and petroleum
products) on, under, or in such property. Certain laws typically impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. Persons who arrange, or are
deemed to have arranged, for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment site, regardless of whether such site
is owned or operated by such person. The Company is currently party to one
proceeding with the United States Environmental Protection Agency ("EPA")
regarding a waste oil storage and recycling plant located in Patterson,
Stanislaus County, California (the "Patterson Site"). In the ordinary course of
Company operations, waste oil products are generated which are required to be
transported to off-site facilities for treatment and disposal. Between June
1991 and February 1995 the Company arranged for the transportation of waste oil
products from the Corning location to the Patterson Site. Sometime in 1997 the
owners of the Patterson Site abandoned operation of the site, the condition of
the site began to deteriorate, and in October 1997 the EPA responded to a
request for assistance from the California Department of Toxic Substances
Control. Notwithstanding that the Company's activities with regards to use of
the Patterson Site were lawfully conducted and have not been challenged by the
EPA, by Order issued by the EPA on August 12, 1998 ("Order"), the Company and
55 other companies were identified by the EPA as "generators, transporters or
arrangers for disposal of hazardous substances" as those terms are defined
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, 42 U.S.C., Section 9601 to 9675, as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("CERCLA"), and thus are named in
the Order as potentially responsible parties, strictly liable under CERCLA for
removal activities associated with the Patterson Site. The Company and
approximately 20 of the other 55 companies identified by the EPA are working
together toward a resolution and plan of action for completion of the removal
activities required by the EPA pursuant to the Order. Although the Company does
not believe that its involvement in the Patterson Site will have a material
adverse effect on the Company's consolidated financial condition or results of
operations, if a plan of action cannot be agreed upon or if the EPA or the
State of California imposes remediation requirements beyond the scope presently
contemplated based upon the Company's current understanding with the EPA, the
liability could be higher.
The Company has accrued for certain environmental remediation activities
consistent with the policy set forth in Note 2. At December 31, 1998 and 1997,
such accrual amounted to approximately $274,000 and $187,000, respectively, and
in management's opinion, was appropriate based on existing facts and
circumstances. The Company's accrual for environmental remediation expenses is
based upon initial estimates obtained from contractors engaged to perform the
remediation work as required by local, state and federal authorities. It is
often difficult to predict the extent and the cost of environmental remediation
until work has commenced and the full scope of the contamination determined.
Accruals are periodically evaluated and updated as information regarding the
nature of the clean up work is obtained. In the event that future remediation
expenditures are in excess of amounts accrued, management does not anticipate
that they will have a material adverse effect on the consolidated financial
position or results of operations of the Company. Actual results, however,
could differ from estimated amounts and those differences could be material. At
December 31, 1998 and 1997, the Company has recognized approximately $160,000
and $262,000, respectively, in the consolidated balance sheet related to
recoveries of certain remediation costs from third parties.
(16) Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information"
F-40
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Segments--(Continued)
("SFAS No. 131"), which the Company has adopted in the current year. The new
rules establish revised standards for public companies relating to the
reporting of financial information about operating segments. The adoption of
SFAS No. 131 did not have a material effect on either the Company's primary
consolidated financial statements or segment information disclosures.
SFAS No. 131 requires the Company to identify and report certain information
on its reportable operating segments. Holdings identified two reportable
operating segments in adopting SFAS No. 131. The two reportable, operating
segments identified are the Company's corporate operated truck stops and its
franchise truck stop operations.
The Company operates large, multi-service truck stops in the United States.
The Company's facilities, which are known as Petro Stopping Centers, offer a
broad range of products, services and amenities, including diesel fuel,
gasoline, home-style restaurants, truck preventive maintenance centers and
retail merchandise stores to the highway motorist. The Company has aggregated
its corporate truck stop operations into one reportable operating segment based
on the distribution of products and services under one common site facility,
classified as a multi-service truck stop. During the years ended December 31,
1996, 1997 and 1998, the revenues generated from the Company's truck-stop
operations were $633,660,000, $681,775,000, and $648,919,000, respectively.
In addition to corporate operations, the Company is a franchisor to 22 Petro
Stopping Center locations. The Company collects royalties and fees in exchange
for the use of its name and for certain services provided to the franchisees.
Franchise fees are based generally upon a percentage of franchisee's sales.
Given the insignificance of initial franchise fees and other revenue types, the
Company reports a total combined revenue amount. During the years ended
December 31, 1996, 1997 and 1998, the revenues generated from the Company's
franchise operations were $3,397,000, $3,954,000, and $4,497,000, respectively.
These revenues are included in net revenues reported on the accompanying
consolidated statements of operations. The Company does not allocate any
expenses or assets in measuring this segment's profit and loss, nor does it
believe there are any significant commitments or obligations resulting from
these franchise agreements.
(17) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allow a derivative's gain and loss to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 was originally
effective for fiscal years beginning after June 15, 1999, but has been
postponed by Statement of Financial Accounting Standard No. 137, "An Amendment
of SFAS No. 133", for one year with a mandatory effective date for fiscal years
beginning after June 15, 2000. Additionally, SFAS 133 has been modified
regarding recognition in the balance sheet of an embedded derivative that is
required to be separated from the host contract. At the date of initial
application of SFAS 133, an entity may choose either to recognize such embedded
derivatives or to select either January 1, 1998 or January 1, 1999, as a
transition date for embedded derivatives. A company may also implement the
F-41
<PAGE>
PETRO STOPPING CENTERS HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Recently Issued Accounting Pronouncements--(Continued)
statement as of the beginning of any fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1999 and thereafter). A company may also
implement the statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1999 and thereafter).
SFAS No. 133 cannot be applied retroactively. Management has not yet quantified
the impact of adopting SFAS No. 133 on our financial statements and has not
determined the timing of, or method of, adoption. However, the implementation
of SFAS No. 133 could increase volatility in earnings.
(18) Restatement of 1997 and 1998 Financial Statements
Subsequent to the original issuance of its consolidated financial statements,
the Company reclassified the minority interests in earnings and losses of
consolidated subsidiaries applicable to minority partners with deficit capital
accounts to the majority interests, and it also discovered an error in the
predecessor basis amount of Mobil's limited partner capital account recorded in
connection with the formation of Holdings. The revision made to Mobil's
predecessor basis also resulted in a reduction in property and equipment, net.
The 1997 and 1998 consolidated financial statements have been restated to
address these matters, the effect of which (i) decreased net loss in 1997 from
$(5,859,000) to $(5,736,000) due to reduced depreciation expense of $187,000
offset by minority interest losses of $(64,000) charged to the majority
interests, (ii) increased net income in 1998 from $1,130,000 to $1,346,000 due
to reduced depreciation expense of $204,000 and minority interest earnings of
$12,000 credited to the majority interests, (iii) decreased limited partners'
capital at December 31, 1997 from $39,172,000 to $42,889,000, (iv) decreased
limited partners' capital at December 31, 1998 from $39,777,000 to $43,294,000,
(v) decreased property and equipment, net at December 31, 1997 from
$153,363,000 to $149,650,000, and (vi) decreased property and equipment, net at
December 31, 1998 from $162,274,000 to $158,765,000.
