<PAGE>
PROSPECTUS
Rule 424(b)(1)
Registration No. 33-56429
$125,000,000
[LOGO OF CROWN CENTRAL PETROLEUM CORPORATION APPEARS HERE]
CROWN CENTRAL PETROLEUM CORPORATION
10 7/8% SENIOR NOTES DUE 2005
---------------------
The 10 7/8% Senior Notes due 2005 (the "Notes") are being offered by Crown
Central Petroleum Corporation (the "Company"). Interest on the Notes will be
payable semiannually on February 1 and August 1 of each year, commencing
August 1, 1995. The Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after February 1, 2000, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. On or prior to February 1, 1998, the Company may
redeem up to $37.5 million principal amount of the Notes, at a price equal to
110.875% of the aggregate principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption, utilizing the proceeds of
one or more Public Equity Offerings (as defined), provided that Notes having
an aggregate principal amount of at least $87.5 million remain outstanding
immediately after any such redemption. In addition, upon the occurrence of a
Change of Control (as defined), each holder of Notes may require the Company
to purchase all or a portion of such holder's Notes at 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase. See "Description of the Notes."
The Notes will be unsecured senior obligations of the Company and will rank
pari passu in right of payment with all existing and future senior
indebtedness of the Company. The Notes, however, will be effectively
subordinated to secured senior indebtedness of the Company with respect to the
assets securing such indebtedness and will also be effectively subordinated to
indebtedness of the Company's subsidiaries. As of September 30, 1994, after
giving effect to the sale of the Notes offered hereby and the application of
the net proceeds thereof, the Company would have had $132.0 million of senior
indebtedness outstanding (including the Notes and $7.0 million of secured
purchase money and other indebtedness of the Company and its subsidiaries). As
of September 30, 1994, the Company had, subject to certain restrictions, the
ability to draw up to $50.0 million of additional senior unsecured
indebtedness under its Credit Facility (as defined).
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "INVESTMENT CONSIDERATIONS."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
------------ ------------ -------------
<S> <C> <C> <C>
Per Note............................... 99.75% 2.00% 97.75%
Total.................................. $124,687,500 $2,500,000 $122,187,500
</TABLE>
- ---------------------
(1) Plus accrued interest, if any, from January 24, 1995.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses estimated at $800,000, payable by the Company.
---------------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, and subject to approval of
certain legal matters by counsel for the several Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that delivery will be made in New York, New York on or about January 24, 1995.
CHASE SECURITIES, INC. NATIONSBANC CAPITAL MARKETS, INC.
January 17, 1995.
<PAGE>
[PHOTOS OR OTHER ARTWORK MAY APPEAR HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed Consolidated Financial Statements of the
Company and notes thereto appearing elsewhere, or incorporated by reference, in
this Prospectus. For definitions of certain terms used herein see "Glossary"
and "Description of the Notes -- Certain Definitions." Reference is made to
"Investment Considerations," which contains certain factors that investors
should consider prior to the purchase of the Notes offered hereby. The
"Company" means Crown Central Petroleum Corporation and its subsidiaries taken
as a whole, unless the context otherwise requires.
THE COMPANY
The Company, which traces its origins to 1917, is one of the largest
independent refiners and marketers of petroleum products in the United States.
The Company owns and operates two high-conversion refineries with a combined
capacity of 152,000 barrels per day of crude oil -- a 100,000 barrel per day
facility located in Pasadena, Texas, near Houston (the "Pasadena Refinery") and
a 52,000 barrel per day facility located in Tyler, Texas (the "Tyler Refinery",
and together with the Pasadena Refinery, the "Refineries"). The Company is also
a leading independent marketer of refined petroleum products and merchandise
through a network of over 350 gasoline stations and convenience stores located
in the Mid-Atlantic and Southeastern United States. In support of these
businesses, the Company operates 16 product terminals located on three major
product pipelines along the Gulf Coast and the Eastern Seaboard and in the
Central United States.
The Refineries are strategically located and have direct access to crude oil
supplies from major and independent producers and trading companies, thus
enabling the Company to select a crude oil mix to optimize refining margins and
minimize transportation costs. The Pasadena Refinery's Gulf Coast location
provides access to tankers, barges and pipelines for the delivery of foreign
and domestic crude oil and other feedstocks. The Tyler Refinery benefits from
its location in East Texas due to its ability to purchase high quality crude
oil directly from nearby suppliers at a favorable cost and its status as the
only supplier of a full range of refined petroleum products in its local market
area. The Refineries are operated to generate a product mix of over 85% higher
margin fuels, primarily transportation fuels such as gasoline, highway diesel
and jet fuel. During the past five years, the Company has invested over $67
million for environmental compliance, maintenance, upgrading, expansion and
process improvements at its two Refineries. As a result of these expenditures,
the Pasadena Refinery has one of the highest rates of conversion to higher
margin fuels, according to a recent industry study. The Tyler Refinery enjoys
essentially the same product yield characteristics as the Pasadena Refinery.
The Company is the largest independent retail marketer of gasoline in its
core retail market areas within Maryland, Virginia and North Carolina. In the
Company's primary retail marketing region of Baltimore, Maryland, the Company
is the leading independent gasoline retailer, with a 1993 market share of
approximately 11%. In addition to its leading market position in Baltimore, the
Company has a geographic concentration of retail locations in high growth areas
such as Charlotte and Raleigh, North Carolina and Atlanta, Georgia. Over the
past several years, the Company has rationalized and refocused its retail
operations, resulting in significant improvements in average unit performance
and positioning these operations for growth from a profitable base. For the
nine months ended September 30, 1994, average merchandise sales per unit
increased 27.1% on a same store basis when compared to the same period in 1993.
The Company has made substantial investments of approximately $22 million at
its retail locations pursuant to environmental requirements from 1989 to 1993
and believes that over 50% of its retail units are currently in full or
substantial compliance with the 1998 underground storage tank environmental
standards.
3
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is designed to utilize its strengths to take
advantage of the anticipated improvement in the refining industry and to
improve retail profitability, while managing the risks inherent in a cyclical,
commodity based business. The key elements of this strategy include: (i)
investing to increase productivity and improve the technical sophistication,
operating reliability and efficiency of the Company's refining operations; (ii)
managing refinery margins through formalized and disciplined programs to
achieve, at a minimum, prevailing margins available to comparable Gulf Coast
refiners and, where appropriate, to pursue hedging opportunities which lock in
attractive returns; (iii) achieving increased profitability and a better
balance between refinery output and retail sales by expanding retail volume
through the enhancement of existing units and the development of new sites, the
implementation of aggressive pricing and marketing strategies and the selective
acquisition of additional retail properties; (iv) continuing to make
investments pursuant to the Clean Air Act Amendments of 1990 (the "Clean Air
Act") and other environmental regulations; and (v) maintaining the Company's
balance sheet strength with particular emphasis on continued liquidity and low
leverage. Management believes that implementation of this strategy should
result in increased operational efficiency, improved profitability and reduced
earnings volatility.
INDUSTRY OVERVIEW
The Company believes that the profitability of the domestic refining industry
is likely to improve due to increased demand for refined petroleum products,
primarily transportation fuels, during a period when domestic refining
utilization is approaching its maximum crude oil processing limits.
Furthermore, the Company believes that increasing foreign demand resulting from
economic recovery in overseas markets, coupled with the more stringent
requirements associated with reformulated gasoline regulations in the United
States, will tend to reduce the opportunity and incentive for foreign refiners
to supply the increasing domestic demand. These trends are likely to benefit
those refiners, such as the Company, which are able to convert a higher
percentage of crude oil into higher margin transportation fuels.
Over the last several years, the retail markets have been characterized by
several significant trends. Since 1982, United States gasoline demand has grown
by an average of approximately 1% to 2% annually and the Company anticipates
that this demand will continue to track domestic economic growth. During the
last several years, however, petroleum retailers have rationalized their retail
networks by divesting many non-strategic, marginal or unprofitable stations as
well as many stations that require significant expenditures to comply with
environmental requirements, such as the replacement of underground storage
tanks. At the same time, petroleum retailers are attempting to increase retail
operating efficiencies by clustering retail units into fewer geographic regions
and increasing the retail space of newly constructed and existing units.
Another trend affecting the retail segment of the business is increased
consumer emphasis on convenience, quality, cleanliness and safety when
purchasing gasoline and related merchandise at a retail location. The Company
believes it has substantially completed its own rationalization program and is
pursuing a retailing strategy designed to increase volumes, margins,
productivity and overall profitability.
4
<PAGE>
THE OFFERING
Notes Offered............. $125,000,000 aggregate principal amount of 10 7/8%
Senior Notes due 2005.
Maturity Date............. February 1, 2005.
Interest Payment Dates.... February 1 and August 1 of each year, commencing
August 1, 1995.
Optional Redemption....... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after February 1, 2000, at the redemption prices
set forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. On or
prior to February 1, 1998, the Company may redeem
up to $37.5 million principal amount of the Notes,
at a price equal to 110.875% of the aggregate
principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption,
utilizing the proceeds of one or more Public Equity
Offerings, provided that Notes having an aggregate
principal amount of at least $87.5 million remain
outstanding immediately after any such redemption.
If less than all of the Notes are to be redeemed,
Notes or portions thereof to be redeemed will be
selected pro rata, by lot or by any other method
deemed fair and reasonable. See "Description of the
Notes -- Optional Redemption."
Change of Control......... Upon the occurrence of a Change of Control, each
holder of Notes may require the Company to purchase
all or a portion of such holder's Notes at 101% of
the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of
purchase. See "Description of the Notes -- Certain
Covenants."
Ranking................... The Notes will be unsecured senior obligations of
the Company and will rank pari passu in right of
payment with all existing and future senior
indebtedness of the Company. The Notes, however,
will be effectively subordinated to secured senior
indebtedness of the Company with respect to the
assets securing such indebtedness and will also be
effectively subordinated to indebtedness of the
Company's subsidiaries. As of September 30, 1994,
after giving effect to the sale of the Notes
offered hereby and the application of the net
proceeds thereof, the Company would have had $132.0
million of senior indebtedness outstanding
(including the Notes and $7.0 million of Purchase
Money Debt (as defined) and other debt of the
Company and its subsidiaries). As of September 30,
1994, the Company had, subject to certain
restrictions, the ability to draw up to $50.0
million of additional senior unsecured indebtedness
under the Credit Facility. See "Description of
Other Indebtedness" and "Description of the Notes--
Ranking of the Notes."
5
<PAGE>
Certain Covenants......... The Indenture (as defined) governing the terms of
the Notes will contain certain covenants for the
benefit of the holders of the Notes, including
limitations on the incurrence of indebtedness, the
making of restricted payments, transactions with
affiliates, the disposition of proceeds of asset
sales, the existence of liens, the making of
guarantees and the granting of pledges by
subsidiaries, the incurrence of sale and leaseback
transactions, the issuance of capital stock by
subsidiaries, the imposition of certain payment
restrictions on subsidiaries and certain mergers
and sales of assets. See "Description of the
Notes -- Certain Covenants."
Use of Proceeds........... The net proceeds from the sale of the Notes
(estimated to be approximately $121.4 million) will
be used to: (i) retire the Existing Senior Notes
(as defined), including a required prepayment
premium; (ii) repay borrowings (excluding letters
of credit) outstanding under the Credit Facility at
the time of issuance of the Notes; and (iii)
provide working capital for general corporate
purposes, including capital expenditures. See "Use
of Proceeds."
6
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The following table sets forth summary financial and other data of the
Company. The Statements of Operations Data and Balance Sheet Data for each of
the five years in the period ended December 31, 1993 are derived from the
Consolidated Financial Statements of the Company. The Statements of Operations
Data and Balance Sheet Data for the nine months ended September 30, 1993 and
1994 are derived from unaudited consolidated condensed financial statements.
"Sales and operating revenues" and "costs and operating expenses" include
Federal and state excise and other similar taxes. The information presented
below should be read in conjunction with the Consolidated Financial Statements
and related notes thereto included elsewhere in this Prospectus. See "Selected
Financial and Other Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1989(A) 1990 1991 1992 1993 1993 1994
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Sales and operating
revenues(b)........... $1,523.1 $2,019.9 $1,857.7 $1,795.3 $1,747.4 $1,316.8 $1,315.3
Costs and operating
expenses(b)........... 1,339.4 1,801.1 1,718.1 1,659.8 1,604.7 1,222.4 1,234.5
Selling and
administrative
expenses.............. 126.9 136.4 112.1 102.8 91.7 69.7 62.6
Operating income
(loss)(c)(d).......... 33.6 49.2 (5.8) (10.1) 6.8 (6.5) (32.1)
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 38.3 $ 82.5 $ 78.1 $ 55.5 $ 52.0 $ 36.4 $ 21.2
Total assets........... 623.7 687.7 687.8 675.3 656.2 649.5 604.2
Long-term debt
(including current
portion).............. 43.1 2.6 88.9 61.6 66.7 61.3 67.0
Total common
stockholders' equity.. 306.5 324.6 310.7 303.3 298.4 292.0 270.4
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............ $ 59.6 $ 123.3 $ 0.5 $ 53.0 $ 28.9 $ 9.3 $ (10.5)
Net cash used in
investing activities.. (142.5) (30.7) (80.8) (45.8) (40.0) (30.5) (17.9)
Net cash provided by
(used in) financing
activities............ 29.8 (48.3) 75.8 (29.8) 7.7 2.1 (2.6)
OPERATING DATA(E):
Refining Operations
Production (m bbl/day). 163.9 149.0 147.0 153.5 158.4 159.3 155.0
Utilization(f)......... 92.6% 83.8% 86.7% 87.8% 91.6% 92.2% 90.3%
Gross margin (per bbl). $ 3.42 $ 4.25 $ 2.35 $ 2.60 $ 2.29 $ 2.38 $ 2.64
Operating expenses (per
bbl).................. 1.73 2.13 2.50 2.36 2.31 2.26 2.41
Retail Operations
Number of units (at
period end)........... 715 605 524 435 376 393 356
Gasoline volume (mm
gals)................. 555 527 469 471 465 345 352
Average gasoline volume
per unit
(m gals/month)........ 64.7 72.6 74.6 90.2 103.1 97.5 109.9
Gasoline gross margin
(per gal)............. 11.9c 11.3c 10.4c 12.6c 13.8c 12.5c 11.0c
Merchandise sales (mm). $ 160.0 $ 150.9 $ 121.0 $ 103.8 $ 82.8 $ 63.7 $ 64.3
Average merchandise
sales per unit
(m $/month)........... 18.6 20.8 19.2 19.9 18.4 18.0 20.1
Merchandise gross
margin................ 32.3% 31.7% 32.3% 32.4% 31.6% 32.2% 23.6%
Operating expenses as a
percentage
of retail sales....... 18.9% 18.5% 17.2% 16.9% 16.6% 16.6% 16.6%
OTHER DATA:
EBITDAAL(g)............ $ 85.0 $ 117.4 $ (18.4) $ 26.9 $ 23.3 $ 24.6 $ 36.1
Turnaround
expenditures(h)....... 4.1 2.1 21.1 17.7 4.1 2.6 0.6
Capital expenditures... 32.5 29.4 64.8 38.0 40.9 29.8 21.1
-------- -------- -------- -------- -------- -------- --------
Total expenditures..... 36.6 31.5 85.9 55.7 45.0 32.4 21.7
Pro forma interest
expense(i)............ -- -- -- -- $ 14.8 -- $ 11.3
Ratio of EBITDAAL to
pro forma interest
expense(j)............ -- -- -- -- 1.6x -- 3.2x
Ratio of long-term debt
to total
capitalization........ 12.3% 0.8% 22.2% 16.9% 18.3% 17.4% 19.9%
</TABLE>
(footnotes on following page)
7
<PAGE>
(a) The Company acquired La Gloria Oil and Gas Company ("La Gloria"), the
owner of the Tyler Refinery, in the fourth quarter of 1989 and accounted
for this acquisition utilizing the purchase method of accounting. La
Gloria's results of operations have been included in the Company's results
of operations since the effective date of the acquisition in the fourth
quarter of 1989.
(b) Sales and operating revenues and costs and operating expenses for the
years 1989 through 1991 have been adjusted to reflect the reclassification
of certain finished product exchange transactions and to include all
Federal and state excise and other similar taxes. These changes were made
to conform with the current presentation and had no impact on net income
(loss) in any of the periods presented.
(c) The Company's crude oil, refined products, and convenience store
merchandise and gasoline inventories are valued at the lower of cost
(last-in, first-out or LIFO) or market with the exception of crude oil
inventory held for resale which is valued at the lower of cost (first-in,
first-out or FIFO) or market. Under the LIFO method, the effects of price
increases and decreases in crude oil and other feedstocks are reflected in
costs and operating expenses in the period that such price changes occur.
In periods of rising prices, using the LIFO method may cause reported
operating income to be lower than would otherwise result from the use of
the FIFO method. Conversely, in periods of falling prices the LIFO method
may cause reported operating income to be higher than would otherwise
result from the use of the FIFO method. The impact of LIFO for the periods
presented was to increase (decrease) operating income from what would have
been reported had the FIFO method been used as follows: year ended
December 31, 1989 - $(28.2) million; 1990 - $(35.0) million; 1991 - $45.9
million; 1992 - $5.8 million; 1993 - $27.7 million; nine months ended
September 30, 1993 - $0.1 million; 1994 - $(17.9) million.
(d) Operating loss for the nine months ended September 30, 1994 includes a
write-down of capitalized expenditures of $16.8 million (before income
taxes) related to the abandonment of the Company's plans to construct a
hydrodesulphurization unit at the Pasadena Refinery.
(e) Operating Data is determined before considering the impact of applying the
LIFO method.
(f) Utilization is defined as crude oil throughput relative to the rated
capacity to process crude oil for both Refineries. If other feedstocks
were included as throughput in the calculation, utilization would have
increased to 107.8%, 98.0%, 96.7%, 101.0%, 104.2%, 104.8% and 102.0% for
the years ended December 31, 1989, 1990, 1991, 1992, 1993, and for the
nine months ended September 30, 1993 and 1994, respectively. Utilization
reflects downtime for maintenance turnarounds during which refinery
production is reduced significantly. See "Business--Refining Operations--
Pasadena Refinery" and "--Tyler Refinery."
(g) EBITDAAL is defined herein as operating income (loss) before interest and
taxes ("EBIT"), excluding depreciation and amortization ("DA"), excluding
(gain) loss on sales and abandonments of property, plant and equipment
("A"), and excluding the impact on operating income (loss) of accounting
for inventory under the LIFO method compared with the FIFO method ("L"),
as set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------
1989 1990 1991 1992 1993 1993 1994
----- ------ ------ ------ ----- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating income (loss). $33.6 $49.2 $ (5.8) $(10.1) $ 6.8 $ (6.5) $ (32.1)
Depreciation and amorti-
zation................. 25.9 31.6 33.3 41.5 41.9 31.3 33.7
(Gain) loss on sales and
abandonments
of property, plant and
equipment.............. (2.7) 1.6 -- 1.3 2.3 (0.1) 16.6
Impact of LIFO method... 28.2 35.0 (45.9) (5.8) (27.7) (0.1) 17.9
----- ------ ------ ------ ----- -------- ---------
EBITDAAL............... $85.0 $117.4 $(18.4) $ 26.9 $23.3 $ 24.6 $ 36.1
===== ====== ====== ====== ===== ======== =========
</TABLE>
The Company has included this information because it believes that such
information is used by certain investors to assess a company's historical
ability to meet future debt service, capital expenditures and working
capital requirements. EBITDAAL should not be considered as an alternative to
net income, as an indicator of operating performance, or as an alternative
to cash flows as a measure of liquidity, as such measures would be
determined pursuant to generally accepted accounting principles.
(h) Turnaround expenditures reflects periodic major maintenance which is
capitalized. See "Business--Refining Operations--Turnarounds."
(i) Pro forma interest expense represents interest expense reported in the
applicable financial statements excluding the interest expense associated
with the Existing Senior Notes, and including estimated interest expense
associated with the Notes in the amount of $13.6 million and $10.2 million
for the year ended December 31, 1993 and for the nine months ended
September 30, 1994, respectively, as if the Notes had been issued at the
beginning of these periods.
(j) Ratio of EBITDAAL to pro forma interest expense is EBITDAAL divided by pro
forma interest expense.
8
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective purchasers of the Notes offered hereby should consider the
following factors, as well as other information contained in this Prospectus.
VOLATILITY OF REFINING AND MARKETING MARGINS
The Company is engaged primarily in the business of refining crude oil and
selling refined petroleum products. The Company's earnings and cash flows from
operations are dependent upon its realizing refining and marketing margins at
least sufficient to cover its fixed and variable expenses. The cost of crude
oil and the prices of refined products depend upon numerous factors beyond the
Company's control, such as the supply of and demand for crude oil, gasoline and
other refined products, which are affected by, among other things, changes in
domestic and foreign economies, political affairs, production levels, the
availability of imports, the marketing of gasoline and other refined petroleum
products by its competitors, the marketing of competitive fuels, the impact of
energy conservation efforts, and the extent of government regulation. The
prices which the Company may obtain for its refined products are also affected
by regional factors, such as local market conditions and the operations of
competing refiners of petroleum products.