(19) Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues..................... $162,565 $160,759 $168,209 $194,196
Operating income................. 3,712 6,472 7,303 4,751
Net income (loss)................ (6,501)(a) 508 1,003 (746)(b)
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues..................... $162,932 $165,157 $167,288 $158,039
Operating income................. 5,260 6,995 7,892 5,777
Net income (loss)................ 95 968 1,380 (1,097)(c)
</TABLE>
- --------
(a) Approximately $12,745,000 of this net loss is due to the Company charging,
as an extraordinary item, debt restructuring costs in conjunction with the
1997 Recapitalization.
(b) During the fourth quarter of 1997, the Company conducted an analysis of the
service lives of all of its capitalized hardware and software assets. The
analysis was completed by determining whether the expected remaining life
of each asset coincided with the remaining service life used in calculating
depreciation expense. The result of this analysis was the revision of
certain of these assets' service lives and the recording of a charge to
depreciation expense in the amount of $1,900,000. Furthermore, a charge of
$1,579,000 was recorded in the fourth quarter as a result of the adoption
of EITF No. 97-13, which required the write-off of certain costs related to
process reengineering activities that were previously allowed to be
capitalized. In accordance with EITF No. 97-13, the charge was recorded as
a cumulative effect of a change in accounting principle.
F-42
<PAGE>
(c) A charge of $3,250,000 was recorded in the fourth quarter as a result of
the adoption of SOP No. 98-5, which required the costs of start-up
activities and organization costs to be expensed as incurred rather than
capitalized and amortized. In accordance with SOP No. 98-5, the charge was
recorded as a cumulative effect of a change in accounting principle.
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Partners
Petro Stopping Centers Holdings, L.P.
We have audited the accompanying consolidated balance sheets of Petro
Stopping Centers Holdings, L.P. (a Delaware limited partnership) and
subsidiaries as of December 31, 1997 (as restated--see Note 18) and 1998 (as
restated--see Note 18), and the related consolidated statements of operations,
changes in partners' capital (deficit) and cash flows for each of the three
years in the period ended December 31, 1998 (1997 and 1998 as restated--see
Note 18). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Petro
Stopping Centers Holdings, L.P. and subsidiaries as of December 31, 1997 (as
restated--see Note 18) and 1998 (as restated--see Note 18), and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 (1997 and 1998 as restated--see Note 18), in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
October 1, 1997, the Company changed its method of accounting for process
reengineering costs.
As discussed in Note 2 to the consolidated financial statements, effective
October 1, 1998, the Company changed its method of accounting for start-up
activities.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 10, 1999 (except with respectto the matter discussed in Note 18,
as to which the date is December 6, 1999)
F-44
<PAGE>
PETRO HOLDINGS FINANCIAL CORPORATION
UNAUDITED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Assets
Cash............................................................ $1,000
------
Total assets.................................................. $1,000
======
Stockholder's Equity
Common stock, $.01 par value: 10,000 shares authorized; 2,500
shares issued and outstanding.................................. $ 25
Additional paid-in capital...................................... 975
------
Total stockholder's equity.................................... $1,000
======
</TABLE>
See accompanying notes to unaudited financial statements
F-45
<PAGE>
PETRO HOLDINGS FINANCIAL CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
From Inception (July 6, 1999) through September 30, 1999
<TABLE>
<CAPTION>
1999
------
<S> <C>
Cash flows provided by financing activities:
Proceeds from sale of stock............................................ $1,000
------
Net cash provided by financing activities............................ 1,000
------
Net increase in cash..................................................... 1,000
Cash, beginning of period................................................ --
------
Cash, end of period...................................................... $1,000
======
</TABLE>
See accompanying notes to unaudited financial statements
F-46
<PAGE>
PETRO HOLDINGS FINANCIAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Company Formation and Description of Business
Company Formation
Petro Holdings Financial Corporation ("Financial Holdings") is a wholly-
owned subsidiary of Petro Stopping Centers Holdings, L.P. ("Holdings") and was
incorporated July 6, 1999 for the sole purpose of serving as a co-issuer with
Holdings for the issuance of 82,707 Units each consisting of $1,000 principal
amount at stated maturity of Holdings 15.0% Senior Discount Notes due 2008
("New Senior Discount Notes") and 82,707 exchangeable Petro Warrant Holdings
Corporation's Warrants. Upon an exchange event, the Warrants will be exchanged,
for no additional consideration, for 100% of the common stock of Petro Warrant
Holdings Corporation, whose sole asset is currently approximately 10.0% of the
common limited partnership interests in Holdings. The issuance will also
include notes issued to Chartwell Investments, Inc. of approximately
$14,800,000 in accreted value, which were issued without warrants. The New
Senior Discount Notes are recorded on the financial statements of Holdings.
(2) Summary of Significant Accounting Policies
Basis of Presentation
Financial Holdings has no employees, only nominal assets, has not and will
not conduct any operations and, accordingly, has no statement of operations. At
September 30, 1999 Financial Holdings' balance sheet consists only of common
stock and additional paid-in capital in the amount of $1,000 and cash in the
amount of $1,000. In the opinion of management, the accompanying unaudited
financial statements contain all necessary adjustments as of inception, July 6,
1999 through the month ended September 30, 1999.
Financial Holdings meets all of the requirements of an Inactive Registrant
as defined by Rule 3-11 of the Securities and Exchange Commission's Regulation
S-X (the "Rule"). The Rule stipulates that if a registrant is inactive, the
financial statements required for purposes of reports pursuant to the
Securities Exchange Act of 1934 may be unaudited.
(3) Stockholder's Equity
Financial Holdings is a wholly-owned subsidiary of Holdings, which is the
sole shareholder of the outstanding common stock of Financial Holdings. As the
sole shareholder, Holdings holds all voting rights and privileges.
F-47
<PAGE>
Schedule II
PETRO STOPPING CENTERS HOLDINGS, L.P.
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to
beginning costs and Write-off/ Balance at
Description of year expenses (Recovery) end of year
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31,
1996:
Allowance for doubtful
accounts............... 608 215 502 321
Inventory Reserve....... -- 1,400 271 1,129
Year Ended December 31,
1997:
Allowance for doubtful
accounts............... 321 271 262 330
Inventory Reserve....... 1,129 -- 1 1,128
Year Ended December 31,
1998:
Allowance for doubtful
accounts............... $ 330 236 (61) $ 627
Inventory Reserve....... 1,128 -- 671 457
</TABLE>
F-48
<PAGE>
PETRO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(As
Restated) (Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ........................ $ 117,546 $ 146,644
Trade accounts receivable, less allowance for
doubtful accounts of $29,000 and $35,875,
respectively..................................... 230,845 293,679
Due from affiliates............................... 188,305 24,988
Inventories....................................... 447,278 507,332
Prepaid expenses and other receivables............ 157,396 163,297
----------- -----------
Total current assets............................ 1,141,370 1,135,940
----------- -----------
Property and Equipment
Property and equipment............................ 656,640 691,795
Less accumulated depreciation..................... 474,684 501,997
----------- -----------
181,956 189,798
----------- -----------
Other Assets
Investments in affiliated entities................ 580,003 587,803
Land held for investment.......................... 473,458 473,458
Land held for sale................................ 1,827,209 --
Advances due from related party................... 669,677 697,849
----------- -----------
3,550,347 1,759,110
----------- -----------
Total Assets.................................... $ 4,873,673 $ 3,084,848
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt.............. $ 616,351 $ 354,554
Note payable--related party....................... 28,002 29,507
Trade accounts payable............................ 247,215 227,432
Accrued expenses and other liabilities............ 143,513 107,710
Intercompany payables............................. 1,343,423 66,016
Claims and judgements............................. 791,126 804,626
----------- -----------
Total current liabilities....................... 3,169,630 1,589,845
----------- -----------
Long-Term Liabilities
Long-term debt, less current maturities........... 150,046 21,830
Note payable--related party....................... 1,113,090 1,090,768
Equity in partnership losses in excess of
investment....................................... 18,649 938,741
----------- -----------
1,281,785 2,051,339
----------- -----------
Stockholder's Equity
Common stock, $.01 par value, 50,000,000
authorized, 99,500 shares issued and
outstanding...................................... 995 995
Additional paid-in capital........................ 13,421,950 13,421,950
Retained earnings (deficit)....................... (13,000,687) (13,979,281)
----------- -----------
422,258 (556,336)
----------- -----------
Total Liabilities & Stockholders Equity......... $ 4,873,673 $ 3,084,848
=========== ===========
</TABLE>
See Notes to Consolidated Balance Sheets.
F-49
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business: The Company is primarily a retailer of truck and
passenger car tires which grants credit to customers located in Texas and New
Mexico. The Company also owns business interests in commercial land development
and certain oil and gas interests located in the Southwest. In addition, the
Company owns an interest in Petro Stopping Centers, L.P., a Limited Partnership
which, in turn, owns and operates a nationwide network of truck stopping
centers. Petro, Inc. is a wholly owned subsidiary of Nevada Trio, Inc.
The following is a summary of the Company's significant accounting policies:
Principles of Consolidation: The consolidated financial statements include
the accounts of Petro, Inc. and El Paso Tire Center, Inc. El Paso Tire Center,
Inc. became a wholly owned subsidiary of Petro, Inc. during 1998 when the
minority shareholder transferred the remaining outstanding shares of common
stock (18.7%) in El Paso Tire Center, Inc. to Petro, Inc. This transaction was
accounted for as an exchange between related entities under common control,
which is similar to a pooling of interests. All significant intercompany
accounts have been eliminated.
Change in Reporting Entity: Petro, Inc., El Paso Tire Center, Inc. and C & R
Distributing, Inc. are members of a consolidated group which is wholly owned by
Nevada Trio, Inc. Effective December 1, 1998 Petro, Inc. transferred assets and
liabilities of El Paso Truck Terminal (a division of Petro, Inc.) to C&R
Distributing, Inc. The transaction was accounted for as an exchange between
related entities under common control, which is similar to a pooling of
interests.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers all cash on hand, cash in
banks and temporary investments with a maturity of three months or less to be
cash equivalents. Cash and cash equivalents as of September 30, 1999 included
$102,370 which is not Federally insured. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Inventories: Tire and merchandise inventories are stated at the lower-of-
cost or market. Cost of tires is determined by the first-in, first-out method.
Land held for sale is stated at the lower-of-cost or market.
Property and Equipment: Property and equipment is stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Leasehold improvements........................................... 40
Furniture and fixtures........................................... 5-7
Equipment........................................................ 5-7
</TABLE>
Investments: A 20% interest in Hueco Mountain Estates, Inc. and a 10%
interest in Trevino Properties are accounted for using the equity method.
Trevino Properties is a real estate joint venture in the form of a general
partnership.
F-50
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 1. Nature of Business and Significant Accounting Policies--(Continued)
As explained further in Note 8, during the year ended December 31, 1998, the
Company adopted the equity method of accounting for its 10% investment in Petro
Stopping Centers, L.P.
Long-Lived Assets: Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the excess of the
asset's carrying amount and fair value of the asset and long-lived assets to be
disposed of are reported at the lower of carrying amount or fair value less
cost to sell.
Land Held for Sale: Land held for sale is currently reflected at its net
realizable value as determined by an independent appraisal.
Advertising and Promotion: Costs incurred in connection with advertising and
promotion are expensed as incurred.
Income Taxes: Deferred income taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax law and rates on the
date of enactment.
Note 2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Tires and tubes................................... $426,324 $477,912
General merchandise and accessories............... 20,954 29,420
-------- --------
Total........................................... $447,278 $507,332
======== ========
</TABLE>
Note 3. Property and Equipment
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Leasehold improvements............................ $115,386 $115,386
Furniture and fixtures............................ 15,356 15,356
Equipment......................................... 525,898 561,053
-------- --------
Total........................................... 656,640 691,795
Less accumulated depreciation..................... 474,684 501,997
-------- --------
$181,956 $189,798
======== ========
</TABLE>
F-51
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 4. Land Held for Sale
Land held for sale consisted of approximately 44.5 acres of land located in
El Paso, Texas which had been developed for sale as commercial industrial park
sites. The land was originally acquired in 1995 from an individual who
indirectly controls Petro, Inc. The land was acquired in satisfaction of debt
owed by the related party to the Company. In addition, the Company legally
assumed certain bank debt related to the land. The land was recorded on the
Company's books at $2,330,000, which represented the debt owed to the Company
by the related party and the debt assumed by the Company.
Due to general deflation in land prices, the land was evaluated for
impairment. During 1997, an impairment loss in the amount of $590,000 was
recognized which represented the difference between the asset's carrying value
and its net realizable value. The net realizable value of the land was
determined by an independent appraisal. The appraised value was determined by
calculating the present value of future cash flows (net of selling costs) which
approximated $1,740,000. During 1998, certain improvements were made to the
land which increased its carrying value from $1,740,000 to $1,827,209.
During 1999, the Company transferred the land and related debt to C&R
Distributing, Inc. (an affiliated entity) in satisfaction of intercompany debt
as follows:
<TABLE>
<CAPTION>
<S> <C>
Carrying cost of land at the time of the 1999 transfer............ $1,827,209
Debt transferred to C&R Distributing, Inc......................... (361,986)
----------
Intercompany debt satisfied by transfer of land................. $1,465,223
==========
</TABLE>
Note 5. Advances Due From Related Party
The Company has a long-term receivable due from J. A. Cardwell, Sr. in the
amount of $667,177 and $695,349 at December 31, 1998 and September 30, 1999,
respectively. The balance due is related to cash advances made in prior years,
and includes interest at the applicable federal rate.
Note 6. Land Held for Investment
Land held for investment consists of the following undeveloped land:
<TABLE>
<CAPTION>
December 31, September 30,
Acres Location 1998 1999
----- -------- ------------ -------------
(Unaudited)
<S> <C> <C> <C>
38.000 Waskom, Texas $473,458 $473,458
======== ========
</TABLE>
Note 7. Investments in Affiliated Entities
Hueco Mountain Estates, Inc.