The Company has recently instituted programs designed to manage refining
profit margins by minimizing the Company's exposure to the risks of price
volatility related to the acquisition, conversion and sale of crude oil and
refined petroleum products. These programs include hedging activities such as
the purchase and sale of futures and options contracts to offset the effects of
fluctuations in the prices of crude oil and refined products. Such hedging
activities are subject to specific policies and guidelines designed to manage
the Company's crude oil acquisition, refining, and product sales on a daily
basis to achieve, at a minimum, prevailing margins available to comparable Gulf
Coast refiners and, where appropriate, to pursue forward hedging opportunities
which lock in attractive returns. There can be no assurance that the Company
will be able to enter into any such hedging activities when it desires to do
so, or if entered into that such hedging activities will be effective in
limiting any adverse effects of fluctuations in the prices of crude oil and
refined products on the Company's operations or its overall profitability. See
"Business -- Business Strategy."
An increase in crude oil prices could adversely affect the Company's
operating margins if the increased cost of raw materials could not be passed on
to the Company's customers and could adversely affect the Company's retail
sales volumes if automobile consumption of gasoline were to decline as a result
of such price increases. The cost of crude oil and the prices of refined
petroleum products fluctuate, making the Company's earnings subject to
substantial fluctuations. As evidence of the foregoing, the Company reported
net income of $21.0 million and $26.0 million for the years ended December 31,
1989 and 1990, respectively, and reported net losses (before cumulative effect
of changes in accounting principles) of $6.0 million, $13.3 million, $4.3
million and $25.2 million for the years ended December 31, 1991, 1992 and 1993
and for the nine months ended September 30, 1994, respectively (including the
effect of a $16.8 million write-down of the capitalized expenditures of certain
property, plant and equipment in the third quarter of 1994 related to the
abandonment of the Company's plans for a hydrodesulphurization unit at the
Pasadena Refinery). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
AVAILABILITY OF CRUDE OIL
Substantially all of the Company's crude oil requirements are currently
purchased in the spot market and are subject to price fluctuations. The Company
believes that adequate supplies of crude oil will be available for its
business, but no assurance can be given that the Company will be able to
negotiate favorable prices for crude oil on the spot market, or that adequate
supplies will be available during times of shortages. See "Business -- Supply,
Transportation and Wholesale Marketing."
9
<PAGE>
COMPETITION
The oil refining and marketing industry in which the Company operates is
highly competitive. Many of the Company's principal competitors are major
integrated, multinational oil companies that are substantially larger and
better known than the Company, and may have substantially greater financial and
operating resources than the Company. Because of their more diverse and
integrated operations, larger refineries and greater resources, these companies
may be better able than the Company to withstand severe price competition and
volatile market conditions, and to obtain crude oil in times of shortages. See
"Business -- Competition."
ENVIRONMENTAL LIABILITIES AND GOVERNMENT REGULATION
The Company's operations are subject to extensive and rapidly changing
Federal and state environmental regulations governing air emissions, waste
water discharges, and solid and hazardous waste management activities. The
Company anticipates that substantial additional capital investment will be
required over the next several years to comply with existing regulations. The
Company cannot predict the nature, scope or effect of future laws or regulatory
requirements, or how those future laws or regulations will be administered or
interpreted. It is possible that any new environmental laws or regulations, or
more vigorous regulatory enforcement policies or stricter interpretation of
existing laws, could have a material adverse effect on the business and
operations of the Company.
The Company's operations are inherently subject to the possibility of spills,
discharges or other releases of contaminants, possibly including hazardous
substances, which may give rise to liability to governmental entities or
private parties under Federal, state or local environmental laws and
regulations. Discharges of contaminants have occurred from time to time during
the normal course of the Company's operations. Although the Company has
invested substantial resources to prevent and minimize future discharges and to
remediate contamination resulting from prior discharges, there can be no
assurance that governmental agencies will not assess penalties against the
Company in connection with any past or future contamination or that third
parties will not assert claims against the Company for damages allegedly
arising out of any past or future contamination. Such governmental or third
party actions could require substantial expenditures by the Company and
adversely affect the financial position of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Environmental and Other Regulations."
CONTROL BY PRINCIPAL STOCKHOLDER; POTENTIAL CONFLICTS OF INTEREST
As of January 31, 1994, American Trading and Production Corporation
("ATAPCO") beneficially owned 2,366,526 shares, or 49.1%, of the Company's
Class A Common Stock (as defined) and 591,629 shares, or 11.8%, of the
Company's Class B Common Stock (as defined). Various persons who hold stock in
ATAPCO, either individually or in a fiduciary or beneficial capacity, also
beneficially owned 104,662 shares, or 2.2%, of the Class A Common Stock and
23,080 shares, or 0.5%, of the Class B Common Stock and are members of a
"group" (as such term is used in Section 13(d) of the Securities and Exchange
Act of 1934, as amended (the "Exchange Act")) (the "ATAPCO Group") along with
ATAPCO. The ATAPCO Group's holdings amount in the aggregate to 2,471,188
shares, or 51.3%, of the Class A Common Stock and 614,709 shares, or 12.3%, of
the Class B Common Stock. The holders of Class B Common Stock are entitled to
elect two directors and the holders of Class A Common Stock are entitled to
elect the remainder of the Board of Directors. Consequently, the ATAPCO Group
has the ability to determine the composition of a majority of the Company's
Board of Directors and thereby effectively has the ability to exercise control
over the Company. Henry A. Rosenberg, Jr., the Company's Chairman and Chief
Executive Officer, and Edward L. Rosenberg, Senior Vice President--
Administration, Corporate Development and Long Range Planning, are directors and
stockholders of ATAPCO, and Frank B. Rosenberg, Vice President--Marketing, is a
stockholder of ATAPCO. See "Management" and "Principal Stockholders."
10
<PAGE>
The relationship with ATAPCO creates the potential for conflicts of interest.
For example, the Company leases offices in a building owned by an indirect,
wholly-owned subsidiary of ATAPCO. There is no established procedure or policy
for resolving such conflicts of interest. The Indenture provides that
transactions between the Company or any of its subsidiaries and any affiliate
of the Company must be on terms that are no less favorable to the Company or
such subsidiary, as the case may be, than would be available in a comparable
transaction in arm's-length dealings with an unrelated third party. The
Indenture provides certain additional procedures for transactions involving
aggregate consideration in excess of $1.0 million. See "Management--Interest of
Management and Others in Transactions with the Company and its Subsidiaries"
and "Description of the Notes--Certain Covenants--Limitation on Transactions
with Affiliates."
RANKING OF THE NOTES
The Notes will be unsecured senior obligations of the Company, will rank pari
passu in right of payment with all existing and future senior indebtedness of
the Company and will be senior in right of payment to all existing and future
subordinated indebtedness of the Company. The Notes, however, will be
effectively subordinated to secured senior indebtedness of the Company with
respect to the assets securing such indebtedness and will also be effectively
subordinated to indebtedness of the Company's subsidiaries. As of September 30,
1994, after giving effect to the sale of the Notes offered hereby and the
application of the net proceeds thereof, the Company would have had $132.0
million of senior indebtedness outstanding (including the Notes and $7.0
million of Purchase Money Debt and other debt of the Company and its
subsidiaries). As of September 30, 1994, the Company had, subject to certain
restrictions, the ability to draw up to $50.0 million of additional senior
unsecured indebtedness under the Credit Facility. Pursuant to the Indenture
governing the Notes, the Company and its subsidiaries may incur additional
secured and unsecured indebtedness, or provide guarantees of indebtedness, in
certain circumstances. See "Description of the Notes -- Ranking of the Notes"
and "-- Certain Covenants."
INABILITY TO FUND A CHANGE OF CONTROL OFFER
In the event of a Change of Control, the Company will be required, subject to
certain conditions, to offer to purchase all outstanding Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any. After giving effect to the sale of Notes offered hereby and the
application of proceeds thereof the Company does not currently have, and no
assurance can be given that the Company will have, sufficient funds available
to purchase all or any material portion of the outstanding Notes were they to
be tendered in response to an offer made as a result of a Change of Control.
See "Description of the Notes -- Certain Covenants."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
There is currently no public market for the Notes, and the Company does not
intend to apply for listing of the Notes on any national securities exchange,
or for inclusion of the Notes on any automated inter-dealer quotation system.
The Underwriters have advised the Company that following the completion of the
offering of the Notes, the Underwriters presently intend to make a market in
the Notes, but they are not obligated to do so, and any such market making may
be discontinued at any time, without notice. Accordingly, there is no assurance
that any market will develop for the Notes or, if developed, that any trading
market will be sustained. If a market for the Notes does develop, the Notes may
trade at a premium or discount from their face amount, depending upon, among
other factors, fluctuations in interest rates, the Company's financial results,
future announcements concerning the Company or its competitors, government
regulation and general economic and other conditions and developments affecting
the industry. If an active public market does not develop or is not maintained,
the market price and liquidity of the Notes may be adversely affected.
11
<PAGE>
THE COMPANY
The Company, which traces its origins to 1917, is one of the largest
independent refiners and marketers of petroleum products in the United States.
The Company owns and operates two high-conversion refineries with a combined
capacity of 152,000 barrels per day of crude oil -- a 100,000 barrel per day
facility located in Pasadena, Texas, near Houston, and a 52,000 barrel per day
facility located in Tyler, Texas. The Company is also a leading independent
marketer of petroleum products and merchandise through a network of over 350
gasoline stations and convenience stores located in the Mid-Atlantic and
Southeastern United States. In support of these businesses, the Company
operates 16 product terminals located on three major product pipelines along
the Gulf Coast and the Eastern Seaboard and in the Central United States.
The Company's principal executive offices are located at One North Charles
Street, Baltimore, Maryland 21201, and the Company's telephone number at such
address is (410) 539-7400.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes (after deducting
the estimated underwriting discount and commissions and offering expenses) are
estimated to be approximately $121.4 million. Such proceeds will be used to:
(i) retire the 10.42% Senior Notes due January 3, 2001 (the "Existing Senior
Notes") in the original principal amount of $60.0 million plus a required
prepayment premium of approximately $3 million; (ii) repay borrowings
(excluding letters of credit) outstanding under the Credit Facility (estimated
to be approximately $15 million at the time of issuance of the Notes); and
(iii) provide working capital for general corporate purposes, including capital
expenditures.
As of September 30, 1994, no cash borrowings were outstanding under the
Credit Facility, and no such borrowings are outstanding as of the date hereof.
For the nine months ended September 30, 1994, the average interest rate on
borrowings under the Credit Facility was 7.25% per annum. The final maturity of
the Credit Facility is May 10, 1996. After giving effect to the sale of the
Notes, the Company will be able to draw up to $50.0 million of additional
indebtedness under the Credit Facility, subject to certain restrictions set
forth therein. Pending the application of the net proceeds from the offering of
the Notes, such proceeds will be invested in short-term marketable securities
as permitted under the terms of the Indenture. See "Description of Other
Indebtedness."
12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company
as of September 30, 1994, and the consolidated capitalization of the Company as
of September 30, 1994 as adjusted to give effect to the sale of the Notes and
the application of the net proceeds thereof, as if such transaction had
occurred on September 30, 1994. The table should be read in conjunction with
the Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1994
---------------------------
ACTUAL AS ADJUSTED
------------ --------------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents (a)...................... $ 21.2 $ 79.6
============ ============
Long-term debt (including current portion) (b):
Credit Facility (c).............................. $ -- $ --
Existing Senior Notes............................ 60.0 --
10 7/8% Senior Notes due 2005.................... -- 125.0
Purchase Money Debt and other debt............... 7.0 7.0
------------ ------------
Total long-term debt........................... 67.0 132.0
Common Stockholders' Equity:
Common Stock, Classes A and B.................... 49.0 49.0
Additional paid-in capital (d)................... 89.3 89.3
Retained earnings (e)............................ 132.1 130.1
------------ ------------
Total Common Stockholders' Equity.............. 270.4 268.4
------------ ------------
Total Capitalization........................... $ 337.4 $ 400.4
============ ============
</TABLE>
- ---------------------
(a) Cash and cash equivalents, as adjusted, includes the proceeds of the Notes
after payment for the retirement of the Existing Senior Notes of
approximately $63 million (including a prepayment premium of approximately
$3 million) and payment of debt issuance costs of approximately $3.3
million.
(b) Long-term debt includes the current portion, consisting of $8.6 million of
the Existing Senior Notes and $1.4 million of the Purchase Money Debt and
other debt.
(c) As of September 30, 1994, no cash borrowings were outstanding under the
unsecured Credit Facility and the Company had cash borrowing availability
of up to $50.0 million, subject to certain restrictions. The Company
estimates that approximately $15 million of cash borrowings will be
outstanding under the Credit Facility at the time of issuance of the Notes,
which amount will be repaid as described under "Use of Proceeds."
(d) Additional paid-in capital is presented net of unearned restricted stock of
$1.7 million.
(e) Retained earnings, as adjusted, is after giving effect to the loss (after
income tax benefit) on the early extinguishment of the Existing Senior
Notes in the amount of approximately $2 million. This loss which consists
principally of the prepayment premium on the Existing Senior Notes will be
recorded as an extraordinary loss from the early extinguishment of debt in
the period that the Existing Senior Notes are retired.
13
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of the
Company. The Statements of Operations Data and Balance Sheet Data for each of
the five years in the period ended December 31, 1993 are derived from the
Consolidated Financial Statements of the Company. The Statements of Operations
Data and Balance Sheet Data for the nine months ended September 30, 1993 and
1994 are derived from unaudited consolidated condensed financial statements.
The unaudited consolidated condensed financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for the fair presentation of the financial position and
the results of operations for these periods. Operating results for the nine
months ended September 30, 1994 are not necessarily indicative of the results
that may be expected for the entire year ended December 31, 1994. The
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", the Consolidated
Financial Statements and related notes thereto and other financial information
included or incorporated by reference in this Prospectus. "Sales and operating
revenues" and "costs and operating expenses" include Federal and state excise
and other similar taxes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------
1989(A) 1990 1991 1992 1993 1993 1994
-------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN MILLIONS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Sales and operating
revenues(b)........... $1,523.1 $2,019.9 $1,857.7 $1,795.3 $1,747.4 $1,316.8 $ 1,315.3
Costs and operating
expenses(b)........... 1,339.4 1,801.1 1,718.1 1,659.8 1,604.7 1,222.4 1,234.5
Selling and
administrative
expenses.............. 126.9 136.4 112.1 102.8 91.7 69.7 62.6
Depreciation and
amortization.......... 25.9 31.6 33.3 41.5 41.9 31.3 33.7
Sales and abandonments
of property, plant and
equipment(c).......... (2.7) 1.6 -- 1.3 2.3 (0.1) 16.6
Operating income
(loss)(d)............. 33.6 49.2 (5.8) (10.1) 6.8 (6.5) (32.1)
Interest expense....... 1.8 2.7 7.9 6.8 7.5 5.5 5.8
Net income (loss)(e)... 21.0 26.0 (6.0) (5.5) (4.3) (11.2) (25.2)
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 38.3 $ 82.5 $ 78.1 $ 55.5 $ 52.0 $ 36.4 $ 21.2
Total assets........... 623.7 687.7 687.8 675.3 656.2 649.5 604.2
Long-term debt
(including current
portion).............. 43.1 2.6 88.9 61.6 66.7 61.3 67.0
Total common
stockholders' equity.. 306.5 324.6 310.7 303.3 298.4 292.0 270.4
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............ $ 59.6 $ 123.3 $ 0.5 $ 53.0 $ 28.9 $ 9.3 $ (10.5)
Net cash used in
investing activities.. (142.5) (30.7) (80.8) (45.8) (40.0) (30.5) (17.9)
Net cash provided by
(used in) financing
activities............ 29.8 (48.3) 75.8 (29.8) 7.7 2.1 (2.6)
OPERATING DATA(F):
Refining Operations
Production (m bbl/day). 163.9 149.0 147.0 153.5 158.4 159.3 155.0
Utilization (g)........ 92.6% 83.8% 86.7% 87.8% 91.6% 92.2% 90.3%
Gross margin (per bbl). $ 3.42 $ 4.25 $ 2.35 $ 2.60 $ 2.29 $ 2.38 $ 2.64
Operating expenses (per
bbl).................. 1.73 2.13 2.50 2.36 2.31 2.26 2.41
Retail Operations
Number of units (at
period end)........... 715 605 524 435 376 393 356
Gasoline volume (mm
gals)................. 555 527 469 471 465 345 352
Average gasoline volume
per unit
(m gals/month)........ 64.7 72.6 74.6 90.2 103.1 97.5 109.9
Gasoline gross margin
(per gal)............. 11.9c 11.3c 10.4c 12.6c 13.8c 12.5c 11.0c
Merchandise sales (mm). $ 160.0 $ 150.9 $ 121.0 $ 103.8 $ 82.8 $ 63.7 $ 64.3
Average merchandise
sales per unit
(m $/month)........... 18.6 20.8 19.2 19.9 18.4 18.0 20.1
Merchandise gross
margin................ 32.3% 31.7% 32.3% 32.4% 31.6% 32.2% 23.6%
Operating expenses as a
percentage of
retail sales.......... 18.9% 18.5% 17.2% 16.9% 16.6% 16.6% 16.6%
OTHER DATA:
EBITDAAL(h)............ $ 85.0 $ 117.4 $ (18.4) $ 26.9 $ 23.3 $ 24.6 $ 36.1
Turnaround
expenditures(i)...... 4.1 2.1 21.1 17.7 4.1 2.6 0.6
Capital expenditures... 32.5 29.4 64.8 38.0 40.9 29.8 21.1
-------- -------- -------- -------- -------- -------- ---------
Total expenditures..... 36.6 31.5 85.9 55.7 45.0 32.4 21.7
Pro forma interest
expense(j)........... -- -- -- -- $ 14.8 -- $ 11.3
Ratio of EBITDAAL to
pro forma interest
expense (k)........... -- -- -- -- 1.6x -- 3.2x
Ratio of long-term debt
to total
capitalization........ 12.3% 0.8% 22.2% 16.9% 18.3% 17.4% 19.9%
Ratio of earnings to
fixed charges(l)..... 6.0x 7.1x -- -- 1.0x -- --
</TABLE>
(footnotes on following page)
14
<PAGE>
(a) The Company acquired La Gloria, the owner of the Tyler Refinery, in the
fourth quarter of 1989 and accounted for this acquisition utilizing the
purchase method of accounting. La Gloria's results of operations have been
included in the Company's results of operations since the effective date
of the acquisition in the fourth quarter of 1989.
(b) Sales and operating revenues and costs and operating expenses for the
years 1989 through 1991 have been adjusted to reflect the reclassification
of certain finished product exchange transactions and to include all
Federal and state excise and other similar taxes. These changes were made
to conform with the current presentation and had no impact on net income
(loss) in any of the periods presented.
(c) Sales and abandonments of property, plant and equipment in 1989 represent
an excess of proceeds over the net book value of the assets sold. Sales
and abandonments for all other periods represent a deficiency of the
proceeds over the net book value of assets sold or abandoned. For the nine
months ended September 30, 1994, losses from sales and abandonments of
property, plant and equipment includes the write-down of capitalized
expenditures of $16.8 million (before income taxes) related to the
abandonment of the Company's plans to construct a hydrodesulphurization
unit at the Pasadena Refinery.
(d) The Company's crude oil, refined products, and convenience store
merchandise and gasoline inventories are valued at the lower of cost
(last-in, first-out or LIFO) or market with the exception of crude oil
inventory held for resale which is valued at the lower of cost (first-in,
first-out or FIFO) or market. Under the LIFO method, the effects of price
increases and decreases in crude oil and other feedstocks are reflected in
costs and operating expenses in the period that such price changes occur.
In periods of rising prices, using the LIFO method may cause reported
operating income to be lower than would otherwise result from the use of
the FIFO method. Conversely, in periods of falling prices the LIFO method
may cause reported operating income to be higher than would otherwise
result from the use of the FIFO method. The impact of LIFO for the periods
presented was to increase (decrease) operating income from what would have
been reported had the FIFO method been used as follows: year ended
December 31, 1989 - $(28.2) million; 1990 - $(35.0) million; 1991 - $45.9
million; 1992 - $5.8 million; 1993 - $27.7 million; nine months ended
September 30, 1993 - $0.1 million; 1994 - $(17.9) million.
(e) In 1992, the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" which resulted in a cumulative
decrease in net loss of $13.4 million, and Statement of Financial
Accounting Standards No. 106 "Accounting for Postretirement Benefits Other
Than Pensions" which resulted in a cumulative increase in net loss of $5.6
million.
(f) Operating Data is determined before considering the impact of applying the
LIFO method.
(g) Utilization is defined as crude oil throughput relative to the rated
capacity to process crude oil for both Refineries. If other feedstocks
were included as throughput in the calculation, utilization would have
increased to 107.8%, 98.0%, 96.7%, 101.0%, 104.2%, 104.8% and 102.0% for
the years ended December 31, 1989, 1990, 1991, 1992, 1993, and for the
nine months ended September 30, 1993 and 1994, respectively. Utilization
reflects downtime for maintenance turnarounds during which refinery
production is reduced significantly. See "Business--Refining Operations--
Pasadena Refinery" and "--Tyler Refinery."