The Company owns approximately 20% of the common stock of Hueco Mountain
Estates, Inc. The following is a summary of the condensed financial position of
Hueco Mountain Estates, Inc., an unconsolidated subsidiary as of July 31, 1998,
the fiscal year end of the subsidiary.
<TABLE>
<CAPTION>
<S> <C>
Total assets..................................................... $4,127,171
Total liabilities................................................ 1,959,668
----------
Net assets..................................................... $2,167,503
==========
Investment in unconsolidated subsidiary at December 31, 1998..... $ 424,072
==========
</TABLE>
F-52
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 7. Investments in Affiliated Entities--(Continued)
Trevino Properties
The following is a summary of the condensed financial position of a
partnership (an unincorporated real estate joint venture) accounted for on the
equity method as of December 31, 1998.
<TABLE>
<S> <C>
Current assets................................................ $ 13,775
Land inventory................................................ 1,647,347
Other assets.................................................. 1,500
----------
Total assets................................................ $1,662,622
==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Current liabilities.......................................... $ 3,151
Long-term debt............................................... 74,431
Partner's equity............................................. 1,585,040
----------
Total liabilities and partner's equity..................... $1,662,622
==========
</TABLE>
The Company's equity investment in the partnership is summarized below:
<TABLE>
<CAPTION>
December 31, September 30, Ownership
1998 1999 Interest
------------ ------------- ---------
(Unaudited)
<S> <C> <C> <C>
Trevino Properties...................... $155,931 $163,731 10%
======== ======== ===
</TABLE>
Note 8. Investment In Limited Partnership
At December 31, 1998 the Company held approximately 1.2% in common general
partnership interests and 8.6% in common limited partnership interests in Petro
Stopping Center, L.P. (the Operating Partnership). During the year ended
December 31, 1998, the Company changed from the cost method to the equity
method of accounting for its investment in the Operating Partnership. Due to
increased participation in the operation of the Operating Partnership by J. A.
Cardwell, Sr., management determined that the Company exercises significant
influence over the operating and financial activities of the Operating
Partnership through the Cardwell Group.
In addition, the Company owns mandatorily redeemable preferred partnership
interests as of December 31, 1998. The mandatorily redeemable preferred
partnership interests are entitled to cumulative preferred returns of 8% and
are subject to mandatory redemption in October 2008. The preferred returns
accrue but are only payable in cash if permitted by the Operating Partnership's
then existing debt instruments. At December 31, 1998 the Company had accrued
preferred returns on the mandatorily redeemable preferred partnership interests
amounting to $150,032.
Effective July 23, 1999, Petro Stopping Center Holdings, L.P. ("Holding"), a
Delaware limited partnership, was formed, whereby the Company and certain other
partners exchanged their interests in the Operating Partnership for identical
interests in Holdings and became owners of Holdings (recapitalization). As a
result of the recapitalization, Petro, Inc. became the sole general partner in
both Holdings (1.1%) and the Operating Partnership (.25%). In addition, Petro,
Inc. holds an 11% common limited partnership interest in Holdings and a
mandatorily redeemable preferred partnership interest. The Company's
investments in Holdings and the Operating Partnership are accounted for using
the equity method.
F-53
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 8. Investment In Limited Partnership--(Continued)
affiliate of the Cardwell Group own the remaining 0.5% of the Operating
Partnership.
The following is a summary of the financial position of Petro Stopping
Centers, L.P. as of December 31, 1998 and Petro Stopping Centers Holdings, L.P.
as of September 30, 1999.
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Assets.......................................... $ 226,999,000 $ 298,718,000
Liabilities..................................... (223,749,000) (277,824,000)
Mandatorily redeemable preferred partnership
interests...................................... (23,172,000) (29,858,000)
Contingently redeemable warrants................ (9,700,000)
Partner Equity (deficit)........................ (19,922,000) (18,664,000)
</TABLE>
The Company's equity investment in the partnerships is summarized below:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
General partner interest .......................... $ (501,679) $ (997,000)
Limited partner interest .......................... (1,679,928) (2,251,882)
Mandatorily redeemable preferred partnership
interests......................................... 2,162,958 2,310,141
----------- -----------
Equity in partnership losses in excess of invest-
ments........................................... $ (18,649) $ (938,741)
=========== ===========
</TABLE>
Note 9. Long-Term Debt
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Note payable to a bank, dated May 12, 1993 in an
original amount of $800,000 and renewed May 12,
1996 and again renewed on August 13, 1997. The
note, which is payable in monthly installments of
$21,910 including interest at prime plus 2% (9.75%
at December 31, 1998), is secured by certain land
located in El Paso, Texas. The note matures
July 12, 2000...................................... $383,895 $
Note payable to an individual, dated January 23,
1996 in an original amount of $300,000 plus accrued
interest of $56,392 which has been added to the
outstanding balance. The note is due on demand,
bearing interest at prime plus .75% (8.5% and 9.0%
at December 31, 1998 and September 30, 1999,
respectively). The note is unsecured............... 356,392 339,474
Unsecured demand note payable to an individual,
renewed on December 1, 1995. The note is payable in
monthly installments of $2,283 including interest
at 9%. The note matures December 1, 1999........... 26,110 6,749
Note payable to a corporation, dated January 31,
1999 in an original amount of $18,060. The note is
due on December 31, 2002, bearing interest at 5.9%.
The note is secured by a vehicle................... 14,989
</TABLE>
F-54
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 9. Long-Term Debt--(Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Note payable to a corporation, dated March 31, 1999
in an original amount of $17,096. The note is due
on March 31, 2003, bearing interest at 5.9%. The
note is secured by a vehicle....................... -- 15,172
Total Long-Term Debt.............................. 766,397 376,384
Less Current Portion................................ 616,351 354,554
-------- -------
Noncurrent Portion................................ $150,046 $21,830
======== =======
</TABLE>
The aggregate minimum principal maturities of the long-term debt for the
four years following September 30, 1999 are as follows:
<TABLE>
<S> <C>
2000............................................................ $354,554
2001............................................................ 8,837
2002............................................................ 9,372
2003............................................................ 3,621
--------
$376,384
========
</TABLE>
Note 10. Related Party Transactions
Nevada Trio, Inc., a Nevada corporation, is wholly-owned by Card Partners,
LP, a Texas limited partnership. C&R Distributing, Inc. and Petro, Inc. are
wholly-owned subsidiaries of Nevada Trio, Inc. Additionally, the Company's
President has significant ownership interests in numerous other entities with
which the Company has transactions. Activity with these related entities is
summarized below.
The intercompany balances represent net balances between Petro, Inc. and
other members of the consolidated group. The amounts due from and due to
affiliates represent balances between Petro, Inc. and other related entities
outside the consolidated group. The balance due from affiliates represents
payments due to Petro, Inc., under the current partnership agreement, for
Petro, Inc.'s tax liability related to its share of income in Petro Stopping
Center, L.P. for the last quarter of 1998. Payment was received in April of
1999. Intercompany payables represent amounts due to C & R Distributing, Inc.
for the purchase of fuel and accessories.
F-55
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 10. Related Party Transactions--(Continued)
The following summarizes amounts due from and to related parties.
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Due from affiliates (current):
Petro Stopping Centers, L.P................................... $ 188,305 $ --
Mission R.V................................................... -- 24,988
---------- ----------
$ 188,305 $ 24,988
========== ==========
Intercompany payables:
C&R Distributing, Inc......................................... $1,343,423 $ 66,016
========== ==========
Note payable--intercompany:
Note payable due to C & R Distributing, Inc., dated August
31, 1998, in an original amount of $1,150,000, payable in
monthly installments of $8,916, including interest at 7%. The
note, which is unsecured, matures August 30, 2018............ $1,141,092 $1,120,275
Less: current portion......................................... 28,002 29,507
---------- ----------
Long-term portion............................................. $1,113,090 $1,090,768
========== ==========
</TABLE>
See Note 5 for information regarding advances due from related parties, and
Note 4 for information regarding transfer of land and debt to a related party
subsequent to December 31, 1998.
Note 11. Income Taxes
During the years ending October 31, 1988 to 1991, the Company was a member
of an affiliated group of corporations. The affiliated group filed federal
income tax returns on a consolidated basis. By Notice of Deficiency dated March
19, 1998, the Internal Revenue Service proposed several tax deficiencies and
penalties in connection with the consolidated returns. Most of the tax
deficiencies and penalties arise from the claim of the Government that the
Company sold truckstops for less than fair market value to corporations owned
by a related party. In June 1998, the successor in interest to the affiliated
group filed a petition in the United States Tax Court to dispute the tax
deficiencies and penalties claimed by the IRS. While both parties are now in
the process of agreeing upon the proper tax treatment of the sale, the
estimated claim associated with the tax deficiencies is approximately $257,000
which includes penalty and interest and was accrued and included in the
accompanying consolidated balance sheet at December 31, 1998.
F-56
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 11. Income Taxes--(Continued)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.................... $3,731,437 $3,699,230
Allowance for uncollectible accounts............... 9,860 12,198
Charitable contribution carryover.................. 9,782 9,782
Capital loss carryforwards......................... 1,078 1,078
Alternative minimum tax credits.................... 921,447 921,447
Interest due to officer............................ 19,173 13,422
Basis in limited partnership interest.............. 1,384,980 1,635,031
Judgement.......................................... 181,603 181,603
Other.............................................. 209 209
---------- ----------
Total............................................ 6,259,569 6,474,000
Less valuation allowance........................... 6,246,361 6,464,906
---------- ----------
Total deferred tax asset......................... $ 13,208 $ 9,094
========== ==========
Deferred tax liabilities
Accumulated depreciation........................... $ 13,208 $ 9,094
---------- ----------
Total deferred tax liability..................... $ 13,208 $ 9,094
========== ==========
</TABLE>
During the year ended December 31, 1998 and for the period ended September
30, 1999, the Company recorded a valuation allowance of $6,246,361 and
$6,464,906, respectively, on the deferred tax assets to reduce the total to an
amount that management believes will ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. Management is currently unable to
estimate future taxable income and therefore can not determine the future
benefit of its deferred tax assets.
The deferred tax amounts mentioned above have been classified as follows on
the accompanying balance sheets:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Noncurrent assets................................ $13,208 $9,094
Noncurrent liabilities........................... 13,208 9,094
------- ------
Net noncurrent asset (liability)............... $ -- $ --
======= ======
</TABLE>
F-57
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 11. Income Taxes--(Continued)
The Company has alternative minimum tax credits of $921,447 available to
offset future regular federal income tax liabilities. In addition, the Company
has operating loss carryforwards totaling $10,880,089, contributions
carryforwards totaling $28,770 and a capital loss carryforward of $3,172 that
may be offset against future taxable income. If not used, the carryforwards
will expire as follows:
<TABLE>
<CAPTION>
Year Operating Capital
Expires Losses Contributions Losses
------- ----------- ------------- -------
<S> <C> <C> <C>
2000..................................... $ 94,724 $ $3,172
2002..................................... 2,343
2003..................................... 26,427
2008..................................... 1,667,215
2009..................................... 883,186
2010..................................... 2,254,623
2011..................................... 2,844,342
2012..................................... 2,693,627
2013..................................... 442,372
----------- ------- ------
Total.................................. $10,880,089 $28,770 $3,172
=========== ======= ======
</TABLE>
Note 12. Leases
The Company leases its tire center facilities in El Paso, Texas from JACs
Properties, Inc. (a related party) under a noncancellable lease. JACs
Properties, Inc. is a wholly-owned subsidiary of C & R Distributing, Inc. (see
Note 10). Personal property is leased on a month-to-month basis from unrelated
parties.
The following is a schedule by years of minimum future rentals on
noncancelable real property.
<TABLE>
<CAPTION>
Real
Property
--------
<S> <C>
2000............................................................ $ 48,000
2001............................................................ 48,000
2002............................................................ 48,000
2003............................................................ 48,000
2004............................................................ 48,000
--------
$240,000
========
</TABLE>
Note 13. Defined Contribution Retirement Plan
The Company sponsors a defined contribution retirement plan under Internal
Revenue Code Section 401(k) covering substantially all of its employees.
Company contributions equal 50% of the participants' contributions up to 2% of
the participants' annual salary.
Note 14. Restatement of 1998 Balance Sheet
Subsequent to the original issuance of its consolidated balance sheet, the
Company discovered an error in the carrying value of a real estate investment.
The 1998 consolidated balance sheet has been restated to correct this error,
the effect of which decreased the retained deficit by $230,700.
Subsequent to the original issuance of its consolidated balance sheet, the
Company changed its method of accounting for its investment in Petro Stopping
Centers, Inc. from the cost method to the equity method. The 1998 consolidated
balance sheet has been restated to reflect this change, the effect of which
increased the retained deficit by approximately $9,586,000.
F-58
<PAGE>
PETRO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS--(Continued)
Note 15. Commitments and Contingencies
During 1997, the Company became a defendant in a civil lawsuit in which a
judgement against the Company in the amount of $534,126 was awarded in March,
1999. On November 15, 1999, the Company entered into a settlement agreement
which required the Company to pay $250,000 at the date of signing and an
additional $284,126 to be paid on January 31, 2000. The total amount of the
judgement was accrued and included in the accompanying consolidated balance
sheet at December 31, 1998.
By Notice of Deficiency dated March 19, 1998, the Internal Revenue Service
proposed several tax deficiencies and penalties in connection with the
consolidated returns. Most of the tax deficiencies and penalties arise from the
claim of the Government that the Company sold truckstops for less than fair
market value to corporations owned by a related party. In June 1998, the
successor in interest to the affiliated group filed a petition in the United
States Tax Court to dispute the tax deficiencies and penalties claimed by the
IRS. While both parties are now in the process of agreeing upon the proper tax
treatment of the sale, the estimated claim associated with the tax deficiencies
is approximately $257,000 which includes penalty and interest and was accrued
and included in the accompanying consolidated balance sheet at December 31,
1998.