(h) EBITDAAL is defined herein as operating income (loss) before interest and
taxes ("EBIT"), excluding depreciation and amortization ("DA"), excluding
(gain) loss on sales and abandonments of property, plant and equipment
("A"), and excluding the impact on operating income (loss) of accounting
for inventory under the LIFO method compared with the FIFO method ("L"),
as set forth below:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------
1989 1990 1991 1992 1993 1993 1994
----- ------ ------ ------ ----- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating income (loss). $33.6 $ 49.2 $ (5.8) $(10.1) $ 6.8 $ (6.5) $ (32.1)
Depreciation and amorti-
zation................. 25.9 31.6 33.3 41.5 41.9 31.3 33.7
(Gain) loss on sales and
abandonments of proper-
ty, plant and equip-
ment................... (2.7) 1.6 -- 1.3 2.3 (0.1) 16.6
Impact of LIFO method... 28.2 35.0 (45.9) (5.8) (27.7) (0.1) 17.9
----- ------ ------ ------ ----- -------- ---------
EBITDAAL............... $85.0 $117.4 $(18.4) $ 26.9 $23.3 $ 24.6 $ 36.1
===== ====== ====== ====== ===== ======== =========
</TABLE>
The Company has included this information because it believes that such
information is used by certain investors to assess a company's historical
ability to meet future debt service, capital expenditures and working
capital requirements. EBITDAAL should not be considered as an alternative to
net income, as an indicator of operating performance, or as an alternative
to cash flows as a measure of liquidity, as such measures would be
determined pursuant to generally accepted accounting principles.
(i) Turnaround expenditures reflects periodic major maintenance which is
capitalized. See "Business--Refining Operations-- Turnarounds."
(j) Pro forma interest expense represents interest expense reported in the
applicable financial statements excluding the interest expense associated
with the Existing Senior Notes, and including estimated interest expense
associated with the Notes in the amount of $13.6 million and $10.2 million
for the year ended December 31, 1993 and for the nine months ended
September 30, 1994, respectively, as if the Notes had been issued at the
beginning of these periods.
(k) Ratio of EBITDAAL to pro forma interest expense is EBITDAAL divided by pro
forma interest expense.
(l) The ratio of earnings to fixed charges equals earnings before fixed
charges divided by fixed charges. For purposes of calculating the ratio of
earnings to fixed charges, earnings consists of earnings (loss) before
income taxes, cumulative effects of changes in accounting principles and
fixed charges (excluding capitalized interest). Fixed charges consists of
interest expense, capitalized interest and that portion of rental expense
representative of the interest factor. For the years ended December 31,
1991 and 1992 and the nine months ended September 30, 1993 and 1994 there
were deficiencies in the coverage of fixed charges by earnings before
fixed charges of $5.6 million, $17.9 million, $11.8 million and $37.0
million, respectively. The deficiency for the nine months ended September
30, 1994 would have been $20.2 million exclusive of the loss incurred on
the abandonment of certain refinery equipment of $16.8 million (before
income taxes).
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Purchases of crude oil supply are typically made pursuant to relatively
short-term, renewable contracts with numerous foreign and domestic major and
independent oil producers, generally containing market-responsive pricing
provisions. The Company has instituted programs designed to manage profit
margins by minimizing the Company's exposure to the risks of price volatility
related to the acquisition, conversion and sale of crude oil and refined
petroleum products. These programs include hedging activities such as the
purchase and sale of futures and options contracts to mitigate the effect of
fluctuations in the prices of crude oil and refined products. While the
Company's net sales and operating revenues fluctuate significantly with
movements in industry crude oil prices, such prices do not have a direct
relationship to net earnings, which are subject to the impact of the Company's
LIFO method of accounting discussed below. The effect of changes in crude oil
prices on the Company's operating results is determined more by the rate at
which the prices of refined products adjust to reflect such changes. See
"Business -- Business Strategy" and "-- Refining Operations."
The following table estimates the sensitivity of the Company's income before
taxes to price changes which impact its refining and retail margins based on a
representative production rate for the Refineries and a representative amount
of total gasoline sold at the Company's retail units:
<TABLE>
<CAPTION>
EARNINGS SENSITIVITY CHANGE ANNUAL IMPACT
-------------------- --------- -------------
<S> <C> <C>
Refining margin.................................. $0.10/bbl $5.8 million
Retail margin.................................... $0.01/gal $4.8 million
</TABLE>
The Company conducts environmental assessments and remediation efforts at
multiple locations, including operating facilities and previously owned or
operated facilities. The Company accrues environmental and clean-up related
costs of a non-capital nature when it is both probable that a liability has
been incurred and that the amount can be reasonably estimated. Accruals for
losses from environmental remediation obligations generally are recognized no
later than completion of the remedial feasibility study. Estimated costs,
which are based upon experience and assessments, are recorded at undiscounted
amounts without considering the impact of inflation, and are adjusted
periodically as additional or new information is available. Expenditures for
equipment necessary for environmental issues relating to ongoing operations
are capitalized.
The Company's crude oil, refined products and convenience store merchandise
and gasoline inventories are valued at the lower of cost (based on the last-
in, first-out or LIFO method of accounting) or market, with the exception of
crude oil inventory held for resale which is valued at the lower of cost
(based on the first-in, first-out or FIFO method of accounting) or market.
Under the LIFO method, the effects of price increases and decreases in crude
oil and other feedstocks are charged directly to the cost of refined products
sold in the period that such price changes occur. In periods of rising prices,
the LIFO method may cause reported operating income to be lower than would
otherwise result from the use of the FIFO method. Conversely, in periods of
falling prices the LIFO method may cause reported operating income to be
higher than would otherwise result from the use of the FIFO method. In
addition, the Company's use of the LIFO method may understate, for periods of
rising prices, or overstate, for periods of falling prices, the value of
inventories on the Company's consolidated balance sheet as compared to the
value of inventories under the FIFO method. The Company will make an actual
valuation of inventory under the LIFO method only at the end of each year
based on the inventory levels and costs at that time. Accordingly, the Company
calculates interim LIFO projections based on management's estimates of
expected year-end inventory levels and values. Following is the Company's
inventory carrying values at September 30, 1994 and December 31, 1993. The
Company recorded a LIFO allowance of $46.1 million and $28.2 million as of
September 30, 1994 and December 31, 1993, respectively, which represents the
approximate understatement of the value of inventories on the
16
<PAGE>
Company's consolidated balance sheets as compared to the value of inventories
as computed on a FIFO basis.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Crude oil........................................ $ 39.0 $ 47.8
Refined products................................. 60.5 73.1
------ ------
Total inventories at FIFO (approximates current
cost).......................................... 99.5 120.9
LIFO allowance................................... (25.8) (43.7)
------ ------
Total crude oil and refined products............ 73.7 77.2
------ ------
Merchandise inventory at FIFO (approximates cur-
rent cost)...................................... 7.2 7.7
LIFO allowance................................... (2.4) (2.4)
------ ------
Total merchandise............................... 4.8 5.3
------ ------
Materials and supplies inventory at FIFO......... 8.3 7.9
------ ------
Total Inventory................................. $ 86.8 $ 90.4
====== ======
</TABLE>
As discussed in Notes D and F of the Notes to Consolidated Financial
Statements contained elsewhere in this Prospectus, the Company and its
subsidiaries adopted the provisions of the Financial Accounting Standards
Board's Statements of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"), and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"), effective January 1,
1992. Results for the year ended December 31, 1992, include a $13.4 million
cumulative benefit from the effect on prior years of the adoption of SFAS 109,
and a $5.6 million cumulative charge, net of tax, from the application of SFAS
106.
The following discussion should be read in conjunction with "Selected
Financial and Other Data" and the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1993 and 1994
The Company's sales and operating revenues increased $12.6 million or 2.8% in
the third quarter of 1994 and decreased $1.5 million or 0.1% for the nine
months ended September 30, 1994 from the comparable periods in 1993. The
Company's sales and operating revenues include all Federal and state excise and
other similar taxes. These taxes totalled $97.0 million and $69.0 million for
the three months ended September 30, 1994 and 1993, respectively, and $295.1
million and $207.3 million for the nine months ended September 30, 1994 and
1993, respectively. The third quarter increase in sales and operating revenues
was primarily attributable to the increase in excise taxes and a 1.8% increase
in the average sales price per gallon of petroleum products. Due to
deteriorating refinery gross margins which occurred during the third quarter of
1994, the Company reduced operating runs which resulted in a 7.4% decrease in
petroleum product sales volumes. The decrease for the nine months ended
September 30, 1994 was a result primarily of an 8.5% decrease in the average
sales price per gallon of petroleum products and a 0.3% decrease in petroleum
products sales volumes which were partially offset by the increase in excise
taxes.
Merchandise sales increased $0.6 million or 1.0% for the nine months ended
September 30, 1994 compared to the same period in 1993, while merchandise gross
profit decreased $5.3 million or 25.9% for the nine months ended September 30,
1994 compared to the same period in 1993. Merchandise gross margin (merchandise
gross profit as a percent of merchandise sales) decreased from 32.2% to
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23.6% for the nine months ended September 30, 1993 and 1994, respectively. In
addition to a reduction in the number of operating units during the period, the
$5.3 million decrease in merchandise gross profit and the related decrease in
gross margin was also due to the introduction in early 1994 of a new
merchandise pricing program designed to increase per unit customer traffic and
overall merchandise sales and gasoline volumes. A key element of the program
includes the reduction of prices on certain items such as tobacco products and
beverages. While overall merchandise gross profit decreased in the first nine
months of 1994 compared with the same period in 1993 as a result of the new
strategy, by late September 1994 (that is, late in the third quarter of 1994),
merchandise revenue had increased to the point that aggregate merchandise gross
profit exceeded same store merchandise gross profit achieved in late September
1993. For the nine months ended September 30, 1994 as compared to the same
period in 1993, same store average monthly gasoline volumes and merchandise
sales increased approximately 7% and 27%, respectively.
Costs and operating expenses increased $35.3 million or 8.4% in the third
quarter of 1994 compared to the third quarter of 1993. The increase was due to
the increase in excise taxes and a 7.7% increase in the average cost per barrel
consumed of crude oil and feedstocks. These increases were partially offset by
the sales volume decreases as previously discussed. Costs and operating
expenses increased $12.2 million or 1.0% for the nine months ended September
30, 1994 compared to the same period in 1993. This increase was due to excise
tax increases as previously discussed which were partially offset by a 10.8%
decrease in the average cost per barrel consumed of crude oil and feedstocks.
The results of operations were affected by the Company's use of the LIFO method
to value inventory which decreased the Company's gross margin $0.54 per barrel
($7.4 million) for the three months ended September 30, 1994, while increasing
the gross margin $0.11 per barrel ($1.6 million) for the three months ended
September 30, 1993. The use of the LIFO method decreased the Company's gross
margin $0.43 per barrel ($17.9 million) for the nine months ended September 30,
1994 but did not have a significant effect on the Company's gross margin for
the nine months ended September 30, 1993.
The Company has recently instituted programs designed to manage refining
profit margins by minimizing the Company's exposure to the risks of price
volatility related to the acquisition, conversion and sale of crude oil and
refined petroleum products. These programs include hedging activities such as
the purchase and sale of futures and options contracts to offset the effects of
fluctuations in the prices of crude oil and refined products. Such hedging
activities are subject to specific policies and guidelines established by the
Company and are reviewed by the Margin Management Committee composed of senior
management and chaired by the Company's Chief Executive Officer. The Company's
policy is to manage its crude oil acquisition, refining, and product sales on a
daily basis to achieve, at a minimum, prevailing margins available to
comparable Gulf Coast refiners and, where appropriate, to pursue forward
hedging opportunities which lock in attractive returns. The number of barrels
of crude oil and refined products covered by such hedging activities varies
from time to time, within certain limits established by the Margin Management
Committee. While the Company's hedging activities are intended to reduce
volatility while providing an acceptable profit margin on a portion of
production, the use of such a program can limit the Company's ability to
participate in an improvement in related product profit margins.
Total refinery throughput averaged 149,500 barrels per day for the third
quarter of 1994 compared to 165,600 barrels per day for the third quarter of
1993 due to planned reductions in throughput. Total refinery throughput
averaged 155,000 barrels per day for the nine months ended September 30, 1994
compared to 159,300 barrels per day for the same period in 1993. Yields of
gasoline and distillates were 87,100 barrels per day (58.3%) and 48,900 barrels
per day (32.7%), respectively, in the third quarter of 1994 and 90,700 barrels
per day (54.8%) and 54,300 barrels per day (32.8%), respectively, for the third
quarter of 1993. Yields of gasoline and distillates were 88,100 barrels per day
(56.8%) and 50,600 barrels per day (32.6%), respectively, for the nine months
ended September 30, 1994 and
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87,600 barrels per day (55.0%) and 50,900 barrels per day (31.9%),
respectively, for the same period in 1993.
Selling and administrative expenses decreased $2.3 million or 9.8% for the
three months ended September 30, 1994 and $7.2 million or 10.3% for the nine
months ended September 30, 1994 as compared to the same periods in 1993. The
decreases are principally due to decreased costs associated with the sale or
closing throughout 1993 of retail marketing units which were either not
profitable or did not fit with the Company's strategic direction, and cost
reductions related to the Company's administrative functions.
Depreciation and amortization increased $2.1 million or 20.2% for the three
months ended September 30, 1994 and $2.4 million or 7.8% for the nine months
ended September 30, 1994 compared to the same periods in 1993. These increases
were due primarily to accelerated deferred turnaround amortization related to
the Pasadena Refinery's fluid catalytic cracking unit. A maintenance
turnaround of the fluid catalytic cracking unit, which was previously
scheduled for the first quarter of 1995, began in October 1994, and was
completed in the fourth quarter of 1994. While the fluid catalytic cracking
unit and certain related units were out of service for a significant portion
of the fourth quarter, the remainder of the Pasadena Refinery was in operation
and is expected to average approximately 81,000 barrels per day of throughput
during the fourth quarter of 1994.
In the three months ended September 30, 1994, costs and operating expenses
included $0.7 million and $0.9 million, respectively, related to environmental
matters and retail unit closings. This compares to $1.0 million and $0.7
million for the same period of 1993. For the nine months ended September 30,
1994 and 1993, costs and operating expenses included $1.8 million and $3.4
million, respectively, for environmental matters and $1.7 million and $1.8
million, respectively, for retail unit closings. Interest expense for the nine
months ended September 30, 1994 and 1993 included the reduction of $0.7
million and $0.6 million, respectively, as a result of the interest rate swap
contracts.
As was discussed in the Company's 1993 Form 10-K, since 1991, the Company
had incurred expenditures of approximately $21 million in connection with
engineering and an equipment acquisition which would enable the Pasadena
Refinery to manufacture low sulphur distillate. As of December 31, 1993, this
project had been temporarily halted while the Company further studied the
market economics of high sulphur versus low sulphur distillate during a
complete business cycle. Management estimates that additional expenditures in
the range of approximately $50 million to approximately $80 million would be
required to complete this project. Following an evaluation of current and
projected margins based on available supply and forecasted demand for low
sulphur distillate after one full business cycle, management abandoned its
plans to construct a hydrodesulphurization unit at the Pasadena Refinery.
Accordingly, sales and abandonments of property, plant, and equipment in the
third quarter of 1994 reflect a write-down of the capitalized expenditures of
$16.8 million to an estimated net realizable salvage value of $4.0 million.
The Pasadena Refinery will continue to manufacture high sulphur distillates
which are readily saleable in the Company's market areas.
Three Years Ended December 31, 1993
The Company's sales and operating revenues decreased 2.7% in 1993 and 3.4%
in 1992 over the previous years. The Company's sales and operating revenues
include all Federal and state excise and other similar taxes, which totaled
$296.2 million in 1993, $218.9 million in 1992, and $214.7 million in 1991.
The 1993 decrease in sales and operating revenues was primarily due to an 8.8%
decrease in the average unit selling price of petroleum products (which was
partially offset by a 2.1% increase in sales volumes), to a 19.9% decrease in
merchandise sales, and to the increase in excise taxes indicated above. The
1992 decrease in sales and operating revenues was primarily attributable to a
6.6% decrease in the average unit selling price of petroleum products, which
was partially offset by a 3.4% increase in sales volumes, and a 12.5% decrease
in merchandise sales. The merchandise sales
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decreases resulted principally from the sale or closing throughout 1992 and
1993 of retail units which were either not profitable or not compatible with
the Company's strategic direction. There were 524, 435 and 376 retail units
operating at December 31, 1991, 1992 and 1993, respectively.
Gasoline sales accounted for 56.4% of total 1993 revenues (excluding excise
taxes), while distillates and merchandise sales represented 30.4% and 6.0%,
respectively. This compares to a dollar mix from sales of 56.8% gasoline,
28.7% distillates and 6.9% merchandise in 1992, and 56.8% gasoline, 29.3%
distillates and 7.5% merchandise in 1991.
Costs and operating expenses decreased 3.3% in 1993, after decreasing 3.4%
in 1992. The 1993 decrease was attributable to a decrease of $2.29, or 11.2%,
in the average cost per barrel of crude oil and feedstocks, which was
partially offset by increases in volumes sold and excise taxes. The 1992
decrease in costs and operating expenses was due primarily to a decrease of
$1.45, or 6.6%, in the average cost per barrel of crude oil and feedstocks,
which was partially offset by higher sales volumes.
The results of operations were affected by the Company's use of the LIFO
method to value inventory, which results in a better matching of current
revenues and costs. The impact of LIFO was to increase the Company's gross
margins in 1993, 1992 and 1991 by $0.48 per barrel ($27.7 million), $0.10 per
barrel ($5.8 million) and $0.86 per barrel ($45.9 million), respectively. The
1992 LIFO impact is net of a $2.3 million gross margin decrease resulting from
a liquidation of LIFO inventory quantities as discussed in Note B of the Notes
to Consolidated Financial Statements appearing elsewhere in this Prospectus.
Total refinery production was: 158,400 barrels per day in 1993, yielding
86,300 barrels per day of gasoline (54.5%) and 51,700 barrels per day of
distillates (32.6%); 153,500 barrels per day in 1992, yielding 86,200 barrels
per day of gasoline (56.2%) and 49,000 barrels per day of distillates (31.9%);
and 147,000 barrels per day in 1991, yielding 78,000 barrels per day of
gasoline (53.1%) and 47,300 barrels per day of distillates (32.2%). Refinery
production was slightly impacted in 1993 by a scheduled maintenance turnaround
in the second quarter at the Tyler Refinery, while refinery production was
more dramatically reduced in 1992 by scheduled first quarter maintenance
turnarounds at both Refineries. Due to poor refining margins in the fourth
quarter of 1993, the Company announced that it had reduced throughput at its
Pasadena Refinery by approximately 20%. In 1991, overall refinery production
and gasoline yields were reduced by the first quarter's scheduled turnaround
and extensive modification of the Pasadena Refinery's fluid catalytic cracking
unit, an important component in gasoline production. The Company's finished
product requirements in excess of its refinery yields and existing inventory
levels are acquired through exchange agreements or outright purchases.
On September 28, 1993, a fire destroyed the Company's Red Bluff truck
loading rack (the "Pasadena Terminal Rack") located one mile from the Pasadena
Refinery. Since the fire, the Company has supplied its terminal rack customers
with refined product from nearby locations. However, due to the strategic
location of the Pasadena Terminal Rack, the Company has experienced certain
reductions in operating margins in selling refined product at these
alternative sites or in the bulk products market. Prior to the fire, refined
product sold from the Pasadena Terminal Rack approximated 4% of consolidated
1993 refined product sales volumes. In the interim, the Company has supplied
its customers through exchange terminals while it evaluates its options
regarding repairs to the facility.
Annual selling and administrative expenses decreased 10.8% in 1993 after
decreasing 8.3% in 1992. The 1993 decrease resulted primarily from decreased
store level and marketing administrative costs associated with the closing of
retail units, and the consolidation of certain marketing field operations. The
1992 decrease is also attributable to reduced costs associated with the
closing of retail units and reductions resulting from the reorganization of
the Company's administrative functions. At December 31, 1993, the Company had
127 convenience stores, 111 mini-marts, and 138 gasoline stations, compared to
173 convenience stores, 119 mini-marts, and 143 gasoline stations at December
31, 1992 and 246 convenience stores, 126 mini-marts, and 152 gasoline stations
at December 31, 1991. Despite the net reduction in 1993 of 59 units (13.6%)
from the December 31, 1992 level, the
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Company experienced a 9.1% increase in total retail petroleum product gross
margin while total retail sales volumes decreased less than 1%. Selling and
administrative expenses in 1993 include $0.7 million in reorganization and
office closure costs, while reorganization costs of $0.4 million and $1.1
million are included in selling and administrative expenses for 1992 and 1991,
respectively.
Operating costs and expenses in 1993, 1992 and 1991 include $6.3 million,
$5.2 million and $10.6 million, respectively, related to environmental matters
and $2.4 million, $2.4 million and $5.2 million, respectively, related to
retail units that have been closed. Operating costs and expenses in 1993 also
include $1.8 million of accrued casualty related costs. Operating costs and
expenses in 1992 include a $1.0 million reserve for the write-off of excess
refinery equipment and a $1.3 million write-off of refinery feasibility
studies.
Depreciation and amortization in 1993 was comparable to that recorded in
1992. Depreciation and amortization increased 24.5% in 1992. This increase
resulted from additional depreciation and amortization relating to the 1991
capital modification and turnaround at the Pasadena Refinery, which was
completed in March 1991, depreciation associated with other capital
expenditures made in 1991 and amortization of the 1992 turnarounds.
Additionally, $2.4 million of depreciation was recorded as a result of the
step-up in basis of fixed assets as required by the adoption of SFAS 109,
effective January 1, 1992.
There was a loss of $2.3 million from sales and abandonments of property,
plant and equipment in 1993, primarily as a result of a write-down of the
sulphur unit at the Pasadena Refinery. There was a loss of $1.3 million from
sales and abandonments of property, plant and equipment in 1992, including a
$0.9 million write-off of abandoned equipment related to the capital
modification of the Pasadena Refinery's fluid catalytic cracking unit.
Interest and other income increased $1.4 million in 1993 and decreased $4.7
million in 1992 from the previous year. The 1992 decrease was due primarily to
a decrease of $40.9 million in the average daily cash invested and to
decreases in average interest rates. Interest and other income in 1993
included income of $0.7 million from the Company's wholly owned insurance
subsidiary, compared to a loss of $1.0 million in 1992 and income of $0.2
million in 1991 from such subsidiary.
Non-operating gains in 1991 related to the Pasadena Refinery include a
favorable $2.4 million litigation settlement with respect to property tax
assessments for the years 1986 to 1989 and a favorable $1.2 million insurance
settlement. There were no material net non-operating gains or losses credited
or charged to income in 1993 or 1992.
Interest expense increased $0.6 million in 1993 and decreased $1.1 million
in 1992 from the previous year. The 1993 increase related to a decrease in
capitalized interest as disclosed in Note C of the Notes to Consolidated
Financial Statements appearing elsewhere in this Prospectus. The 1992 decrease
was due to decreases in the average effective rate on cash borrowed,
reflecting the positive results of the Company's interest rate swap program.
Interest expense for 1993 and 1992 was reduced by $0.8 million and $1.1
million, respectively, as a result of the interest rate swap contracts.
Increases of $5.2 million in the average daily cash borrowed in 1992 partially
offset the decreased expense.
As discussed in Note D of the Notes to Consolidated Financial Statements
appearing elsewhere in this Prospectus, the passage of the Tax Act of 1993
increased the Federal corporate income tax rate from 34% to 35%, effective
January 1, 1993. The effect of this change in rate was to increase the
Company's 1993 income tax expense and net loss by $2.3 million, or $0.23 per
share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at September 30, 1994 of $21.2
million were $30.9 million lower than at December 31, 1993. This decrease
resulted from cash used in investment activities
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of $17.9 million for the nine months ended September 30, 1994, which consists
of capital expenditures of $21.1 million and deferred turnaround expenditures
of $0.6 million net of proceeds from sales of property, plant and equipment of
$3.4 million. Additionally, cash outflows included $2.7 million for the
acquisition of shares of the Company's Class B Common Stock as discussed below.
Partially offsetting these cash outflows was cash provided from operations
before changes in working capital of $17.9 million and net proceeds received
from the Purchase Money Debt of $0.4 million.
Net cash used in operating activities (including changes in working capital)
totaled $10.4 million for the nine months ended September 30, 1994 compared to
cash provided by operating activities of $9.3 million for the nine months ended
September 30, 1993. The 1994 outflows consist of $28.3 million related to
working capital requirements resulting from increases in the value and volume
of crude oil and finished product inventories, receivables and prepaid
operating expenses and to decreases in inventory payables and in accrued excise
tax liabilities. These outflows were partially offset by $17.9 million of cash
provided from operations before changes in working capital. The 1993 amount
consists of cash provided from operations before changes in working capital of
$20.0 million, and cash outflows of $10.7 million relating to working capital,
resulting primarily from decreases in crude oil and refined products payable
and increases in the value of crude oil and finished product inventories, which
were partially offset by net decreases in accounts receivable. The timing of
collection of the Company's receivables is impacted by the specific type of
sale and associated terms. Bulk sales of finished products are typically sold
in 25,000 barrel increments with three day payment terms. Rack sales at the
Company's product terminals are sold by truckload (approximately 8,000 gallons)
with seven to ten day payment terms. While the Company's overall sales are
aligned to its refining capability, receivables can vary between periods
depending upon the specific type of sale and associated payment terms for sales
near the end of a reporting period. At September 30, 1994 and December 31,
1993, accounts receivable had decreased from the same period of the previous
year due to bulk sales representing a higher proportion of overall sales volume
immediately preceding the end of the respective periods.
Net cash outflows from investment activities were $17.9 million for the nine
months ended September 30, 1994 compared to a net outflow of $30.5 million for
the same period in 1993. The 1994 activity relates primarily to $21.1 million
of capital expenditures (which includes $11.8 million for the Refineries and
$6.9 million related to the marketing area). These cash outflows were partially
offset by proceeds from the sale of property, plant and equipment of $3.4
million. The 1993 amount consists principally of capital expenditures of $29.8
million ($15.3 million relating to marketing and $14.0 million relating to the
Refineries) and $2.6 million in Tyler Refinery deferred turnaround charges.
Net cash used in financing activities was $2.6 million for the nine months
ended September 30, 1994 compared to cash provided by financing activities of
$2.1 million for the nine months ended September 30, 1993. The 1994 cash
outflows relate primarily to the acquisition of 135,000 shares of Class B
Common Stock for use in connection with the awards of stock and options under
the 1994 Long-Term Incentive Plan, as disclosed in Note E of the Notes to
Unaudited Consolidated Condensed Financial Statements appearing elsewhere in
this Prospectus. The 1993 inflows are the result of proceeds from the
termination of interest rate swap contracts.
The Company had recorded a liability of approximately $16 million as of
September 30, 1994 to provide for the estimated costs of compliance with
environmental regulations which are not anticipated to be of a capital nature.
During the years 1994-1996, the Company estimates environmental related
expenditures of approximately $4 million and approximately $19 million at the
Pasadena Refinery and the Tyler Refinery, respectively. Of these expenditures,
it is anticipated that approximately $3 million for the Pasadena Refinery and
approximately $17 million for the Tyler Refinery will be of a capital nature,
while approximately $1 million at the Pasadena Refinery and approximately $2
million for the Tyler Refinery will be related to previously accrued
expenditures of a non-capital nature. At the Company's retail marketing
facilities, capital expenditures relating to environmental improvements are
planned totalling approximately $23 million through 1998.
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The Company's cash and cash equivalents were $3.5 million lower at year-end
1993 than at year-end 1992. The decrease was attributable to $40.0 million of
net cash outflows from investment activities, which was partially offset by
cash provided by operating activities of $28.9 million and cash provided by
financing activities of $7.6 million.
The $28.9 million cash generated from operating activities in 1993 is net of
an $11.2 million cash outflow relating to working capital. The cash was
generated primarily from $40.0 million of cash from operations before changes
in operating assets and liabilities and a net reduction in accounts receivable
of $21.5 million. This amount was reduced by decreases in accounts payable for
crude oil and refined products and by increases in crude oil and finished
product inventories. Since the Company purchases much of its crude oil in
bulk, crude oil payables fluctuate, depending on when the cargo is received
and when the related payment is made.
Net cash outflows from investment activities in 1993 consisted principally
of capital expenditures of $40.9 million (which includes $19.1 million related
to marketing and $19.5 million for the Refineries operations) and $4.1 million
of Tyler Refinery deferred turnaround costs. The total outflows from
investment activities were partially offset by proceeds of $5.5 million from
the sale of property, plant and equipment.
Net cash provided by financing activities in 1993 relates primarily to $5.5
million borrowed upon the security of the Purchase Money Debt as discussed in
Note C of the Notes to Consolidated Financial Statements appearing elsewhere
in this Prospectus.
As a result of a strong balance sheet and overall favorable credit
relationships, the Company has been able to maintain open lines of credit with
its major suppliers. Under the Credit Facility, the Company had outstanding as
of September 30, 1994 irrevocable standby letters of credit in the principal
amount of $18.8 million for purposes in the ordinary course of business.
During the second quarter of 1994, the Company obtained an additional
uncommitted line of credit with a major financial institution, for up to $20.0
million in standby letters of credit, primarily for the purchase of crude oil.
Under this agreement, the Company had outstanding as of September 30, 1994 an
irrevocable standby letter of credit in the principal amount of $7.2 million.
As discussed in Note C of the Notes to Consolidated Financial Statements
appearing elsewhere in this Prospectus, effective December 1, 1993, the
Company entered into the Purchase Money Debt for the financing of certain
gasoline station and terminal equipment and office furnishings. As of
September 30, 1994, there was a total of $5.8 million outstanding under the
Purchase Money Debt.
As of September 30, 1994, no cash borrowings were outstanding under the
Credit Facility, and no such borrowings are outstanding as of the date hereof.
As discussed in Note C of the Notes to Unaudited Consolidated Condensed
Financial Statements, effective September 30, 1994, the Company executed
amendments to the Credit Facility and the Note Purchase Agreement (as defined)
under which the Existing Senior Notes were issued. These amendments establish
new financial covenants which became necessary due to decreased refining
margins in 1994 and the write-down of Pasadena Refinery equipment as
previously discussed. The amendment to the Credit Facility also permits the
incurrence of indebtedness represented by the Notes. At September 30, 1994,
the Company was in compliance with all amended covenants and provisions of the
Note Purchase Agreement and the Credit Facility. Continued compliance with the
covenants imposed by the Note Purchase Agreement and the Credit Facility is
dependent, among other things, upon the level of future earnings and the rate
of capital spending. The Company intends to use a portion of the net proceeds
from the sale of the Notes to retire the Existing Senior Notes, including the
payment of accrued interest and a required prepayment premium, and to repay
borrowings outstanding under the Credit Facility. See "Use of Proceeds" and
"Description of Other Indebtedness."
Also as discussed in Note C of the Notes to Unaudited Consolidated Condensed
Financial Statements appearing elsewhere in this Prospectus, the Company has
entered into interest rate swap
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agreements to manage the cost of borrowings. These swaps have effectively
converted $47.5 million of its fixed rate debt to variable interest rates with
remaining periods ranging from 1996 to 1998. According to the terms of these
swap agreements, interest rates are reset on various predetermined dates which
range from November 1994 to March 1998. Due to recent increases in market
interest rates, it is possible that the Company's net effective interest rate
will increase from current levels. As of September 30, 1994, the Company had
recorded a deferred gain of $1.4 million associated with having terminated an
interest rate swap. The termination of existing interest rate swap agreements
as of September 30, 1994 would result in a loss of approximately $2 million.
The Company may utilize interest rate swaps in the future to manage the cost
of funds.
In 1993, due to declining interest rates, the Company reduced the discount
rate used to measure obligations for pension and postretirement benefits other
than pensions. While this change has the effect of increasing the Company's
1994 net periodic pension cost, adjustments to other assumptions used in
accounting for the Company's defined benefit plans have resulted in a minimal
impact on the overall cost.
The Company is involved in a continual process of evaluating growth
opportunities in its core business as well as its capital resources
alternatives. Total capital expenditures and deferred turnaround costs in 1994
are projected to approximate the 1993 expenditures of $44.9 million. The
capital expenditures relate primarily to planned enhancements at the
Refineries, retail unit improvements and company-wide environmental
requirements. The estimated expenditures for 1994 include approximately $17.4
million expected during the fourth quarter relating to the Pasadena Refinery
turnaround and associated capital expenditures. The Company anticipates
funding these 1994 expenditures principally through funds from operations,
existing available cash and the net proceeds from the sale of Notes.
The oil refining and marketing industry in which the Company operates is
highly competitive. Many of the Company's principal competitors are major
integrated, multinational oil companies that are substantially larger and may
have substantially greater financial and operating resources than the Company.
See "Business -- Competition."
The Company believes that following the sale of the Notes and the
application of the proceeds thereof, cash provided from its operating
activities, together with other available sources of liquidity, including
borrowings under the Credit Facility and the remaining proceeds of the Notes,
will be sufficient over the next several years to make required payments of
principal and interest on its debt, including interest payments due on the
Notes, permit anticipated capital expenditures and fund the Company's working
capital requirements.
The Company has disclosed in Note G of the Notes to Consolidated Financial
Statements various contingencies which involve litigation, environmental
liabilities and examinations by the Internal Revenue Service. Depending on the
occurrence, amount and timing of an unfavorable resolution of these
contingencies, the outcome of which cannot be determined at this time, it is
possible that the Company's future results of operations or cash flows could
be materially affected in a particular quarter or year. However, the Company
has concluded, after consultation with counsel, that there is no reasonable
basis to believe that the ultimate resolution of any of these contingencies
will have a material adverse effect on the Company.
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's Consolidated Financial Statements are prepared on the
historical cost method of accounting and, as a result, do not reflect changes
in the dollar's purchasing power. In the capital intensive industry in which
the Company operates, the replacement costs for its properties would generally
far exceed their historical costs. Accordingly, depreciation would be greater
if it were based on current replacement costs. However, since replacement
facilities would reflect technological
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improvements and changes in business strategies, such facilities would be
expected to be more productive and versatile than existing facilities, thereby
increasing profits and offsetting increased depreciation and operating costs.
In recent years, crude oil and refined petroleum product prices have been
falling which has resulted in a net reduction in working capital requirements.
If the prices increase in the future, the Company will expect a related
increase in working capital needs.
BUSINESS
COMPANY OVERVIEW
The Company, which traces its origins to 1917, is one of the largest
independent refiners and marketers of petroleum products in the United States.
The Company owns and operates two strategically located, high-conversion
refineries with a combined capacity of 152,000 barrels of crude oil per day--a
100,000 barrel per day facility located in Pasadena, Texas, near Houston, and a
52,000 barrel per day facility located in Tyler, Texas. The Company is also a
leading marketer of petroleum products and merchandise through a network of over
350 gasoline stations and convenience stores located in the Mid-Atlantic and
Southeastern United States. In support of these businesses, the Company operates
16 product terminals located on three major product pipelines along the Gulf
Coast and Eastern Seaboard and in the Central United States.
The Company's predecessor began operations as an oil and gas exploration and
production company. The Company constructed its own refinery in 1920, the first
on the Houston Ship Channel, which began manufacturing lube oils in 1920 and
gasoline in 1925. The Company began retail operations on the East Coast in
1943. In addition, during World War II, the Company pioneered the manufacture
of 100 octane aviation fuel. In the 1960's, the Company expanded the Pasadena
Refinery and originated the multi-pump retailing concept. The Company further
expanded its retail operations in the Southeastern United States in 1983 by
acquiring two convenience store chains. In 1987, the Company divested its
exploration and production operations and focused on its refining and marketing
businesses. The proceeds of the sale of the exploration and production
properties enabled the Company to acquire all of the outstanding stock of La
Gloria Oil and Gas Company, the owner of the Tyler Refinery. As a result of
that acquisition, the Company's aggregate refining capacity increased by more
than 50%.
BUSINESS STRATEGY
The Company's business strategy is designed to take advantage of the
anticipated improvement in the refining industry and to improve retail
profitability, while managing the risks inherent in a cyclical, commodity based
business. The key elements of this strategy include:
Invest in Improved Productivity
The Company intends to focus on improving productivity in two areas. First,
the Company is continuing efforts to position itself as a low-cost refiner
through the implementation of low-risk capital projects which are expected to
have short payback periods and attractive internal rates of return. Over the
last five years, the Company has invested over $91 million in projects focusing
on improved productivity. For example, the Company recently completed the first
phase of a distributed control system designed to optimize yields and improve
efficiency at the Pasadena Refinery. Second, the Company has recently initiated
a comprehensive program to improve its business processes, including the
installation of an integrated information system. This integrated system should
enable management to more effectively monitor and control the critical elements
of its business. In particular, the system is designed to link relevant
information throughout the Company's operations, including raw material
25
<PAGE>
acquisitions, refining operations, finished product distribution and retail
marketing operations. Management believes that this project should improve
productivity by reducing expenses and enhancing organizational effectiveness.
Manage Refinery Margins
The Company has recently instituted programs designed to manage refining
profit margins by minimizing the Company's exposure to the risks of price
volatility related to the acquisition, conversion and sale of crude oil and
refined petroleum products. These programs include hedging activities such as
the purchase and sale of futures and options contracts to offset the effects of
fluctuations in the prices of crude oil and refined products. Such hedging
activities are subject to specific policies and guidelines established by the
Company and are reviewed by the Margin Management Committee composed of senior
management and chaired by the Company's Chief Executive Officer. The Company's
policy is to manage its crude oil acquisition, refining, and product sales on a
daily basis to achieve, at a minimum, prevailing margins available to
comparable Gulf Coast refiners and, where appropriate, to pursue forward
hedging opportunities which lock in attractive returns. The number of barrels
of crude oil and refined products covered by such hedging activities varies
from time to time, within certain limits established by the Margin Management
Committee. While the Company's hedging activities are intended to reduce
volatility while providing an acceptable profit margin on a portion of
production, the use of such a program can limit the Company's ability to
participate in an improvement in related product profit margins.
Expand Retail Volume and Profitability
The Company believes that there is substantial opportunity to improve margins
and reduce earnings volatility by improving the balance between its Pasadena
Refinery production and its marketing of gasoline through retail units.
Currently, average daily retailing volumes of gasoline represent approximately
47% of the Pasadena Refinery's daily gasoline production capability. Management
believes that improving this balance should enable the Company to reduce its
vulnerability to short term or cyclical margin shrinkage at the refining level.
The Company has developed a retail marketing initiative which focuses on
increasing gasoline volumes and merchandise sales and decreasing the per unit
administrative cost of its retail operations to improve overall productivity.
In pursuit of increased gasoline volumes and merchandise sales, the Company
intends to: (i) enhance its existing retail locations and develop new sites;
(ii) continue its aggressive pricing and marketing strategies, including
regular promotional programs; and (iii) pursue the selective acquisition of
additional retail units which are located adjacent to or within the Company's
current market areas or in new markets. Additionally, the Company intends to
improve overall retail marketing productivity by taking advantage of newly
developed technologies and by leveraging its existing retail support and
overhead structure across a higher volume retail marketing operation.
Continue Emphasis on Environmental Improvements
The Company intends to continue to invest in projects encouraged by the Clean
Air Act and projects required by Federal and state environmental regulations.
The Company recently installed a hydrodesulphurization unit at its Tyler
Refinery at a cost of $8.5 million to enable the Company to produce 12,000
barrels per day of low sulphur highway diesel. The Company is also spending
$3.5 million to enable the Pasadena Refinery to produce summer grade
reformulated gasoline. With respect to its retail operations, the Company has
accelerated compliance with the 1998 underground storage tank environmental
requirements. The Company believes that over 50% of its retail units are
currently in full or substantial compliance with these 1998 standards. The
Company has spent approximately $107 million over the past five years on
environmental related matters, both capital and non-capital in nature. The
Company plans to invest approximately $63 million during the next five years on
capital projects for its refining and marketing operations either in connection
with compliance or to enable the
26
<PAGE>
Company to produce transportation fuel products that meet higher environmental
standards such as improved air quality.
Maintain Strong Balance Sheet
The Company intends to maintain a low ratio of debt to total capitalization
consistent with historical levels, which management believes will assist the
Company in withstanding cyclical industry downturns and taking advantage of
strategic opportunities. As of September 30, 1994, as adjusted to give effect
to the sale of the Notes and the application of the net proceeds therefrom,
the Company's ratio of total debt to total capitalization was 33.0%.
REFINING OPERATIONS
Overview
The Company owns and operates two strategically located, high conversion
refineries with a combined capacity of 152,000 barrels of crude oil per day--a
100,000 barrel per day facility located in Pasadena, Texas, near Houston, and a
52,000 barrel per day facility located in Tyler, Texas. Both Refineries are
operated to generate a product mix of over 85% higher margin fuels, primarily
transportation fuels such as gasoline, highway diesel and jet fuel. When
operating to maximize the production of light products, the product mix at both
of the Refineries is approximately 55% gasoline, 33% distillates (such as
diesel, home heating oil, jet fuel, and kerosene), 6% petrochemical feedstocks
and 6% slurry oil and petroleum coke.
The Pasadena Refinery and Tyler Refinery averaged production of 106,746
barrels per day and 48,213 barrels per day, respectively, during the nine
months ended September 30, 1994. While both Refineries primarily run sweet
(low sulphur content) crude oil, they can process up to 20% of sour (high
sulphur content) crude oil in their mix.
The Company's access to extensive pipeline networks provides it with the
ability to acquire crude oil directly from major integrated and independent
domestic producers, foreign producers, or trading companies, and to transport
this crude to the Refineries at a competitive cost. The Pasadena Refinery, has
docking facilities which provide direct access to tankers and barges for the
delivery of crude oil and other feedstocks. The Company also has agreements
with terminal operators for the storage and handling of the crude oil it
receives from large ocean-going vessels and which the Company transports to
the Refineries by pipeline. The Tyler Refinery benefits from its location in
East Texas since the Company can purchase high quality crude oil at favorable
prices directly from nearby producers. In addition, the Tyler Refinery is the
only supplier of a full range of petroleum products in its local market area.
See "-- Supply, Transportation and Wholesale Marketing."
Over the past several years, the Company has made significant capital
investments to upgrade its refining facilities and improve operational
efficiency. The Company has also recently completed several programs which
have resulted in increased profitability at the refinery level. The Company
began a maintenance expense reduction program at the Pasadena Refinery in
1992. This program is designed to reduce routine maintenance expenditures by
increasing project reliability, reducing the use of outside contractors,
decreasing the overall amount of overtime expenditures and realigning
maintenance personnel responsibilities. The result of this program has been to
reduce average maintenance expenditures from $1.6 million per month in 1991 to
approximately $1 million per month for the nine months ended September 30,
1994. The Company has also initiated a gain sharing program with its employees
at the Tyler Refinery under which savings realized are shared with the
employees on a quarterly basis. Both the Company and the employees are already
benefitting from the early stages of this program. See "-- Employees."