The Company is also involved in various litigation incidental to its
business. In the opinion of management, such proceedings will not have a
material adverse effect on the Company's financial position or results of
operations.
Note 16. Corporation Reorganization
Petro, Inc. and C & R Distributing, Inc. are members of a consolidated group
which is wholly owned by Nevada Trio, Inc. Effective December 1, 1998, Petro,
Inc. transferred assets and liabilities of El Paso Truck Terminal (a division
of Petro, Inc.) to C & R Distributing, Inc. in partial satisfaction of
intercompany debt. The summarized assets and liabilities of El Paso Truck
Terminal, prior to the transfer were as follows:
<TABLE>
<S> <C>
Current assets............................................... $ 371,202
Other assets................................................. 2,083,862
----------
Total assets............................................... $2,455,064
==========
Current liabilities.......................................... $ 63,660
Long-term liabilities........................................ 2,586,546
----------
Total liabilities.......................................... 2,650,206
----------
Accumulated deficit.......................................... (195,142)
----------
Total liabilities and accumulated deficit.................. $2,455,064
==========
</TABLE>
F-59
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Petro, Inc.
El Paso, Texas
We have audited the accompanying consolidated balance sheet of Petro, Inc.
and subsidiary as of December 31, 1998 (as restated--see Note 14). This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Petro, Inc. and
subsidiary as of December 31, 1998 (as restated--see Note 14) in conformity
with generally accepted accounting principles.
Lauterbach, Borschow & Company
El Paso, Texas
December 10, 1999
F-60
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any represen-
tations in connection with this offering other than those contained in this
Prospectus. If any person makes a statement that differs from what is in this
Prospectus, you should not rely on it. This Prospectus is not an offer to sell,
nor is it seeking an offer to buy, the new notes in any state where such offer
or sale is not permitted. The information in this Prospectus is complete and
accurate as of its date, but the information may change after that date.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors ............................................................ 12
Exchange Offer........................................................... 22
Use of Proceeds.......................................................... 30
Capitalization .......................................................... 31
Pro Forma Consolidated Financial Statements.............................. 32
Selected Historical Consolidated Financial Data ......................... 36
Management's Discussion and Analysis of Results of Operations and
Financial Condition .................................................... 38
Business ................................................................ 49
Management............................................................... 60
Security Ownership of Certain Beneficial Owners and Management........... 67
Material Relationships and Related Transactions.......................... 69
Description of Other Indebtedness........................................ 74
Description of the Notes................................................. 77
U.S. Federal Income Tax Considerations................................... 114
Description of Holdings Partnership Agreement............................ 118
Description of Petro Warrant Holdings Corporation........................ 121
Book-Entry; Delivery and Form............................................ 122
Plan of Distribution..................................................... 124
Experts.................................................................. 124
Legal Matters ........................................................... 124
Index to Consolidated Financial
Statements ............................................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
[LOGO OF PETRO STOPPING CENTERS]
Petro Stopping Centers Holdings, L.P.
Petro Holdings Financial Corporation
Offer to Exchange $113.4 Million Aggregate Principal Amount at Stated Maturity
of 15% Senior Discount Notes due 2008
For 15% Series B Senior Discount Notes due 2008
January . , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 17-108 of the Delaware Uniform Partnership Law (the "UPL") provides,
in substance, that Delaware limited partnerships shall have the power to
indemnify and hold harmless any partner or other person from and against any
and all claims and demands whatsoever, subject to such standards and
restrictions as are set forth in its partnership agreement.
Pursuant to Section 17-108 of the UPL, Article VII of the Partnership
Agreement (the "Partnership Agreement") (filed as Exhibit 3.2 to this
Registration Statement) of Petro Stopping Centers Holdings, L.P. ("Holdings")
provides that Holdings shall indemnify any current or former partner, member of
the board of directors or officer to the fullest extent permitted by law with
respect to any liability, damage, loss, injury, expense and cost to any person
for any act or omission performed or omitted: (a) in good faith on behalf of
Holdings; (b) in a manner reasonably believed by such partner, officer or
director to be within the scope of the authority granted to such partner,
officer or director by the Partnership Agreement or the board of directors; and
(c) in a manner not constituting willful misconduct, fraud, gross negligence,
or breach of such partner's, officer's or director's fiduciary duty of loyalty.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), Article Thirteen of the Certificate of Incorporation (the "Certificate
of Incorporation") (filed as Exhibit 3.3 to this Registration Statement) of
Petro Holdings Financial Corporation ("Financial Corporation") eliminates the
liability of Financial Corporation's directors to Financial Corporation or its
stockholders, except for liabilities related to breach of duty of loyalty,
actions not in good faith and certain other liabilities. Section 7 of Financial
Corporation's Bylaws (filed as Exhibit 3.4 to this Registration Statement)
provides that Financial Corporation shall indemnify to the fullest extent
permitted by the DGCL its current and former directors and officers and persons
serving as directors and officers of any corporation at the request of
Financial Corporation. Financial Corporation also maintains officers' and
directors' liability insurance which insures against liabilities that officers
and directors of Financial Corporation may incur in such capacities.
Section 145 of the DGCL gives Delaware corporations broad powers to
indemnify their present and former directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with threatened, pending or
completed actions, suits or proceedings to which they are parties or are
threatened to be made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; gives a director
or officer who successfully defends an action the right to be so indemnified;
and permits a corporation to buy directors' and officers' liability insurance.
Such indemnification is not exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders
or otherwise.
As permitted by Section 145 of the DGCL, Section 7 of the Bylaws of
Financial Corporation and Article Twelve of the Certificate of Incorporation of
Financial Corporation provide for the indemnification by Financial Corporation
of its directors, officers, employees and agents against liabilities and
expenses incurred in connection with actions, suits or proceedings brought
against them by a third party or in the rights of the corporation, by reason of
the fact that they were or are such officers, employees or agents.
The Purchase Agreement by and among First Union Capital Markets Corp. and
CIBC World Markets Corp. (together, the "Initial Purchasers") and Holdings,
Holdings Financial, and Warrant Financial Corporation, dated as of July 19,
1999 (the "Purchase Agreement"), provides for indemnification of Holdings and
Holdings Financial and persons who control Holdings and Holdings Financial
within the meaning of Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act") for certain liabilities,
including liabilities under the Securities Act.
II-1
<PAGE>
The Notes Registration Rights Agreement by and among Holdings, Holdings
Financial and the Initial Purchasers dated as of July 23, 1999 (the
"Registration Rights Agreement"), provides for indemnification of Holdings and
Holdings Financial, its directors and officers, and persons who control
Holdings and Holdings Financial within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act for certain liabilities,
including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Holdings and
Holdings Financial pursuant to the foregoing provisions, Holdings and Holdings
Financial have been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1+ Purchase Agreement, dated as of July 19, 1999, by and among Petro
Stopping Centers Holdings, L.P., Petro Holdings Financial
Corporation, Petro Warrant Financial Corporation, First Union
Capital Markets Corp. and CIBC World Markets Corp.
3.1+ Certificate of Limited Partnership of Petro Stopping Centers
Holdings, L.P.
3.2+ Limited Partnership Agreement of Petro Stopping Centers Holdings,
L.P., dated July 23, 1999.
3.3+ Certificate of Incorporation of Petro Holdings Financial
Corporation.
3.4+ Bylaws of Petro Holdings Financial Corporation.
4.1+ Indenture, dated as of July 23, 1999, by and among Petro Stopping
Centers Holdings, L.P., Petro Holdings Financial Corporation and
State Street Bank and Trust Company, as Trustee.
4.2+ Form of 15% Senior Discount Note due 2008 (included in Exhibit
4.1).
4.3+ Registration Rights Agreement, dated as of July 23, 1999, by and
among Petro Stopping Centers Holdings, L.P., Petro Holdings
Financial Corporation, First Union Capital Markets Corp. and
CIBC World Markets Corp.
4.4+ Registration Rights and Partners' Agreement, dated as of July 23,
1999, by and among Petro Stopping Centers Holdings, L.P., Petro
Warrant Financial Corporation, Permitted Holders of Petro
Stopping Centers Holdings, L.P., Sixty Eighty, LLC, First Union
Capital Markets Corp. and CIBC World Markets Corp.
4.5+ Warrant Agreement, dated as of July 23, 1999, by and among Petro
Stopping Centers Holdings, L.P., Petro Warrant Financial
Corporation, Sixty Eighty, LLC, First Union Capital Markets
Corp., CIBC World Markets Corp. and State Street Bank and Trust
Company.
4.6+ Form of 15% Series B Senior Discount Note due 2008 (of included
in Exhibit 4.1).
5.1+ Opinion of Gibson, Dunn & Crutcher LLP, including consent.
8.1+ Opinion of Gibson, Dunn & Crutcher LLP with regard to federal
income tax consequences of the Exchange Offer.
10.1 (bb) Surety Drive lease agreement, dated April 30, 1992, between James
A. Cardwell and Petro Stopping Centers, L.P.
10.2 (bb) Agreement relating to trademark license for Bordentown, New
Jersey, dated April 30, 1992, between Petro Stopping Centers,
L.P. and Petro, Inc.
10.3 (bb) Petro: Tread Lease Agreement, dated April 30, 1992, between James
Arthur Lyle and Petro Stopping Centers, L.P.
10.4 (bb) Lease Agreement relating to Texas convenience store liquor sales,
dated April 30, 1992, between Petro Stopping Centers, L.P. and C
and PPR, Inc.
10.5 (bb) Servicing Agreement relating to Texas Convenience store liquor
sales, dated April 30, 1992, between Petro Stopping Centers, L.P.
and C and PPR, Inc.
10.6 (bb) Lease relating to the Effingham, Illinois, Stopping Center, dated
May 23, 1990, between Truck Stop Property Owners, Inc. and Petro
Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.7 (bb) Lease with Option to purchase, dated September 9, 1983, among
Vaughn O. Seale, Francine S. Dodson, Hazel S. Darouse and Metro
Hammond, Inc.
10.8 (bb) Profit Participation Agreement, dated March 1, 1993, between
Pelican Gaming, Inc. and Petro Truckstops, Inc.
10.9 (aa) Distributor sales Agreement (Branded) Renewal Offer dated
November 1, 1996, between Exxon Company, U.S.A. and Petro
Stopping Centers, L.P.
10.10 (aa) Amended Split Dollar Life Insurance Agreement, dated as of May
1, 1995, among the Company, James A. Cardwell, Jr., Trustee of
the James A., and Evonne Cardwell Trust Number Two and James A.
Cardwell, Jr., Trustee of the James A. Cardwell Trust No. Three.
10.11 (cc) Lease and Services Agreement, dated February 10, 1995, between
Petro Stopping Centers, L.P. and Petro Beverage, Inc.
10.12 (aa) Memorandum of Understanding - Joint Project Development, dated
January 30, 1997, by and between Mobil Oil and Petro Stopping
Centers, L.P.
10.13 (aa) Product Services Agreement, dated January 30, 1997, by and
between C&R Distributing, Inc., a Texas corporation , and Petro
Stopping Centers, L.P.
10.14 (aa) Petro/El Paso Amusement Services Agreement, dated January 30,
1997, by and between El Paso Vending and Amusement Company and
Petro Stopping Centers, L.P.
10.15 (aa) Display Space Agreement, dated January 30, 1997, by and between
Motor Media, Inc. and Petro Stopping Centers, L.P.
10.16 (bb) Southwestern Bell Telephone Company Public Telephone License
Agreement, dated May 16, 1990, between Southwestern Bell
Telephone Company and Petro, Inc.
10.17 (dd) Limited Liability Company Operating Agreement of Petro Travel
Plaza, LLC, dated as of December 5, 1997, among the Company,
Tejon Ranch Company, as Guarantor.
10.18 (ee) Petro Stopping Centers Deferred Compensation Plan Agreement,
dated November 26, 1997.
10.19 (ff) Employment Agreement, dated February 10, 1999, by and between
James A. Cardwell, Sr. and Petro Stopping Centers, L.P.
10.20 (ff) Employment Agreement, dated February 10, 1999, by and between
James A. Cardwell, Jr. and Petro Stopping Centers, L.P.
10.21 (ff) Employment Agreement, dated March 1, 1999, by and between Evan
Brudahl and Petro Stopping Centers, L.P.
10.22 (gg) Fourth Amended and Restated Limited Partnership Agreement of the
Company, a Delaware Limited Partnership, dated July 23, 1999, by
and among Petro Inc., as a General Partner and Petro Stopping
Centers Holdings, L.P., Petro Holdings GP, L.L.C. and James A.
Cardwell, Jr., as Limited Partners.
10.23 (gg) Limited Partnership Agreement of Petro Stopping Centers
Holdings, L.P., a Delaware Limited Partnership, dated July 15,
1999, by and among Petro, Inc., as General Partner and James A.
Cardwell, Sr., James A. Cardwell, Jr., JAJCO II, Inc., Petro,
Inc., Mobil Long Haul Inc., Volvo Petro Holdings, LLC and Petro
Warrant Holdings Corporation, as Limited Partners.
10.24 (gg) Second Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of July 23, 1999, among Petro Stopping
Centers, L.P., Bankboston, N.A. (formerly known as The First
National Bank of Boston) and the other lending institutions
listed as Fleet Business Credit Corporation, Merrill Lynch Prime
Rate Portfolio, Merrill Lynch Senior Floating Rate Fund, Inc.,
Morgan Stanley Dean Witter Prime Income Trust, Natexis Banque,
KZH Crescent-3 LLC, KZH Crescent-2 LLC, KZH Crescent LLC, United
of Omaha Life Insurance Company, Sequils I, Ltd., Wells Fargo
Bank, N.A. and Bank of Boston), as Agent, Union Bank of
California, N.A., as Co- Agent, First Union National Bank, as
Documentation Agent and BancBoston Robertson Stephens Inc., as
Arranger.
10.25 (gg) Amended and Restated PMPA Motor Fuels Franchise Agreement, dated
July 23, 1999, by and between Mobil Oil Corporation and Petro
Stopping Centers, L.P.