Refining Strategy
The Company's refining strategy is designed to utilize its strengths to take
advantage of the anticipated improvement in the refining industry while
managing the risks involved in a cyclical,
27
<PAGE>
commodity based business. The key elements of this strategy include: (i)
increasing productivity and improving the technical sophistication and
operating reliability of the Company's refining operations; (ii) managing
margins through formalized and disciplined programs to achieve, at a minimum,
prevailing industry margins available to comparable Gulf Coast refiners and,
when appropriate, to pursue hedging opportunities which lock in attractive
returns; and (iii) continuing to make investments encouraged by the Clean Air
Act and other regulations. The Company believes that the implementation of this
strategy should result in increased operational efficiency, improved refining
profitability and reduced earnings volatility.
Pasadena Refinery
The Pasadena Refinery is located on approximately 174 acres in Pasadena,
Texas and was the first refinery built on the Houston Ship Channel. The
Refinery has been substantially modernized since 1969 and today has a rated
crude capacity of 100,000 barrels per day. During the past five years, the
Company has invested approximately $105 million in major upgrading and
maintenance projects.
The Company's refining strategy includes several initiatives to enhance
productivity. For example, the Company has completed the first phase of an
extensive plant-wide distributed control system at the Pasadena Refinery which
is designed to improve product yields, make more efficient use of personnel and
optimize process operations. The crude and vacuum distillation, coking, and
distillate hydrotreating units are currently benefitting from the system which
began operating in June 1994. The fluid catalytic cracking unit is scheduled to
be added to the system in the second quarter of 1995 and the remainder of the
Pasadena Refinery is scheduled to be added by the first quarter of 1996. The
distributed control system uses technology that is fast, accurate and provides
increased information to both operators and supervisors.
The Pasadena Refinery has a crude unit with a 100,000 barrels per day
atmospheric column and a 38,000 barrels per day vacuum tower. Major downstream
units consist of a 52,000 barrels per day fluid catalytic cracking unit, a
12,000 barrels per day delayed coking unit, two alkylation units with a
combined capacity of 10,000 barrels per day of alkylate production, and two
reformers with a combined capacity of 36,000 barrels per day. Other units
include two depropanizer units that can produce 5,500 barrels per day of
refinery grade propylene, a liquefied petroleum gas unit that removes
approximately 1,000 barrels per day of liquids from the refinery fuel system
and a methyl tertiary butyl ether ("MTBE") unit which can produce approximately
1,500 barrels per day of MTBE for gasoline blending. The Company recently
abandoned its plans to construct a hydrodesulphurization unit at its Pasadena
Refinery. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Nine Months Ended September
30, 1993 and 1994."
The Clean Air Act mandates that after January 1, 1995 only reformulated
gasoline ("RFG") may be sold in certain ozone non-attainment areas, including
some metropolitan areas where the Company sells gasoline. Using production from
its MTBE unit, the Pasadena Refinery can currently produce 12,000 barrels per
day of winter grade RFG. With additional purchases of MTBE, ethanol or other
oxygenates, all of the Pasadena Refinery's current gasoline production could
meet winter grade RFG standards. The Company is in the process of constructing
a reformate splitter at its Pasadena Refinery at a cost of $3.5 million which
will enable it to make 12,000 barrels per day of summer grade RFG using its own
MTBE, and up to 100% of its Pasadena Refinery gasoline production as summer
grade RFG with the purchase of additional oxygenates. This project is expected
to be completed by August 1995 and will satisfy all of the Company's retail RFG
requirements.
During the first nine months of 1994, the Pasadena Refinery operated at
approximately 90% of rated crude unit capacity with production yielding
approximately 57% gasoline and 32% distillates. Of the total gasoline
production, approximately 16% was premium octane grades. In addition, the
Pasadena Refinery produced and sold by-products including propylene, propane,
slurry oil, petroleum coke and sulphur.
28
<PAGE>
The Company owns and operates storage facilities located on approximately
130 acres near its Pasadena Refinery which, together with tanks on the
refinery site, provide the Company with a storage capacity of approximately
6.2 million barrels (2.8 million barrels for crude oil and 3.4 million barrels
for refined petroleum products and intermediate stocks).
The Pasadena Refinery's refined petroleum products are delivered to both
wholesale and retail customers. Approximately one-half of the gasoline and
distillate production is sold wholesale into the Gulf Coast spot market and
one-half is shipped by the Company on the Colonial and Plantation pipelines
for sale in East Coast wholesale and retail markets. The Company's retail
gasoline requirements represent approximately 47% of the Pasadena Refinery's
gasoline production capability.
The production levels of the Pasadena Refinery for the years ended December
31, 1991, 1992 and 1993 and for the nine months ended September 30, 1993 and
1994 were as follows:
PASADENA REFINERY PRODUCTION YIELD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- -------------------------------
1991 1992 1993 1993 1994
------------ ------------- ------------- --------------- ---------------
BPD % BPD % BPD % BPD % BPD %
------ ----- ------- ----- ------- ----- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline
Unleaded............... 39,600 40.1 46,445 44.8 49,009 45.1 49,590 45.1 51,200 48.0
Premium unleaded....... 11,301 11.4 12,468 12.0 9,903 9.1 10,697 9.7 9,613 9.0
------ ----- ------- ----- ------- ----- -------- ------ -------- ------
Total gasoline......... 50,901 51.5 58,913 56.8 58,912 54.2 60,287 54.8 60,813 57.0
Diesel fuel............. 25,452 25.7 28,311 27.3 28,064 25.8 28,758 26.3 24,783 23.1
Jet fuel................ 5,898 6.0 3,767 3.6 6,646 6.2 5,754 5.2 9,346 8.8
------ ----- ------- ----- ------- ----- -------- ------ -------- ------
Total high value
products.............. 82,251 83.2 90,991 87.7 93,622 86.2 94,799 86.3 94,942 88.9
Other................... 16,556 16.8 12,783 12.3 15,031 13.8 15,101 13.7 11,804 11.1
------ ----- ------- ----- ------- ----- -------- ------ -------- ------
Total production....... 98,807 100.0 103,774 100.0 108,653 100.0 109,900 100.0 106,746 100.0
====== ===== ======= ===== ======= ===== ======== ====== ======== ======
Refinery utilization(a). 84.5 85.2 90.6 91.6 89.7
</TABLE>
- ---------------------
(a) Refinery utilization is crude throughput relative to the rated capacity of
the refinery to process crude oil. If other feedstocks were included as
throughput in the calculation, the utilization would have increased to
98.8%, 103.8%, 108.7%, 109.9% and 106.7% for the years ended December 31,
1991, 1992, 1993 and for the nine months ended September 30, 1993 and
1994, respectively. Refinery utilization reflects downtime for maintenance
turnarounds of approximately two months on the fluid catalytic cracking
unit in 1991, and two months on the crude, alkylation, coking and reformer
units in 1992. During a turnaround, refinery production is reduced
significantly.
Tyler Refinery
The Tyler Refinery is located on approximately 100 of the 529 acres owned by
the Company in Tyler, Texas and has a rated crude capacity of 52,000 barrels
per day. This Refinery, which was acquired from Texas Eastern Corporation in
the fourth quarter of 1989, had been substantially modernized between 1977 and
1980. The Tyler Refinery's location allows it to access nearby high quality
East Texas crude oil which accounts for approximately 95% of its crude supply.
This crude oil is transported to the Refinery on the McMurrey and Scurlock
pipeline systems. The Company owns the McMurrey system and has a long-term
contract for use of the Scurlock system with Scurlock Permian Pipe Line
Corporation. The Company also has the ability to ship crude oil to the Tyler
Refinery by pipeline from the Gulf Coast and does so when market conditions
are favorable. Storage capacity at the Tyler Refinery exceeds 2.7 millions
barrels (1.2 million barrels for crude and 1.5 million barrels for refined
petroleum products and intermediate stocks), including tankage along the
Company's pipeline system.
The Tyler Refinery has a crude unit with a 52,000 barrels per day
atmospheric column and a 16,000 barrels per day vacuum tower. The other major
process units at the Tyler Refinery include an 18,000
29
<PAGE>
barrels per day fluid catalytic cracking unit, a 6,000 barrels per day delayed
coking unit, a 20,000 barrels per day naphtha hydrotreating unit, a 12,000
barrels per day distillate hydrotreating unit, two reforming units with a
combined capacity of 16,000 barrels per day, a 5,000 barrels per day
isomerization unit, and an alkylation unit with a capacity of 4,700 barrels
per day. The hydrotreating units were significantly modified in 1993 enabling
this plant to produce 12,000 barrels per day of distillate which meets the
Clean Air Act's .05% sulphur requirements for highway diesel.
For the first nine months of 1994, the Tyler Refinery operated at
approximately 91% of rated crude unit capacity, with production yielding
approximately 57% gasoline and approximately 34% distillates. Of the total
gasoline production, approximately 18% was premium octane grades. In addition,
the Refinery produced and sold by-products including propylene, propane,
slurry oil, petroleum coke and sulphur. The Tyler Refinery is the principal
supplier of refined petroleum products in the East Texas market with
approximately 60% of production sold at the Refinery's truck terminal. The
remaining production is shipped via the Texas Eastern Products Pipeline for
sale either from the Company's terminals or from other terminals along the
pipeline. Deliveries under term exchange agreements account for the majority
of the truck terminal sales.
The production levels of the Tyler Refinery for the years ended December 31,
1991, 1992 and 1993 and for the nine months ended September 30, 1993 and 1994
were as follows:
TYLER REFINERY PRODUCTION YIELD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ---------------------------------
1991 1992 1993 1993 1994
------------ ------------ ------------ ---------------- ----------------
BPD % BPD % BPD % BPD % BPD %
------ ----- ------ ----- ------ ----- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline
Unleaded............... 22,831 47.4 22,650 45.5 22,443 45.1 22,338 45.3 22,290 46.2
Premium unleaded....... 4,263 8.9 4,651 9.4 4,921 9.9 4,936 10.0 4,969 10.3
------ ----- ------ ----- ------ ----- -------- ------- -------- -------
Total gasoline......... 27,094 56.3 27,301 54.9 27,364 55.0 27,274 55.3 27,259 56.5
Diesel fuel............. 11,341 23.5 11,440 23.0 12,516 25.1 11,872 24.1 11,777 24.5
Jet fuel................ 4,572 9.5 5,439 10.9 4,478 9.0 4,475 9.1 4,725 9.8
------ ----- ------ ----- ------ ----- -------- ------- -------- -------
Total high value prod-
ucts.................. 43,007 89.3 44,180 88.8 44,358 89.1 43,621 88.5 43,761 90.8
Other................... 5,139 10.7 5,556 11.2 5,399 10.9 5,740 11.5 4,452 9.2
------ ----- ------ ----- ------ ----- -------- ------- -------- -------
Total production....... 48,146 100.0 49,736 100.0 49,757 100.0 49,361 100.0 48,213 100.0
====== ===== ====== ===== ====== ===== ======== ======= ======== =======
Refinery utilization(a). 90.9 92.8 93.6 93.4 91.3
</TABLE>
- ---------------------
(a) Refinery utilization is crude throughput relative to the rated capacity
of the refinery to process crude oil. If other feedstocks were included as
throughput in the calculation, the utilization would have increased to
92.6%, 95.6%, 95.7%, 94.9% and 92.7% for the years ended December 31,
1991, 1992, 1993 and for the nine months ended September 30, 1993 and
1994, respectively. Refinery utilization reflects downtime for maintenance
turnarounds of approximately one month on the fluid catalytic cracking and
alkylation units in 1992, and approximately one month on the crude,
vacuum, coking and reformer units in 1993. During a turnaround, refinery
production is reduced significantly.
Inventory Management
The Company employs several strategies to minimize the impact on
profitability due to the volatility of feedstock costs and refined product
prices. These strategies involve the purchase and sale of futures and options
contracts on the New York Mercantile Exchange to minimize, on a short-term
basis, the Company's exposure to the risk of fluctuations in crude oil and
refined product prices. The number of barrels of crude oil and refined
products covered by such contracts varies from time to time. Such purchases
and sales are closely managed, balanced daily and subject to internally
established risk standards. See "--Business Strategy."
Turnarounds
Each unit in a refinery requires periodic shutdown for major maintenance
(referred to as a "turnaround") which can not be performed while the unit is
in operation. Turnaround cycles vary for
30
<PAGE>
different units and, in general, refinery managers plan product inventories
and unit maintenance to permit some operations to continue during specific
process unit turnarounds. Maintenance turnarounds involve the Company's own
personnel and some additional contract labor. Turnarounds are carefully
planned in order to minimize each unit's downtime. The Company has
historically expensed current maintenance charges and capitalized turnaround
costs which are then amortized over the estimated period until the next
turnaround.
In general, turnaround cycles vary from two and one-half to five years
depending on the maintenance requirements of the specific unit. In October
1994, at the Pasadena Refinery, the Company began a turnaround on the fluid
catalytic cracking and associated units which was completed in the fourth
quarter of 1994. At the Tyler Refinery, a turnaround on the fluid catalytic
cracking unit is scheduled for the first quarter of 1995.
RETAIL OPERATIONS
Overview
The Company traces its retail marketing history to the early 1930's when it
operated a retail network of 30 service stations in the Houston, Texas area.
It began retail operations on the East Coast in 1943. The Company has been
recognized as an innovative industry leader and, in the early 1960's,
pioneered the multi-pump retailing concept which has since become an industry
standard in the marketing of gasoline. In 1983 the Company significantly
expanded its retail presence with the acquisition of 642 Fast Fare (R) and
Zippy Mart (R) convenience stores located in the Southeastern United States.
In 1986 the Company purchased an additional 50 gasoline stations, expanding
the Company's presence in the Baltimore/Washington, D.C. region, and in 1991,
the Company acquired 48 additional units in Virginia which doubled its
presence in that state.
Beginning in 1989, the Company conducted a facility by facility review of
its retail units. As a result, the Company disposed of non-strategic, marginal
or unprofitable units as well as certain units which would have required
significant capital improvements to comply with environmental regulations.
During this period, the Company rebuilt and added individual units to increase
its market share in strategic core markets. Since 1990, the Company has
eliminated 414 retail units and added 45 retail units. During the same period,
the Company closed a number of district offices and divisional headquarters.
The Company believes it has substantially completed its retail unit
rationalization program.
As of September 30, 1994, the Company had 356 retail locations. Of these 356
units (245 owned and 111 leased), the Company directly operated 254 and the
remainder were operated by independent dealers. The Company conducts its
operations in Maryland through an independent dealer network as a result of
legislation which prohibits refiners from operating gasoline stations in
Maryland. The Company believes that the high proportion of Company-operated
units enables it to respond quickly and uniformly to changing market
conditions.
While most of the Company's units are located in or around major
metropolitan areas, its sites are generally not situated on major interstate
highways or inter-city thoroughfares. These off-highway locations primarily
serve local customers and, as a result, the Company's retail marketing unit
volumes are not as highly seasonal or dependent on seasonal vacation traffic
as locations operating on major traffic arteries. The Company is the largest
independent retail marketer of gasoline in its core retail market areas within
Maryland, Virginia and North Carolina. In the Company's primary retail
marketing area of Baltimore, Maryland, the Company is the leading independent
gasoline retailer, with a 1993 market share of approximately 11%. In addition
to its leading market position in Baltimore, the Company has a geographic
concentration of retail locations in high growth areas such as Raleigh and
Charlotte, North Carolina and Atlanta, Georgia. The Company's three highest
volume core markets are Baltimore,
31
<PAGE>
the suburban areas of Maryland and Virginia surrounding Washington, D.C., and
the greater Norfolk, Virginia area.
The geographic distribution of retail locations by state, as of September 30,
1994, was as follows:
<TABLE>
<CAPTION>
COMPANY DEALER TOTAL
STATE OPERATED OPERATED UNITS
----- -------- -------- -----
<S> <C> <C> <C>
Maryland............................................. -- 101 101
Virginia............................................. 76 1 77
North Carolina....................................... 61 -- 61
Georgia.............................................. 50 -- 50
South Carolina....................................... 39 -- 39
Alabama.............................................. 26 -- 26
Pennsylvania......................................... 2 -- 2
--- --- ---
Total.............................................. 254 102 356
=== === ===
</TABLE>
Retail Marketing Strategy
The Company believes that there is substantial opportunity to increase
margins by improving the balance between its Pasadena Refinery production and
its sale of gasoline through retail units. Additionally, the Company believes
that increasing sales of gasoline through its retail units will enable the
Company to capture a greater portion of the available downstream margin,
thereby reducing the Company's exposure to the volatility inherent in its
refining operations. To capitalize on this opportunity and capture greater
margins, the Company has developed a retail marketing strategy which focuses
on: (i) increasing gasoline volumes and merchandise sales and (ii) decreasing
the administrative cost of its retail operations to improve overall
productivity.
In pursuit of increased gasoline volumes and merchandise sales, the Company
intends to: (i) enhance its existing retail locations and develop new sites;
(ii) continue its aggressive pricing and marketing strategies, including
regular promotional programs; and (iii) pursue the selective acquisition of
additional retail units which are located adjacent to or within the Company's
current market areas or in new markets. In early 1994, the Company unveiled,
with significant advertising support, a new merchandise pricing program
designed to increase per unit customer traffic. The key elements of this
program include the reduction of prices on certain items such as tobacco
products and beverages, improved retail unit layouts and higher impact signage.
In addition to this program, the Company is continuing its efforts to increase
customer loyalty and purchase frequency through the expansion of a frequent
fueler program and increased local media advertising.
The Company intends to improve overall retail marketing productivity by
taking advantage of newly developed technologies and by leveraging its existing
retail support and overhead structure across a higher volume retail marketing
operation. The Company intends to upgrade its point of sale system to provide
unit level personnel with more accurate, timely and focused retail pricing and
operating data. Additionally, the Company has introduced gasoline pump credit
and debit card readers which streamline the sales process and provide increased
customer convenience. These enhancements are intended to expand retail unit
management responsibility, thereby enabling the Company to decentralize
decision making and reduce per unit overhead expenses.
The initial results from the implementation of this retail marketing strategy
are illustrated by evaluating same store sales data for recent periods. As the
table below demonstrates, for the nine months ended September 30, 1994 compared
to the same period in 1993, both gasoline volumes and merchandise sales have
increased throughout the Company's network of retail units.
32
<PAGE>
SAME STORE SALES DATA(A)
<TABLE>
<CAPTION>
AVERAGE AVERAGE MONTHLY
MONTHLY GALLONS MERCHANDISE SALES
----------------------------------------- -----------------------------------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
----------------------- ----------------- ----------------------- -----------------
RETAIL UNIT
CONFIGURATION 1991 1992 1993 1993 1994 1991 1992 1993 1993 1994
------------- ------- ------- ------- -------- -------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Convenience stores...... 45,834 45,236 53,575 51,701 62,074 $30,976 $31,654 $33,037 $ 33,242 $ 40,305
Mini-marts.............. 114,902 108,151 113,154 111,367 122,031 18,590 18,151 18,393 18,539 24,272
Gasoline stations....... 125,732 128,637 131,908 129,075 131,332 7,495 7,595 7,862 7,751 13,348
</TABLE>
- --------
(a) Same store sales data is based on those units open at September 30, 1994
which have been open for all of the previous periods presented.
Retail Unit Operations
The Company conducts its retail marketing operations through three basic
store formats: convenience stores, mini-marts and gasoline stations. At
September 30, 1994, the Company had 106 convenience stores, 112 mini-marts and
138 gasoline stations.
. The Company's convenience stores operate primarily under the names Fast
Fare and Zippy Mart. These units generally contain 1,500 to 2,800 square
feet of retail space and typically provide gasoline and a variety of
convenience store merchandise such as tobacco products, beer, wine, soft
drinks, snacks, dairy products and baked goods.
. The Company's mini-marts generally contain up to 800 square feet of
retail space and typically sell gasoline and much of the same merchandise
as at the Company's convenience stores. The Company has installed lighted
canopies at most of its locations which extend over the multi-pump fuel
islands and the store itself, providing added security and protection
from the elements for customers and employees.
. The Company's gasoline stations generally contain up to 100 square feet
of retail space in an island kiosk and typically offer gasoline and a
limited amount of merchandise such as tobacco products, candies, snacks
and soft drinks.
The Company's units are brightly decorated with its trademark signage to
create a consistent appearance and encourage customer recognition and
patronage. The Company believes that consistency of brand image is important to
the successful operation and expansion of its retail marketing system. In all
aspects of its retail marketing operations the Company emphasizes quality,
value, cleanliness and friendly and efficient customer service. The Company has
conducted customer surveys which indicate strong consumer preference for units
which are well-lighted and safe. In response to such customer preferences, the
Company has initiated a system-wide lighting upgrade and safety enhancement
program which includes the installation of improved lighting as well as the
installation of its proprietary Coronet (R) Security System, an interactive
audio and video monitoring system, at over 70 of its units.
While the Company derives approximately 75% of its revenue from the sale of
gasoline, it also provides a variety of merchandise and other services designed
to meet the non-fuel needs of its customers. Sales of these additional products
are an important source of revenue, contribute to increased profitability and
serve to increase customer traffic. The Company believes that its existing
retail sites present significant additional profit opportunities based upon
their strategic locations in high traffic areas. The Company also offers
ancillary services such as compressed air service, car washes, vacuums, and
automated teller machines, and management continues to evaluate the addition of
new ancillary services such as the marketing of fast food from major branded
chains.
Dealer Operations
The Company maintains 102 dealer-operated units, 101 of which are located in
Maryland. Under the Maryland Divorcement Law, refiners are prohibited from
operating gasoline stations. The Maryland
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units are operated under a Branded Service Station Lease and Dealer Agreement
(the "Dealer Agreement"), generally with a term of three years. Pursuant to
the Dealer Agreement, a dealer leases the facility from the Company and
purchases and resells Crown-branded motor fuel and related products. Dealers
also purchase and resell merchandise from independent third parties. The
Dealer Agreement sets forth certain operating standards; however, the Company
does not control the independent dealer's personnel, pricing policies or other
aspects of the independent dealer's business. The Company believes that its
relationship with its dealers has been very favorable as evidenced by a low
rate of dealer turnover.
The Company realizes little direct benefit from the sale of merchandise or
ancillary services at the dealer operated units, and the revenue from these
sales is not reflected in the Company's Consolidated Financial Statements.
However, to the extent that the availability of merchandise and ancillary
services increases customer traffic and gasoline sales at its units, the
Company benefits from higher gasoline sales volumes.
Promotional Programs
From time to time, the Company engages in various promotional programs
designed to enhance the Company's reputation for value as well as to enlarge
its customer base. For example, the Company periodically sells premium grades
of gasoline for the price of regular unleaded gasoline. The Company also
coordinates joint promotions with local car dealers and radio stations for
gasoline giveaways which generate significant positive publicity for the
Company. As part of its marketing campaign in Maryland and Virginia, the
Company features the Baltimore Orioles (R) baseball team in certain of its
promotional materials. Recently, the Company has used posters of Orioles star
Cal Ripken, Jr. and a video highlighting the Orioles' success. Many of the
Company's television and radio advertisements feature former Orioles star and
Major League Hall of Famer Brooks Robinson.
The Company has maintained a Crown branded consumer credit card program for
many years. As of September 30, 1994, there were approximately 175,000 Crown
credit card accounts outstanding, of which on average approximately 30,000
accounts were active on a monthly basis during the first nine months of 1994.
Aggregate credit card sales accounted for approximately 12% of total sales
during such nine month period, of which approximately half was charged to
Crown branded credit card accounts.
In order to increase customer loyalty and purchase frequency, the Company
has established its proprietary frequent fueler program to complement its
existing branded credit card program, and has also developed a branded fleet
credit card program designed specifically to encourage fleet participation.
The Company's frequent fueler program, entitled Road to RedemptionTM
encourages repeat visits by awarding customers with points redeemable for
selected items of merchandise or services. Awards which have been available
under this program include Starter (R) hats and T-shirts, Champion (R)
sportswear, free dinners at Subway (R), Pizza Hut (R) and Olive Garden (R)
restaurants, and American Automobile Association (R) memberships.
SUPPLY, TRANSPORTATION AND WHOLESALE MARKETING
Supply
The Company's Refineries, terminals and retail outlets are strategically
located in close proximity to a variety of supply and distribution channels.
As a result, the Company has the flexibility to acquire available domestic and
foreign crude oil economically, and also the ability to distribute its
products cost effectively to its own system and to other domestic wholesale
markets. Purchases of crude oil and feedstocks are determined by quality,
price and general market conditions.
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Purchases of raw materials for the periods indicated are summarized below:
RAW MATERIALS CONSUMPTION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ---------------------------
1991 1992 1993 1993 1994
------------- ------------- ------------- ------------- -------------
BPD % BPD % BPD % BPD % BPD %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic crude.......... 81,532 55.5 78,982 51.4 80,825 51.0 82,685 51.9 84,044 54.2
Foreign crude........... 50,208 34.2 54,465 35.5 58,477 36.9 57,480 36.1 53,139 34.3
Other feedstocks........ 15,213 10.3 20,063 13.1 19,108 12.1 19,096 12.0 17,776 11.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total.................. 146,953 100.0 153,510 100.0 158,410 100.0 159,261 100.0 154,959 100.0
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Transportation
Most of the domestic crude oil processed by the Company at its Pasadena
Refinery is transported by pipeline. The Company's purchases of Alaskan and
foreign crude oil are transported primarily by tankers under spot charters
which are arranged by either the seller or by the Company. The Company is not
currently obligated under any time-charter contracts. The Company has an
approximate 5% interest in the Rancho Pipeline and generally receives between
20,000 and 25,000 barrels per day of crude through this system. As the table
above indicates, foreign crudes (principally from the North Sea, West Africa
and South America) account for approximately 35% of total crude supply and are
delivered by tanker. Most of the crude for the Tyler Refinery is gathered from
local East Texas fields and delivered by two pipeline systems, one of which is
owned by the Company. Foreign crude also can be delivered to the Tyler Refinery
by pipeline from the Gulf Coast.
Terminals
The Company operates 11 product terminals located along the Colonial and
Plantation pipelines from the Pasadena Refinery to Elizabeth, New Jersey and,
in addition to the terminal at the Tyler Refinery, operates four product
terminals located along the Texas Eastern Products Pipeline system. These
terminals have a combined storage capacity of 2.7 million barrels. The
Company's distribution network is augmented by agreements with other terminal
operators also located along these pipelines. In addition to serving the
Company's retail requirements, these terminals supply products to other
refiner/marketers, jobbers and independent distributors.
Wholesale Marketing
Approximately 16% of the gasoline produced by the Company's Pasadena Refinery
is transported by pipeline for sale at wholesale through Company and other
terminals in the Mid-Atlantic and Southeastern United States. Heating oil is
also regularly sold at wholesale through these same terminals. Gasoline,
heating oil, diesel fuel and other refined products are also sold at wholesale
in the Gulf Coast market.
The Company has entered into long-term product exchange agreements for
approximately one-third of its Tyler Refinery production with two major oil
companies headquartered in the United States. These agreements provide for the
delivery of refined products at the Company's terminals in exchange for
delivery by these companies of a similar amount of refined products to the
Company. The terms of these agreements extend through March 1998 and December
1999, respectively, and require the exchange of 8,400 barrels per day and 9,800
barrels per day, respectively. These exchange agreements provide the Company
with the ability to broaden its geographic distribution, supply markets not
connected to the refined products pipeline systems and reduce transportation
costs.
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INDUSTRY OVERVIEW
Refining
The refining industry processes crude oil into refined products such as
gasoline, jet fuel, diesel fuel, home heating oil, slurry oil and petroleum
coke. The Company believes that the profitability of the domestic refining
industry is likely to improve due to increased demand for refined products
during a period when domestic refining utilization approaches its maximum
crude oil processing limits. Furthermore, the Company believes that increasing
foreign demand, resulting from economic recovery in overseas markets, coupled
with the more stringent requirements associated with reformulated gasoline
regulations in the United States, will tend to reduce the opportunity and
incentive for foreign refiners to supply the increasing domestic demand. The
Company believes that it is well positioned to benefit from these trends.
In the last decade, worldwide demand for all refined petroleum products has
grown from 57.9 million barrels per day to 67.4 million barrels per day. The
Company believes that this rate of demand growth is likely to continue due to
economic growth occurring in developing countries, principally in Eastern
Europe and Asia. In addition, industry studies forecast that worldwide demand
growth will continue to be linked to worldwide economic development.
Similarly, in the last decade, United States demand for all refined
petroleum products has grown from 15.2 million barrels per day to 17.2 million
barrels per day. Industry studies indicate that this growth is largely the
result of demand for gasoline, jet fuel and highway diesel. These studies
further indicate that from 1983 to 1993, demand for these transportation fuels
has grown from 9.4 million barrels per day to 11.1 million barrels per day.
The Company believes that this growth is particularly noteworthy given the
impact of fleet efficiency standards in the United States. Industry studies
anticipate demand for these transportation fuels will continue to track
overall levels of economic growth as measured by statistics such as gross
national product.
In contrast, industry studies indicate that United States demand for
residual fuel oils peaked at 3.1 million barrels per day in 1977 and declined
over the next 14 years, to 1.2 million barrels per day in 1991. The Company
believes that demand for residual fuel oils in the United States is likely to
remain stable or continue to decline due to the growing use of natural gas and
coal.
The Company believes that these industry trends are likely to benefit those
refiners, such as the Company, which are able to convert a higher percentage
of crude oil into higher margin transportation fuels. Approximately 85% of the
Company's refined output meets the specifications for transportation fuels.
Approximately 72% of the Company's current refined output meets the
requirements for highway use and the remaining 13% of light product production
(mainly No. 2 distillate) consists of products capable of meeting
specifications for off-road uses.
The Company believes that domestic refining utilization is near its maximum
capacity and that significant increases in domestic processing capacity are
unlikely due to a number of factors. First, the cost of new refinery
construction has increased significantly over the last two decades. Industry
consultants estimate the cost of constructing a new refinery to be in excess
of $5,000 per barrel per day of rated crude capacity. The last significant new
domestic refinery construction was completed in the mid-1970's. Second, the
increased scope and complexity of environmental and other governmental
requirements has made the permitting process for refinery construction more
difficult. Third, refiners are faced with significant expenditures to bring
older refineries into compliance with current environmental requirements.
Industry studies indicate that as a result of these factors, refinery rated
capacity has declined 15% since 1982 from 17.9 million barrels per day to 15.2
million barrels per day in 1993 and that the number of operable refineries has
fallen from 301 to 187 during this same period. However, in order
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<PAGE>
to meet growing demand, domestic refiners have increased production capacity
for higher margin transportation fuels by 0.5 million barrels per day through
investment in projects to increase conversion capabilities. Capacity
reductions have also been offset by the addition of oxygenates to gasoline to
meet the requirements of the Clean Air Act. The Company believes that these
offsetting factors and initiatives are unlikely to continue due to physical
constraints on existing facilities and the reduction in the need for
additional capacity for oxygenates.
The net result of these factors has been a substantial increase in the
domestic refining industry's capacity utilization rate over the last decade
from 71.7% to 91.6% in 1993. The Company believes that the maximum sustainable
crude oil processing capacity for the refinery industry is approximately 93%
due to the industry-wide requirement for periodic major maintenance
turnarounds of refinery operations as well as unscheduled shutdowns.
Accordingly, the Company believes that current domestic utilization rates are
nearing capacity and are likely to remain above historical averages due to
modestly increasing demand for transportation fuels, lack of future
significant increases in domestic refining capacity and less incentive for
foreign refiners to export their product into the United States market.
Retail Marketing
The retail markets have historically been highly competitive with a number
of well capitalized oil companies and both large and small independent
competitors. Management believes that over the last several years, the retail
markets have been characterized by several significant trends including: (i)
increased store rationalization with marketers clustering retail units into
fewer geographic regions and increasing the retail space of newly constructed
and existing units; (ii) increased consumer emphasis on convenience, quality,
cleanliness and safety when purchasing gasoline and related merchandise at a
retail location; and (iii) growth in gasoline demand.
Rationalization. During the past several years, the retail market has
experienced increased concentration of market shares as major oil companies
have divested non-strategic stations and have focused efforts in fewer
geographic regions, many of which are near strategic supply sources.
Additionally, many smaller operators have closed marginal and unprofitable
stations as a result of increasing environmental regulations. The lack of
favorable new sites in existing markets and the high cost of construction of
new facilities are also believed to be barriers to new competition.
Consumer Emphasis on Convenience. Industry studies indicate that consumer
buying behavior continues to reflect the effect of increasing demands on
consumer time. Convenience and the time required to make the purchase are
increasingly important considerations in the buying decision.
Gasoline Demand Growth. Since 1982, United States gasoline demand has grown
by an average of approximately 1% to 2% annually and industry studies
anticipate this demand will continue to track economic growth. Other factors
which contribute to the modest growth outlook for gasoline sales include: (i)
the lower energy content of oxygenated gasoline compared with conventional
gasoline, and the resultant fewer miles per gallon delivered by this fuel when
used in the existing automobile fleet; (ii) the declining differential between
the fuel efficiency of the existing and retiring automobile fleet; and (iii)
the anticipation of relatively small increases in fuel economy of new car
models.
Impact of Regulatory Requirements
The Company believes that government regulation with respect to the
environment and worker safety has increased significantly in the last decade
and that the costs associated with complying with these regulatory
requirements have altered the economics of the refining business. The
regulatory requirements that have had the most significant impact upon the
Company's business are the requirements of the Clean Air Act and requirements
pertaining to retail fuel pumps and underground storage tanks.
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The Clean Air Act requires the Company to meet certain air emission
standards and to obtain and comply with the terms of emissions permits. The
Clean Air Act will impact the Company primarily in the following areas: (i)
beginning in 1995, reformulated gasoline (meeting content standards for
oxygen, benzene and aromatics) is mandated for gasoline sold in certain non-
attainment areas, including certain of the Company's core retail market areas;
(ii) Stage II hose and nozzle controls are required in gas pumps to capture
fuel vapors in certain non-attainment areas, including areas in which many of
the Company's retail units are located; and (iii) the imposition of more
stringent refinery emissions limitations, particularly with regard to
emissions of hazardous air pollutants. Recently, the United States
Environmental Protection Agency ("EPA") has required additional controls upon
emissions of benzene from refineries under the National Emission Standards for
Hazardous Air Pollutants ("NESHAPS") program. Emission standards under the
NESHAPS program for other hazardous air pollutants will be applicable to the
Refineries and most of the Company's terminals in the next few years.
The Company believes that the long term profitability of the retail
marketing sector of the petroleum industry will be affected by the number of
gasoline stations competing in each geographic region. Industry studies
indicate a trend toward closing or divesting marginally profitable gasoline
stations as the industry faces more widespread implementation of Stage II
vapor recovery requirements, as well as eventual compliance with underground
storage tank regulations. The Company believes that closing or divesting
retail locations due to large expected environmental liabilities has not been
limited to the smaller companies in the industry. The Company believes that,
not only are the larger companies divesting marginally profitable sites, but
during the past two years these companies have invested primarily in areas
where they desire to strengthen an existing presence. The Company believes
that the net effect has been, and will continue to be, a reduction in the
number of gasoline stations.
COMPETITION
Oil industry refining and marketing is highly competitive. Many of the
Company's principal competitors are integrated multinational oil companies
that are substantially larger and better known than the Company. Because of
their diversity, integration of operations, larger capitalization and greater
resources, these major oil companies may be better able to withstand volatile
market conditions, compete on the basis of price and more readily obtain crude
oil in times of shortages.
The principal competitive factors affecting the Company's refining division
are crude oil and other feedstock costs, refinery efficiency, refinery product
mix and product distribution and transportation costs. Certain of the
Company's larger competitors have refineries which are larger and more complex
and, as a result, could have lower per barrel costs or higher margins per
barrel of throughput. The Company has no crude oil reserves and is not engaged
in exploration. The Company believes that it will be able to obtain adequate
crude oil and other feedstocks at generally competitive prices for the
foreseeable future.
The principal competitive factors affecting the Company's retail marketing
division are locations of stores, product price and quality, appearance and
cleanliness of stores and brand identification. Competition from large,
integrated oil companies, as well as from convenience stores which sell motor
fuel, is expected to continue. The principal competitive factors affecting the
Company's wholesale marketing business are product price and quality,
reliability and availability of supply and location of distribution points.
EMPLOYEES
At September 30, 1994, the Company had approximately 2,960 full-time
employees, including approximately 1,826 in convenience stores. The total
number of employees decreased approximately 2.3% from year end 1993. This
decrease was due primarily to the elimination of retail units and to the
consolidation of certain marketing field operations.
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At September 30, 1994, the Company employed 277 hourly workers at its
Pasadena Refinery who are represented by the Oil, Chemical and Atomic Workers
Union under a collective bargaining agreement which expires in February of
1996. Also as of September 30, 1994, the Company employed 161 hourly workers at
its Tyler Refinery who are represented by the same union under a separate
collective bargaining agreement which expires in March of 1997. During March
1994, the Company experienced a brief work stoppage at its Tyler Refinery which
did not interrupt production. Following such work stoppage, the Company and the
union negotiated and entered into the present collective bargaining agreement.
The Tyler Refinery collective bargaining agreement is innovative in the
industry in that it links a portion of employee compensation to the success and
profitability of the operation. The Company is also a party to various other
labor agreements covering 29 of its employees. The Company believes its
relations with its employees to be satisfactory.
ENVIRONMENTAL AND OTHER REGULATIONS
Like other companies in the petroleum refining and marketing industries, the
Company's operations are subject to extensive regulation and the Company has
responsibility for the investigation and cleanup of contamination resulting
from past operations. Current compliance activities relate to air emissions
limitations, waste water and storm water discharges and solid and hazardous
waste management activities. In connection with certain of these compliance
activities and for other reasons, the Company is engaged in various
investigations and, where necessary, remediation of soils and ground water
relating to past spills, discharges and other releases of petroleum, petroleum
products and wastes. The Company's environmental activities are different with
respect to each of its principal business activities: refining, terminal
operations and retail marketing. The Company is not currently aware of any
information that would suggest that the costs related to the air, water or
solid waste compliance and clean-up matters discussed herein will have a
material adverse effect on the Company's financial condition or results of
operations.
The Company conducts environmental assessments and remediation efforts at
multiple locations, including operating facilities, and previously owned or
operated facilities. Estimated closure and post-closure costs for active,
operated refinery and finished product terminal facilities are not recognized
until a decision for closure is made. Estimated closure and post-closure costs
for active and operated marketing facilities and costs of environmental matters
related to ongoing refinery, terminal and marketing operations are recognized
as described below. Expenditures for equipment necessary for environmental
issues relating to ongoing operations are capitalized. The Company accrues
environmental and clean-up related costs of a non-capital nature when it is
both probable that a liability has been incurred and that the amount can be
reasonably estimated. Accruals for costs of environmental remediation
obligations generally are recognized no later than completion of the remedial
feasibility study. Estimated costs, which are based upon experience and
assessments, are recorded at undiscounted amounts without considering the
impact of inflation, and are adjusted periodically as additional or new
information is available. The Company has recorded a liability as of September
30, 1994 of $16.3 million for certain identified environmental compliance and
remediation costs that are not of a capital nature. The Company reviews its
accruals regularly to determine whether the anticipated future costs of
environmental remediation projects are adequately provided for in light of this
accounting policy with respect to accruals.
Refining Operations
All refinery operations are subject to extensive regulation relating to air
emissions, waste water discharges and the generation of solid and hazardous
waste. In order to achieve and ensure compliance with current and anticipated
permits and requirements relating to such regulation, the Company plans to
undertake capital facility improvements totaling approximately $15 million at
the Pasadena Refinery and approximately $9 million at the Tyler Refinery during
the period from 1995 to 1999.
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Air Emissions. The Company has recently reached agreement in principle with
the Texas Natural Resource Conservation Commission ("TNRCC") to settle
outstanding proceedings relating to air emissions at the Pasadena Refinery.
TNRCC originally alleged a variety of violations in connection with sulphur
dioxide emissions from the sulphur recovery unit, the hydrogen sulfide content
limit in fuel gas from the fluid catalytic cracking unit and the release of
catalyst from that unit. Under the proposed settlement, which is subject to
TNRCC approval, the Company will implement various corrective measures and
improved record keeping procedures and will pay administrative penalties of
$110,000 which have been accrued. Settlement of the TNRCC matter is also
expected to satisfy related charges filed by the EPA and by the Harris County
Pollution Control Board. Recently, TNRCC has issued a Notice of Violation (the
"NOV") with respect to certain alleged violations at the reformer unit at the
Pasadena Refinery, which the Company had self-reported in early 1994. The
Company and the TNRCC staff are currently working to resolve the issues raised
by the NOV.
In general, the Company continues to review and evaluate air emissions
requirements and compliance with respect to its refinery operations. At
present, the Company is evaluating specific compliance issues that, in the
Company's opinion, may require capital expenditures in addition to capital
expenditures that have already been identified. Although the Company cannot
determine at this time the amount of such expenditures that may be necessary,
the Company believes that they are not likely to materially adversely affect
its consolidated financial position or results of operations. If the Company
were required to modify process or air pollution control equipment or
operating procedures to achieve compliance, the Company would expect to
consult appropriate regulatory authorities and to pursue resolution of those
issues without enforcement action. There can be no assurance, however, that
the Company will not be subjected to additional fines or penalties with
respect to historical or future operations.
The Company has been reviewing a number of air quality issues at the
Pasadena Refinery (in connection with the recent TNRCC proceedings) and at the
Tyler Refinery, and has also been attempting to assess the scope of additional
environmental compliance that will be required under Title V of the Clean Air
Act ("Title V"). The Company expects that Title V will require all refineries,
including both the Pasadena Refinery and the Tyler Refinery, to apply for and
obtain one or more Federal operating permits covering all operations and
processes at their facilities. Under proposed Texas regulations, initial
permit applications by refineries will be required no earlier than January 1,
1996.
Waste Water Discharges. Waste water discharges from the Refineries are
subject to permits governing storm water discharges to surface waters and
process and sanitary waste water discharges to municipal sewer systems. The
Company is nearing completion of an upgrade of the Tyler Refinery's storm
water management and treatment system, pursuant to a 1993 Agreed Order with
the TNRCC in order to achieve compliance with waste water discharge permits.