10.26 (gg) Master Supply Contract for Resale or Oils and Greases, dated
July 23, 1999, by and between Mobil Oil Corporation and Petro
Stopping Centers, L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.27+ Pledge Agreement, dated as of July 29, 1999, entered into by
Petro Stopping Centers Holdings, Inc. in favor of BankBoston
N.A.
10.28+ Guaranty, dated as of July 29, 1999, entered into by Petro
Stopping Centers Holdings, Inc. in favor of BankBoston, N.A.
10.29 (hh) Indenture, dated as of May 24, 1994, among Petro Stopping
Centers, L.P., Petro Financial Corporation and First Trust
National Association, as trustee, for Petro Stopping Centers,
L.P.'s $100,000,000 principal amount 12 1/2% Senior Notes due
2002.
10.30 (hh) Form of 12 1/2% Senior Note due 2002.
10.31 (hh) Guarantee Agreement, dated as of May 24, 1994, between Petro
Stopping Centers, L.P. and First Trust National Association.
10.32 (hh) Warrant Agreement, dated as of May 24, 1994, among Petro
Stopping Centers, L.P., Petro Financial Corporation and First
Trust National Association.
10.33 (hh) Specimen of Exchangeable Debt Warrant.
10.34 (aa) Indenture, dated as of January 30, 1997 among Petro Stopping
Centers, L.P., Petro Financial Corporation and State Street Bank
and Trust Company, as trustee, relating to Petro Stopping
Centers, L.P.'s $135,000,000 principal amount 10 1/2% Senior
Notes due 2007.
10.35 (aa) Form of 10 1/2% Senior Note due 2007.
10.36+ Supplemental Indenture, dated as of January 29, 1997, by and
among Petro Stopping Centers, L.P., Petro Financial Corporation
and First Trust National Association, relating to Petro Stopping
Centers, L.P.'s $100,000,000 principal amount 12 1/2% Senior
Notes due 2002.
10.37+ Supplemental Indenture, dated July 23, 1999, by and among Petro
Stopping Centers, L.P., Petro Financial Corporation and State
Street Bank and Trust Company, relating to Petro Stopping
Centers, L.P.'s 10 1/2% Senior Notes due 2007.
12.1+ Statement of Computation of Ratios of Earnings to Fixed Charges
21.1+ Subsidiaries of the Company
23.1 Consents of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1
and Exhibit 8.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Lauterbach, Borschow & Company
24.1+ Powers of Attorney (included as part of the signature page of
this Registration Statement)
25.1+ Form T-1 Statement of Eligibility of United States Trust Company
of New York to act as trustee under the Indenture
27.1+ Financial Data Schedule
99.1+ Form of Letter of Transmittal to be used in connection with the
exchange offer
99.2+ Form of Notice of Guaranteed Delivery
</TABLE>
- --------
(aa) Incorporated by reference to Petro Stopping Centers, L.P.'s Annual Report
on Form 10-K for the year ended December 31, 1996.
(bb) Incorporated by reference to Petro Stopping Centers, L.P.'s Registration
Statement on Form S-1 (Registration No. 33-76154).
(cc) Incorporated by reference to Petro Stopping Centers, L.P.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995.
(dd) Incorporated by reference to Petro Stopping Centers, L.P.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
(ee) Incorporated by reference to Petro Stopping Centers, L.P.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
(ff) Incorporated by reference to Petro Stopping Centers, L.P.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(gg) Incorporated by reference to Petro Stopping Centers, L.P.'s Current Report
on Form 8-K, filed on August 6, 1999.
(hh) Incorporated reference to Petro Stopping Centers, L.P.'s Quarterly Report
on Form 10-Q for the quarter ended March 30, 1994.
+ Previously filed
II-4
<PAGE>
Item 22. Undertakings.
The undersigned registrants hereby undertake with respect to the securities
offered by them:
1. (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 of 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 the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act, if in the aggregate, the
changes in volume and price present no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(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;
(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 the 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.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted as to directors, officers
and controlling persons of any Registrant pursuant to the provisions described
in Item 20 or otherwise, the Registrants have been advised that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Act and is, therefore unenforceable. In the event a claim for
indemnification against such liabilities (other than the payment by any
Registrant of expenses incurred or paid by a director, officer or controlling
person of such 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, such 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 Act and
will be governed by the final adjudication of such issue.
3. The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, 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.
4. The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of El Paso, State of Texas
on the 6th day of January, 2000.
PETRO STOPPING CENTERS HOLDINGS,
L.P.
/s/ J.A. Cardwell, Sr.*
By: _________________________________
J. A. Cardwell, Sr.,
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ J.A. Cardwell, Sr.* Director and President
(Principal Executive Officer)
_____________________________ January 6, 2000
J. A. Cardwell, Sr.
/s/ David A. Appleby* Vice President of Finance and
_____________________________ Treasurer (Principal January 6, 2000
David A. Appleby Financial and Chief
Accounting Officer)
/s/ James A. Cardwell, Jr.* Director
_____________________________ January 6, 2000
James A. Cardwell, Jr.
/s/ Larry J. Zine* Director
_____________________________ Janaury 6, 2000
Larry J. Zine
/s/ Nancy B. Carlson* Director
_____________________________ January 6, 2000
Nancy B. Carlson
/s/ Kevin T. Weir* Director
_____________________________ January 6, 2000
Kevin T. Weir
/s/ Robert Grussing IV* Director
_____________________________ January 6, 2000
Robert Grussing IV
/s/ Martha P. Boyd* Director
_____________________________ January 6, 2000
Martha P. Boyd
/s/ Nancy C. Santana
*By:___________________________ January 6, 2000
Nancy C. Santana
Attorney-in-Fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of El Paso, State of Texas
on the 6th day of January, 2000.
PETRO HOLDINGS FINANCIAL CORPORATION
/s/ J.A. Cardwell, Sr.*
By: _________________________________
J. A. Cardwell, Sr.,
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ J.A. Cardwell, Sr.* Director and President
(Principal Executive Officer)
_____________________________ January 6, 2000
J. A. Cardwell, Sr.
/s/ David A. Appleby* Vice President of Finance and
_____________________________ Treasurer (Principal January 6, 2000
David A. Appleby Financial and Chief
Accounting Officer)
/s/ James A. Cardwell, Jr.* Director
_____________________________ January 6, 2000
James A. Cardwell, Jr.
/s/ Larry J. Zine* Director
_____________________________ January 6, 2000
Larry J. Zine
/s/ Nancy B. Carlson* Director
_____________________________ January 6, 2000
Nancy B. Carlson
/s/ Kevin T. Weir* Director
_____________________________ January 6, 2000
Kevin T. Weir
/s/ Robert Grussing IV* Director
_____________________________ January 6, 2000
Robert Grussing IV
/s/ Martha P. Boyd* Director
_____________________________ January 6, 2000
Martha P. Boyd
/s/ Nancy C. Santana
*By:___________________________ January 6, 2000
Nancy C. Santana
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Dallas, TX
January 6, 2000
<PAGE>
EXHIBIT 23.3
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
LAUTERBACH, BORSCHOW & COMPANY
El Paso, Texas,
January 6, 2000