Soil and Ground Water Remediation. Certain areas at the Refineries have also
been subject to remediation under the Resource Conservation and Recovery Act
("RCRA"), which governs hazardous waste disposal activities and the
remediation of certain past waste disposal activities. Under RCRA, the Company
has conducted investigations of soil and ground water conditions at both
Refineries. As a result of those investigations, the Company has conducted
certain treatment, removal, disposal and containment activities to address
areas of soil contamination. In addition, the Company operates an extensive
system of ground water wells at both Refineries for the monitoring, extraction
and remediation of ground water. The Company is currently planning to install
additional ground water wells, to continue monitoring, pumping and remediating
ground water and to conduct additional remediation of contaminated soils. The
Tyler Refinery is subject to both a RCRA permit, issued by the EPA, and an
Agreed Order, issued by the Texas Water Commission (now the TNRCC), with
respect to solid waste management practices. The Company has implemented
programs at the Tyler Refinery necessary to bring its operations into
compliance with Federal and state solid and hazardous waste regulations, as
required by the RCRA permit and the Agreed Order. The Company estimates that
compliance with the RCRA permit
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and the Agreed Order will require additional expenditures of approximately $6
million, over the next five years of which approximately $1 million may be
attributable to environmental clean-up matters.
Terminals
The Company currently owns or operates 16 terminals for the storage of
refined petroleum products, including gasoline, highway diesel, home heating
oil and jet fuel. Many of these terminal locations are subject to permit
requirements relating to air emissions and waste water discharges. The Company
anticipates capital spending of approximately $2 million over the next five
years to upgrade emissions control equipment and waste water management and
treatment systems at the terminals.
Many of the terminal locations have been affected by on-site or off-site
releases of petroleum products and some waste materials. At some terminals,
there have been accidental spills of various products. At other terminals, tank
and line leaks have been discovered and corrected. Most of the terminals have
been in operation for several decades. Based on historical industry practices,
it is possible that discharges of petroleum products and wastes, such as tank
bottoms, may have occurred at some of the terminals at times when such releases
were not illegal. As a result of these and other causes (including migration of
off-site contamination), the soil or ground water at several of the terminals
has been adversely affected.
The Company is currently conducting ground water remediation activities,
including in some cases the recovery of free product, at many of the terminals
in accordance with regulatory requirements. The Company actively monitors and
manages these remediation activities to achieve and maintain compliance with
all applicable government orders, permits and other requirements with respect
to this contamination.
In the past five years, the Company has incurred $1.3 million in capital
expenditures and $1.2 million in non-capital expenses relating to environmental
matters at the terminal facilities. In the next five years, the Company
anticipates incurring approximately $7 million in capital expenditures, and
non-capital expenditures of approximately $2 million which has been accrued for
remediation of past releases of petroleum products at the terminal locations.
There can be no assurance that the costs associated with the terminal
remediation activities will not increase substantially if new issues are
identified or the regulatory authorities impose unanticipated requirements upon
the Company.
Retail Operations
The Company owns or operates over 350 retail units at which there are
underground storage tanks containing gasoline, and formerly owned or operated
more than 400 other sites. The Company believes that it is substantially in
compliance with current Federal and state underground storage tank
requirements, which require monitoring, tank tightness testing and inventory
control to discover leaks. The Company has replaced many such tanks, and has
budgeted approximately $20 million through 1998 to comply with environmental
requirements at the retail locations.
The Company's retail units are subject to environmental requirements for
Stage II vapor recovery systems and requirements with respect to underground
storage tanks. The Clean Air Act requires states with certain designated ozone
non-attainment areas to implement a Stage II vapor recovery control program. In
those areas where Stage II systems are required, the Company has either
installed, or is currently in the process of installing Stage II equipment.
EPA regulations require that by 1998 all underground storage tanks must have
installed the following: (i) leak detection monitoring; (ii) spill and overfill
protection; and (iii) corrosion protection for tanks and piping (coated and
cathodically-protected steel, or fiberglass). The Company believes that
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<PAGE>
over 30% of its retail units are currently in full compliance with the 1998
standards and an additional 24% require very little additional work in order to
achieve such compliance.
The Company is aware of soil or ground water conditions requiring further
investigation or remediation at 185 of the operating locations and 226 of the
closed locations. Thirty-six sites are currently undergoing remediation
activities, at an average per unit cost to date of approximately $135,000 per
site. Based on reduced costs for recent remediation activities, the average per
unit cost of future remediation at affected sites is expected to be
approximately $45,000. The Company has accrued approximately $5 million with
respect to the costs of investigating, monitoring and remediating the retail
sites. While the Company's anticipated costs with respect to environmental
matters at the retail locations are not expected to adversely affect the
Company's financial condition or results of operations, there can be no
assurance that future investigations or changing regulatory requirements will
not result in substantially higher costs than have been projected by the
Company which could adversely affect the financial position of the Company.
Superfund
Under the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended ("CERCLA") and analogous state laws, the Company has
received notice of potential liability at several sites for the disposal of
materials allegedly containing hazardous substances. As a potentially
responsible party ("PRP"), the Company could be jointly, severally and strictly
liable for the response costs associated with such sites. The Company's
exposure in these matters has either been resolved or is de minimis and is not
expected to have a material adverse effect on the financial position of the
Company.
LITIGATION
Various lawsuits and other litigation have been filed against the Company, in
some of which substantial amounts are claimed for alleged personal injury and
property damage from prolonged exposure to petroleum, petroleum related
products and asbestos used at the Company's refineries or in the petroleum
refining process. The Company is a co-defendant with numerous other defendants
in a number of these suits. Although the Company is vigorously defending these
actions, their final resolution could take several years. The Company's
liability, if any, in connection with these cases has either been accrued in
accordance with generally accepted accounting principles or was not
determinable at September 30, 1994. The Company consults with counsel with
respect to pending or threatened claims. While litigation can contain a high
degree of uncertainty and the risk of an unfavorable outcome, in the opinion of
management, there is no reasonable basis to believe that the eventual outcome
of any such matter or group of related matters will have a material adverse
effect on the Company's consolidated financial position.
The Company is a defendant in a citizens suit pertaining to alleged
violations of waste water discharge permits at the Tyler Refinery. As noted
above, the Company has made significant investments in improving its waste
water discharge treatment capability at the Tyler Refinery and believes that it
will be able to demonstrate a current and continuing ability to achieve
compliance with its permit. In the event that such compliance cannot be
achieved, the Company may be exposed to liability in connection with the suit,
which the Company does not believe would be material to its consolidated
financial position or results of operations.
The Company has recently reached an agreement in principle to settle with the
TNRCC outstanding enforcement proceedings relating to air emissions at the
Pasadena Refinery. See "Environmental and Other Regulations -- Refining
Operations."
42
<PAGE>
MANAGEMENT
Following is a list of the Company's executive officers and directors, their
ages and their offices and positions as of September 30, 1994:
<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE
------------------------- --- -----------------------------------------------
<C> <C> <S>
Henry A. Rosenberg, Jr. 64 Director, Chairman of the Board and Chief
Executive Officer
Charles L. Dunlap 51 Director, President and Chief Operating Officer
Edward L. Rosenberg 39 Senior Vice President -- Administration,
Corporate Development and Long Range Planning
Phillip W. Taff 52 Senior Vice President -- Finance and Chief
Financial Officer
John E. Wheeler, Jr. 41 Senior Vice President -- Treasurer and
Controller
Thomas L. Owsley 53 Vice President -- Legal
Randall M. Trembly 48 Vice President -- Refining
Paul J. Ebner 36 Vice President -- Marketing Support Services
J. Michael Mims 45 Vice President -- Human Resources
George R. Sutherland, Jr. 49 Vice President -- Supply and Transportation
Frank B. Rosenberg 36 Vice President -- Marketing
Dolores B. Rawlings 57 Secretary
Jack Africk 66 Director
George L. Bunting, Jr. 53 Director
Michael F. Dacey 50 Director
Robert M. Freeman 53 Director
Patricia A. Goldman 52 Director
William L. Jews 42 Director
Thomas M. Gibbons 68 Director
Malcolm McNair 69 Director
</TABLE>
Henry A. Rosenberg, Jr. has been Chairman of the Board and Chief Executive
Officer of the Company since April 24, 1975. He is also a director of Signet
Banking Corporation and USF&G Corporation. Mr. Rosenberg is a member of the
National Petroleum Council, a member and former Chairman of the National
Petroleum Refiners Association and a member of the 25 Year Club of the
Petroleum Industry. Mr. Rosenberg has been a director of the Company since
1955. Mr. Rosenberg is the father of Edward L. Rosenberg and Frank B.
Rosenberg. He is a member of the ATAPCO Group. See "Principal Stockholders."
Charles L. Dunlap has been President and Chief Operating Officer of the
Company since December 1991. He is presently a director and member of the
Executive Committee of the National Petroleum Refiners Association, and a
member of the 25 Year Club of the Petroleum Industry. He previously was the
Executive Vice President and a Director of Pacific Resources, Inc. from July
1985 through November 1991. Mr. Dunlap has been a director of the Company since
1991.
Edward L. Rosenberg has been Senior Vice President -- Administration,
Corporate Development and Long Range Planning of the Company since June, 1994.
He was formerly Senior Vice President --Finance and Administration from
December 1991 to June 1994; Vice President -- Supply & Transportation from
October 1990 to December 1991; and Vice President -- Corporate Development
43
<PAGE>
from August 1989 to October 1990. He is the son of Henry A. Rosenberg, Jr.,
and the brother of Frank B. Rosenberg. He is a member of the ATAPCO Group. See
"Principal Stockholders."
Phillip W. Taff has been Senior Vice President -- Finance and Chief
Financial Officer of the Company since June 1994. He was Executive Vice
President, Chief Financial Officer and Chief Administrative Officer of
Greyhound Lines, Inc. from April 1993 to May 1994; and Senior Vice President
and Chief Financial Officer, American Trading and Production Corporation from
May 1991 to April 1993. He was Executive Vice President, PHH Corporation and
President, PHH Fleet America, April 1987 through April 1991.
John E. Wheeler, Jr. has been Senior Vice President -- Treasurer and
Controller of the Company since June 1994. He was formerly Vice President --
Treasurer and Controller from December 1991 to June 1994; and Vice
President -- Controller from March 1984 to December 1991.
Thomas L. Owsley has been Vice President -- Legal of the Company since April
1983.
Randall M. Trembly has been Vice President -- Refining of the Company since
December 1991. He was formerly Vice President -- Treasurer from October 1987
to December 1991.
Paul J. Ebner has been Vice President -- Marketing Support Services since
December 1991. He was formerly General Manager -- Marketing Support Services
from November 1988 to December 1991.
J. Michael Mims has been Vice President -- Human Resources of the Company
since June 1992. He was formerly Vice President -- Internal Auditing and
Consulting Services from December 1991 to June 1992, and Director of Internal
Auditing from September 1983 to December 1991.
George R. Sutherland, Jr. has been Vice President -- Supply and
Transportation of the Company since July 1992. He was formerly Senior Vice
President -- Trading of Pacific Resources, Inc. from 1989 until his employment
by the Company.
Frank B. Rosenberg has been Vice President -- Marketing of the Company since
January 1993. He was formerly Southern Marketing Division Manager from January
1992 to January 1993; Vice President -- Wholesale Marketing -- La Gloria Oil
and Gas Company from October 1990 to January 1992; Manager -- Economics,
Planning and Scheduling from October 1989 to October 1990; and Manager --
Refinery Sales from November 1988 to October 1989. Mr. Rosenberg is the son
of Henry A. Rosenberg, Jr. and the brother of Edward L. Rosenberg. He is a
member of the ATAPCO Group. See "Principal Stockholders."
Dolores B. Rawlings has been Secretary of the Company since November 1990.
She was formerly Assistant to the Chairman and Assistant Secretary from April
1988 to November 1990.
Jack Africk was formerly Vice Chairman, UST Inc. from September 1990 through
May 1993. Mr. Africk was Executive Vice President of UST Inc. from May 1985
through September 1990. He was President and Chief Executive Officer of U.S.
Tobacco Company, a subsidiary of UST Inc. from May 1987 through September
1990. Mr. Africk is also a director of Duty-Free International, Inc., Tanger
Factory Outlet Centers, Inc. and Transmedia Network, Inc. He has been a
director of the Company since 1991. Mr. Africk also acts as a general business
advisor and consultant to the Company.
George L. Bunting, Jr. has been President and Chief Executive Officer of
Bunting Management Group since July 1991. Mr. Bunting was Chairman and Chief
Executive Officer of Noxell Corporation from April 1986 through June 1991. He
is also a director of Mercantile Bankshares Corporation, PHH Corporation and
USF&G Corporation. He has been a director of the Company since 1992.
44
<PAGE>
Michael F. Dacey was an Executive Vice President of The Chase Manhattan
Corporation and The Chase Manhattan Bank, N.A. from December 1987 through
December 1994. He has been a director of the Company since 1991.
Robert M. Freeman has been Chairman of the Board and Chief Executive Officer
of Signet Banking Corporation since April of 1990. He was President and Chief
Executive Officer of Signet from April 1989 through March 1990 and Vice
Chairman from December 1978 to April 1989. He is also a director of Signet
Banking Corporation. Mr. Freeman has been a director of the Company since 1993.
Patricia A. Goldman was Senior Vice President -- Corporate Communications of
USAir, Inc. from February 1988 through January 1994. She has been a director of
the Company since 1989.
William L. Jews has been President and Chief Executive Officer of Blue Cross
and Blue Shield of Maryland since April 1993. Mr. Jews was President and Chief
Executive Officer of Dimensions Health Corporation from March 1990 through
March 1993, and was President and Chief Executive Officer of Liberty Medical
Center, Inc., and St. Luke's Lutheran Holding Company from June 1986 through
February 1990. Mr. Jews is also a director of NationsBank, N.A. and the Shelter
Development Corporation. He has been a director of the Company since 1992.
Thomas M. Gibbons was formerly Chairman of the Board of The Chesapeake and
Potomac Telephone Companies (part of Bell Atlantic Corporation) from January
1990 through April 1990. Mr. Gibbons was Chairman of the Board and Chief
Executive Officer of that corporation from July 1988 to January 1990. He was
President and Chief Executive Officer from January 1983 to July 1988. He has
been a director of the Company since 1988.
Malcolm McNair was formerly a Financial Services Group Representative,
Cushman & Wakefield of Long Island, Inc., from January 1988 through May 1989.
He has been a director of the Company since 1972.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company or any subsidiary of the
Company is paid $12,000 per year for serving as a director and a meeting fee of
$600, plus travel expenses, for attendance at each meeting. Each non-employee
director who is a member of any committee of the Board of Directors other than
the Executive Committee is paid $3,000 per year for serving on each such
committee. The Chairman of any committee other than the Executive Committee is
paid a fee of $1,000 for serving in that capacity. Directors who are employees
receive no separate compensation for serving on the Board, on any Board
committee or as Chairman of any committee.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or paid
to the Chief Executive Officer and the other four most highly compensated
executive officers as of December 31, 1993 for all services rendered in all
capacities to the Company and its subsidiaries during the last three fiscal
years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION(A)
----------------------------------------- ------------------------
NAME AND OTHER ANNUAL LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(B) PAYOUTS COMPENSATION(C)
------------------ ---- -------- -------- --------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Henry A. Rosenberg, Jr. 1993 $525,000 -- $17,734 -- $15,736
Chairman of the Board 1992 521,668 -- 17,460 -- 15,670
and Chief Executive 1991 501,672 -- $125,698
Officer
Charles L. Dunlap 1993 $381,672 -- $16,224 -- $13,777
President and Chief 1992 375,000 -- 15,210 -- 3,833
Operating Officer 1991 31,250 $100,000(d) --
Thomas L. Owsley 1993 $148,000 -- $13,225 -- $ 7,038
Vice President -- Legal 1992 137,000 -- 13,044 -- 6,914
1991 132,500 -- $ 33,692
George R. Sutherland,
Jr. 1993 $152,504 -- $12,265 -- $ 5,322
Vice President --
Supply 1992 75,577 -- 6,000 -- 1,241
and Transportation 1991 N/A N/A N/A
Randall M. Trembly 1993 $145,000 -- $12,000 -- $ 7,034
Vice President -- 1992 135,000 -- 12,000 -- 6,945
Refining 1991 119,667 -- $ 31,250
</TABLE>
- ---------------------
(a) These amounts represent payments made under the Company's Long-Term
Performance Reward Plan which is based on the Company's earnings during a
three year period, and bonuses are calculated as a percentage of the
employee's year-end base pay during the cycle.
(b) These amounts include automobile allowances, gasoline allowances, and the
tax gross-ups applicable to the gasoline allowances. Information for years
prior to 1992 is not required.
(c) These amounts include imputed income related to excess life insurance,
payments for executive medical insurance and the Company's matching
payments under the Employees Savings Plan. Information for years prior to
1992 is not required. In 1993, the imputed income for Mr. Rosenberg was
$4,176; for Mr. Dunlap, $2,218 and for Mr. Sutherland, $1,072. The
executive medical payments for the officers listed in the table were
$1,560. The balance of the amount reported for 1993 represents the
Company's matching payments under the Employees Savings Plan.
(d) Mr. Dunlap joined the Company in 1991 and was paid a signing bonus of
$100,000.
1994 ANNUAL INCENTIVE PLAN
The 1994 Annual Incentive Plan is a cash plan that may, based upon the
approval of the Executive Compensation and Bonus Committee (the "Committee"),
be offered to officers, senior management and other key operational managers.
Minimum performance levels, targets and maximum awards are established by the
Committee for each plan year. Participants can earn a percentage of base salary
46
<PAGE>
and from 25% to 40% of a participant's award is based upon the individual's
performance which is measured by the Crown management system. The balance of
the award is determined by the Company's performance which is based upon income
before income taxes. Income before income taxes must meet the annual minimum
threshold approved by the Committee for any awards to be earned in a plan year.
1994 LONG-TERM INCENTIVE PLAN
At the Company's 1994 Annual Meeting, the stockholders approved the adoption
of the 1994 Long-Term Incentive Plan (the "Plan"). There are currently 12
executive officers and 14 other key employees participating in the Plan. The
Plan provides for Awards of Non-qualified Stock Options ("Options") for the
purchase of the Class B Common Stock (the "Option Stock") and Performance
Vested Restricted Stock ("PVR Stock") which is also awarded in shares of Class
B Common Stock.
Awards are made by the Committee, or such other committee as may be
designated by the Board. Awards of up to a total of 1,100,000 shares of Option
Stock and PVR Stock are available under the Plan, either from authorized but
unissued shares of Class B Common Stock or from shares of Class B Common Stock
purchased specifically for use under the Plan. No more than 550,000 shares of
the total shares allocated to the Plan may be for awards in the form of PVR
Stock, and no participant may receive more than 150,000 shares of Option Stock
or 50,000 shares of PVR Stock in any one year. Shares relating to unexercised
Options or undistributed shares that have been terminated or forfeited may, to
the extent permitted by law, be reissued under the Plan.
INTEREST OF MANAGEMENT AND OTHERS IN TRANSACTIONS WITH THE COMPANY AND ITS
SUBSIDIARIES
In the ordinary course of business, the Company leases offices in an office
building owned by American Trading Real Estate Company, Inc., all of the stock
of which is owned by American Trading Real Estate Properties, Inc., a wholly-
owned subsidiary of ATAPCO of which Messrs. Henry A. Rosenberg, Jr. and Edward
L. Rosenberg are directors and stockholders, and Mr. Frank B. Rosenberg is a
stockholder. During 1993 the total rent paid including escalation was
$1,031,059 which was no greater than the rent charged others for comparable
space in such building. In addition, the Company paid $61,928 for alterations,
maintenance, and miscellaneous charges, which was no greater than charges to
others for comparable services.
In the ordinary course of business, the Company and its subsidiaries maintain
bank accounts in and relationships with, including from time to time borrowings
from, The Chase Manhattan Bank, N.A., of which Mr. Dacey was formerly an
officer, and Signet Bank/Maryland, a subsidiary of Signet Banking Corporation,
of which Mr. Freeman is an officer and a director and Mr. Henry A. Rosenberg,
Jr. is a director. The Chase Manhattan Bank, N.A. is the agent and a lender,
and Signet Bank/Maryland is a lender, under the Credit Facility. Signet
Bank/Maryland is also the Trustee of the Company's Retirement Plan.
NationsBank, N.A., of which Mr. Jews is a director, and its affiliate
NationsBank of Texas, N.A., are lenders under the Credit Facility.
Effective November 1, 1993, Mr. Africk became a general business advisor and
consultant to the Company for which he is paid a consultancy fee of $3,000 per
month. His work in this capacity is in addition to his service as a director,
member of the Executive Committee and Chairman of the Audit Committee.
EMPLOYMENT CONTRACTS
The Company has a five-year employment contract with Charles L. Dunlap, its
President and Chief Operating Officer. The contract provides for Mr. Dunlap to
serve as President and Chief Operating Officer and as a director of the
Company. The contract also provides for him to participate in the Company's
bonus and benefit plans and to be covered by the Company's Supplemental
Retirement Income Plan for Senior Executives.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The Company's common stock is divided into two classes, Class A Common
Stock, par value $5 per share (the "Class A Common Stock") and Class B Common
Stock, par value $5 per share (the "Class B Common Stock"). The holders of the
Class B Common Stock, voting separately as a class, are entitled to elect two
directors (who may not be employees of the Company or any of its subsidiaries)
and to remove the directors so elected. The holders of the Class A Common
Stock, voting separately as a class, are entitled to elect and remove all
directors other than the directors elected by the holders of the Class B
Common Stock. On all matters other than the election of directors, each share
of Class A Common Stock is entitled to one vote, and each share of Class B
Common Stock is entitled to one-tenth ( 1/10) vote. Except with respect to
voting rights, both classes of stock have the same rights and privileges
without differentiation as to class, except that the Board of Directors has
the authority to declare stock dividends payable in Class A Common Stock to
the holders of the Class A Common Stock and dividends payable in Class B
Common Stock to the holders of the Class B Common Stock, or dividends payable
in either class to the holders of both classes. As a consequence of its
stockholdings, the ATAPCO Group, detailed herein, has the ability to determine
the composition of a majority of the Company's Board of Directors, except for
the two directors elected by the holders of the Class B Common Stock and
thereby effectively has the ability to exercise control over the Company. The
ATAPCO Group's stockholdings also give it the ability to determine the outcome
of any matter submitted to the Company's stockholders for approval other than
matters requiring a vote in excess of a majority, or a vote by class of
stockholders, under the Maryland General Corporation Law or the Company's
charter. The following table sets forth the shares of each class of the
Company's stock and the percentage of each class owned by all persons known by
the Company to be the beneficial owner of more than 5% of the shares of any
class on January 31, 1994:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENTAGE
BENEFICIAL OWNER TITLE OF CLASS SHARES OF CLASS
- ------------------------------- -------------------- --------- ----------
<S> <C> <C> <C>
American Trading and Production
Corporation "group"(a)(b) Class A Common Stock 2,471,188 51.3%
Blaustein Building Class B Common Stock 614,709 12.3
P.O. Box 238
Baltimore, MD 21203
A.I.C. Limited "group"(c) Class A Common Stock 448,900 9.3
7930 Clayton Road
St. Louis, MO 63117
Heine Securities Corporation(d) Class A Common Stock 242,700 5.0
51 John F. Kennedy Parkway Class B Common Stock 463,600 9.2
Short Hills, NJ 07078
</TABLE>
- ---------------------
(a) ATAPCO (holder of 2,366,526 shares of Class A Common Stock and 591,629
shares of Class B Common Stock) and various persons who hold stock in that
corporation either individually or in a fiduciary or beneficial capacity
(holders of 104,662 shares of Class A Common Stock and 23,080 shares of
Class B Common Stock) are a "group" as that term is used in Section
13(d)(3) of the Exchange Act.
(b) Henry A. Rosenberg, Jr., the Company's Chairman and Chief Executive
Officer, and Edward L. Rosenberg, Senior Vice President -- Administration,
Corporation Development and Long Range Planning, are directors and
stockholders of ATAPCO, and Frank B. Rosenberg, Vice President --
Marketing, is a stockholder of ATAPCO. Henry A. Rosenberg, Jr. owns shares
of preferred stock of ATAPCO and is a beneficiary of a trust of which he
is one of the trustees holding common stock of ATAPCO. In addition Mr.
Henry Rosenberg is one of the trustees of other trusts, in which he has no
beneficial interest, which own shares of preferred and common stock of
ATAPCO. Of the ATAPCO Group's shares listed above, Mr. Henry Rosenberg
holds 21,132 shares of Class A Common Stock and 2,187 shares of Class B
Common Stock individually and in the Company's Employees Savings Plan.
(c) This information was obtained from a report on Schedule 13D dated January
14, 1983, and an amendment dated May 24, 1990, which were filed with the
Securities and Exchange Commission (the "Commission"). A.I.C. Limited, the
record owner of 448,900 shares of Class A Common Stock, and two
associates, who have no record ownership of Class A Common Stock, are a
"group" as that term is used in Section 13(d)(3) of the Exchange Act.
(d) This information was obtained from a report on Schedule 13G dated February
12, 1993 filed with the Commission. Heine Securities Corporation is a
registered investment advisor.
48
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
The Company entered into a Credit Agreement dated as of May 10, 1993 (the
"Credit Facility") among the Company and the lenders named therein and The
Chase Manhattan Bank, N.A., as agent. The eight lenders have committed a
maximum of $125.0 million to the Company for cash borrowings and letters of
credit. The maximum amount permitted to be outstanding under the Credit
Facility (the "Borrowing Base") is limited to, as at any date, the sum of (A)
80% of certain of the Company's aggregate accounts receivable, and (B) 50% of
certain of the Company's aggregate inventory. There is a $50.0 million
limitation on cash borrowings. As of September 30, 1994 there were $18.8
million in undrawn letters of credit issued under the Credit Facility and no
cash borrowings. The Credit Facility expires on May 10, 1996, subject to the
right of the Company to request an extension for a period of one year, which
extension may be agreed to or rejected by each individual bank. If banks with
aggregate commitments of at least $50.0 million agree to the extension, the
expiration date with respect to the commitments of the agreeing banks will be
extended for one year. The Company may utilize the Credit Facility for working
capital and general corporate purposes.
The Credit Facility provides for interest on outstanding borrowings to be
calculated under either a base rate or a fixed rate. The base rate is defined
as the higher of the Federal funds rate plus one-half of 1%, or the prime rate.
The fixed rate for Eurodollar loans is defined as the arithmetic mean of the
rates quoted by the reference banks referred to in the Credit Facility for the
offering to leading banks in the London interbank market of United States
dollar deposits of comparable terms and amounts. The fixed rate for certificate
of deposit loans is defined to mean the arithmetic mean of the rates determined
by the reference banks to be the average of the bid rates quoted by at least
two certificate of deposit dealers for the purchase of certificates of deposit
with a comparable term and amount. For the nine months ended September 30,
1994, the average interest rate on borrowings under the Credit Facility was
7.25% per annum.
The Credit Facility contains numerous restrictive financial and other
covenants including, without limitation: (i) prohibitions on incurring further
indebtedness (other than indebtedness represented by the Notes) and
restrictions on creating further liens and contingent obligations; (ii)
restrictions on mergers, acquisitions, purchases and sales of assets,
investments and transactions with affiliates; (iii) limitations on
distributions and dividends by the Company; (iv) limitations on the Company's
ability to acquire assets or engage in activities outside of its ordinary
course of business; and (v) financial maintenance tests, including, among
others, those requiring the Company to maintain a minimum current ratio,
minimum consolidated tangible net worth and a maximum ratio of indebtedness to
tangible net worth, all as defined. The Credit Facility also limits the
Company's capital expenditures. The Credit Facility includes a fixed charge
coverage ratio and other customary events of default.
EXISTING SENIOR NOTES
The Company issued $60.0 million of unsecured Existing Senior Notes pursuant
to a Note Purchase Agreement dated January 3, 1991 (the "Note Purchase
Agreement"). The Note Purchase Agreement limits the payment of cash dividends
on the Company's Common Stock and requires the maintenance of various covenants
including minimum working capital, a minimum fixed charge coverage ratio, and
minimum consolidated tangible net worth, all as defined. The Note Purchase
Agreement provides for the principal to be repaid in seven equal annual
installments commencing January 3, 1995. It is anticipated that the Existing
Senior Notes will be retired from the proceeds of the Notes offered hereby.
PURCHASE MONEY DEBT
Effective December 1, 1993, the Company and two subsidiaries entered into a
secured purchase money borrowing (the "Purchase Money Debt") for the financing
of certain gasoline station and terminal
49
<PAGE>
equipment and office furnishings, at an effective rate of 6.65%. Ninety percent
of the principal is repayable in 60 monthly installments, with a balloon
payment of 10% of the principal being payable in January 1999. The Purchase
Money Debt is secured by gasoline station equipment and office furnishings
having a cost basis of $6.5 million. The Purchase Money Debt allows for a
maximum drawdown of $6.5 million, all of which has been drawn down by the
Company. The Purchase Money Debt includes various customary events of default.
STANDBY LETTERS OF CREDIT
The Company has an additional uncommitted line of credit with a major
financial institution, for up to $20.0 million in standby letters of credit,
primarily for the purchase of crude oil. Under this agreement, the Company had
outstanding as of September 30, 1994, an irrevocable standby letter of credit
in the principal amount of $7.2 million.
DESCRIPTION OF THE NOTES
The Notes offered hereby will be issued under an Indenture to be dated as of
January 24, 1995 (the "Indenture") between the Company and The First National
Bank of Boston, as trustee (the "Trustee"), a copy of the form of which is
filed as an exhibit to the Registration Statement and will be made available to
prospective purchasers of the Notes upon request. The Indenture is subject to
and governed by the Trust Indenture Act. The following summary of the material
provisions of the Indenture does not purport to be complete, and where
reference is made to particular provisions of the Indenture, such provisions,
including the definitions of certain terms, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture by the Trust Indenture Act. For definitions of certain
capitalized terms used in the following summary, including the term "Company",
see "-- Certain Definitions."
GENERAL
The Notes will mature on February 1, 2005, will be limited to $125,000,000 in
aggregate principal amount, and will be unsecured senior obligations of the
Company. Each Note will bear interest at the rate set forth on the cover page
hereof from January 24, 1995 or from the most recent interest payment date to
which interest has been paid, payable semi-annually on February 1 and August 1
in each year (each, an "Interest Payment Date"), commencing August 1, 1995, to
the Person in whose name the Note (or any predecessor Note) is registered at
the close of business on the January 15 or July 15 preceding such Interest
Payment Date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes will be exchangeable and transferable, at the office or agency of the
Company maintained for such purpose (which initially will be the office or
agent of the Trustee); provided, however, that payment of interest may be made
at the option of the Company by check mailed to the Person entitled thereto as
shown on the security register. The Notes will be issued only in fully
registered form without coupons, in denominations of $1,000 and any integral
multiple thereof. (Section 302). No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith. (Section 305).
OPTIONAL REDEMPTION
The Notes will be subject to redemption at any time on or after February 1,
2000, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or an integral
multiple thereof at the following redemption prices (expressed as percentages
of
50
<PAGE>
the principal amount), if redeemed during the 12-month period beginning
February 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000........................................................... 105.438%
2001........................................................... 103.625%
2002........................................................... 101.813%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on regular record dates to receive interest due on
an Interest Payment Date).
Notwithstanding the foregoing, at any time prior to February 1, 1998, the
Company may redeem up to $37.5 million principal amount of the Notes at a
redemption price of 110.875% of the principal amount of Notes redeemed,
together with accrued and unpaid interest, if any, to the redemption date,
with the Net Cash Proceeds of one or more Public Equity Offerings; provided
that after such redemption, Notes having an aggregate principal amount of at
least $87.5 million remain outstanding.
If less than all of the Notes are to be redeemed, the Trustee will select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee deems fair and reasonable. (Section 1104).
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
RANKING OF THE NOTES
The Indebtedness evidenced by the Notes will be senior unsecured obligations
of the Company, will rank pari passu in right of payment with all existing and
future senior Indebtedness of the Company and will be senior in right of
payment to all existing and future Subordinated Indebtedness of the Company.
The Notes, however, will be effectively subordinated to secured senior
Indebtedness of the Company with respect to the assets securing such
Indebtedness and will also be effectively subordinated to any Indebtedness of
the Company's Subsidiaries. As of September 30, 1994, after giving effect to
the sale of the Notes and the application of the estimated net proceeds
thereof, the Company would have had $132.0 million of senior Indebtedness
outstanding (including the Notes and $7.0 million of Purchase Money Debt and
other Indebtedness of the Company and its Subsidiaries). As of September 30,
1994, the Company had, subject to certain restrictions, the ability to draw up
to $50.0 million of additional senior unsecured Indebtedness under the Credit
Facility. See "Investment Considerations -- Ranking of the Notes."
Holders of secured Indebtedness of the Company have claims with respect to
the assets constituting collateral for such Indebtedness that are prior to the
claims of holders of the Notes. In the event of a default on the Notes, or a
bankruptcy, liquidation or reorganization of the Company, such assets will be
available to satisfy obligations with respect to the Indebtedness secured
thereby before any payment therefrom could be made on the Notes. To the extent
that the value of such collateral is not sufficient to satisfy the
Indebtedness secured thereby, amounts remaining outstanding on such
Indebtedness would be entitled to share, together with the Indebtedness under
the Notes, with respect to any other assets of the Company.
CERTAIN COVENANTS
The Indenture will contain, among other things, the following covenants:
Limitation on Indebtedness
(a) The Company will not create, issue, assume, guarantee, or otherwise in
any manner become directly or indirectly liable for or with respect to or
otherwise incur (collectively, "incur") any
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Indebtedness and the Company will not permit any of its Subsidiaries to incur
any Indebtedness, except that (1) the Company may incur Indebtedness and (2)
any Subsidiary of the Company may incur Acquired Indebtedness, Purchase Money
Indebtedness and Indebtedness in respect of Sale and Leaseback Transactions,
if, in each case, (x) the Consolidated Fixed Charge Coverage Ratio for the
Company for the four full fiscal quarters immediately preceding the incurrence
of such Indebtedness taken as one period (and after giving pro forma effect to
(i) the incurrence of such Indebtedness and (if applicable) the application of
the net proceeds therefrom, including to refinance other Indebtedness, as if
such Indebtedness was incurred, and the application of such proceeds occurred,
at the beginning of such four-quarter period; (ii) the incurrence, repayment or
retirement of any other Indebtedness by the Company and its Subsidiaries since
the first day of such four-quarter period as if such Indebtedness was incurred,
repaid or retired at the beginning of such four-quarter period (except that, in
making such computation, the amount of Indebtedness under any revolving credit
facility will be computed based upon the average daily balance of such
Indebtedness during such four-quarter period); (iii) in the case of Acquired
Indebtedness and Purchase Money Indebtedness, the related acquisition as if
such acquisition occurred at the beginning of such four-quarter period; and
(iv) any acquisition or disposition by the Company and its Subsidiaries of any
company or any business or any assets out of the ordinary course of business,
whether by merger, stock purchase or sale or asset purchase or sale or any
related repayment of Indebtedness, since the first day of such four-quarter
period, as if such acquisition or disposition occurred at the beginning of such
four-quarter period) is at least equal to 2.5 to 1.0 and (y) if such
Indebtedness is Subordinated Indebtedness, such Indebtedness has an Average
Life to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes and a Stated Maturity for its final scheduled principal
payment later than the Stated Maturity for the final scheduled principal
payment of the Notes.
(b) The foregoing limitations will not apply to the incurrence of any of the
following (collectively "Permitted Indebtedness"):
(i) Total Indebtedness under the Credit Facility in an aggregate
principal amount at any one time outstanding not to exceed $125.0 million;
provided that if such Indebtedness is for borrowed money, then such
Indebtedness together with all other Indebtedness for borrowed money under
the Credit Facility shall not exceed at any time $50.0 million in aggregate
principal amount;
(ii) Indebtedness of the Company pursuant to the Notes and Indebtedness
of any Guarantor pursuant to a Guarantee of the Notes;
(iii) Indebtedness of the Company or any of its Subsidiaries outstanding
on the date of the Indenture and listed on a schedule thereto;
(iv) Indebtedness (1) of the Company owing to a Subsidiary of the Company
or (2) of a Wholly Owned Subsidiary owing to the Company or another Wholly
Owned Subsidiary provided that any such Indebtedness is made pursuant to an
intercompany note in the form attached as an exhibit to the Indenture and,
in the case of Indebtedness of the Company owing to a Subsidiary of the
Company, is subordinated in right of payment from and after such time as
the Notes become due and payable (whether at Stated Maturity, acceleration
or otherwise) to the payment and performance of the Company's obligations
under the Notes; provided, further, that (x) any disposition, pledge or
transfer of any such Indebtedness to a Person (other than the Company or a
Wholly Owned Subsidiary) will be deemed to be an incurrence of such
Indebtedness by the obligor not permitted by this clause (iv) and (y) any
transaction pursuant to which any Wholly Owned Subsidiary, which has
Indebtedness owing to the Company or any other Wholly Owned Subsidiary,
ceases to be a Wholly Owned Subsidiary will be deemed to be the incurrence
of Indebtedness by the Company or such other Wholly Owned Subsidiary that
is not permitted by this clause (iv);
(v) Indebtedness of the Company pursuant to Hedging Obligations, so long
as the notional amount of those Hedging Obligations which relate to other
Indebtedness described in clause (i),
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(ii) or (iii) of the definition of "Indebtedness" at the time incurred does
not exceed the aggregate principal amount of such Indebtedness then
outstanding or in good faith anticipated to be outstanding within 90 days
of such incurrence;
(vi) guarantees of any Subsidiary of the Company made in accordance with
the provisions described under "-- Limitation on Issuances of Guarantees of
and Pledges for Indebtedness";
(vii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (ii) and (iii) of this definition of "Permitted
Indebtedness," including any successive refinancings, provided, that (A)
the aggregate principal amount of Indebtedness represented thereby is not
increased by such refinancing plus the lesser of (I) the stated amount of
any premium, interest or other payment required to be paid in connection
with such refinancing pursuant to the terms of the Indebtedness being
refinanced or (II) the amount of premium, interest or other payment
actually paid at such time to refinance such Indebtedness, plus, in either
case, the amount of reasonable fees and expenses of the Company incurred in
connection with such refinancing, (B) such refinancing does not reduce the
Average Life to Stated Maturity or the Stated Maturity of such
Indebtedness, (C) Subordinated Indebtedness is refinanced only with
Indebtedness which is equally subordinated and (D) Indebtedness of the
Company is not refinanced with Indebtedness of any Subsidiary of the
Company; and
(viii) Indebtedness of the Company (including without limitation under
the Credit Facility) in addition to that described in clauses (i) through
(vii) above, and any renewals, extensions, substitutions, refundings,
refinancings or replacements of such Indebtedness, so long as the aggregate
principal amount of such Indebtedness does not exceed at any time the
greater of (A) $10.0 million and (B) the dollar amount represented by the
product of 0.5 million and the settlement price on the New York Mercantile
Exchange of the spot month for a barrel of West Texas Intermediate crude
oil (or, if such price cannot be obtained, the applicable price shown in
the then most recently published Platt's Oilgram Price Report or, if such
publication is not published at any time, or if it does not include such
prices, then in any comparable industry publication including such prices),
which amount will be calculated by the Company as of the last day of each
calendar quarter using the price per barrel as determined under (B) above
as of such date and shall be in effect for the next succeeding calendar
quarter. (Section 1008).
Limitation on Restricted Payments
(a) The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire such Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of the Capital Stock of the Company or any
Affiliate thereof (other than any Wholly Owned Subsidiary of the Company)
or any options, warrants or other rights to acquire such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary of the Company to any Person (other than the Company or any
of its Wholly Owned Subsidiaries) or purchase, redeem or otherwise acquire
or retire for value any Capital Stock of any Subsidiary of the Company held
by any Person (other than the Company or any of its Wholly Owned
Subsidiaries);
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(v) incur, create, assume or suffer to exist any guarantee of
Indebtedness of any Affiliate (other than a Wholly Owned Subsidiary); or
(vi) make any Investment (other than any Permitted Investment) in any
Person
(any of the foregoing payments described in clauses (i) through (vi) being,
collectively, "Restricted Payments"), unless after giving effect to the
proposed Restricted Payment (the amount of any such Restricted Payment, if
other than cash, as determined in good faith by the Board of Directors of the
Company, whose determination will be conclusive and evidenced by a board
resolution), (1) no Default or Event of Default has occurred and is continuing;
(2) immediately before and immediately after giving effect to such transaction
on a pro forma basis, the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in accordance with the provisions described
under "-- Limitation on Indebtedness"; and (3) the aggregate amount of all such
Restricted Payments declared or made after the date of the Indenture does not
exceed the sum of:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on the
date of the Indenture and ending on the last day of the Company's last
fiscal quarter ending prior to the date of the proposed Restricted Payment
(or if such aggregate cumulative Consolidated Net Income is a loss, minus
100% of such loss);
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company as capital contributions to the Company;
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Subsidiaries) of its shares of Qualified Capital Stock or any options,
warrants or rights to purchase such shares of Qualified Capital Stock
(except, in each case, to the extent such proceeds are used to redeem any
of the Notes with the proceeds of an issuance of common stock of the
Company in a Public Equity Offering as provided under "-- Optional
Redemption");
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options, warrants or other rights to purchase shares of
Qualified Capital Stock of the Company;
(E) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Subsidiaries) of debt securities or shares of Redeemable Capital Stock
of the Company that have been converted into or exchanged for Qualified
Capital Stock of the Company to the extent such debt securities or shares
of Redeemable Capital Stock were originally issued or sold for cash plus
the aggregate Net Cash Proceeds received by the Company at the time of such
conversion or exchange; and
(F) $10.0 million.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(iv) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions will not prohibit the following actions:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) of this "Limitation on
Restricted Payments" covenant (such payment will be deemed to have been
paid on such date of declaration for purposes of the calculation required
by paragraph (a) of this "Limitation on Restricted Payments" covenant);
(ii) the repurchase, redemption or other acquisition or retirement of any
shares of any class of Capital Stock of the Company in exchange for, or out
of the Net Cash Proceeds of, a substantially concurrent issue and sale for
cash (other than to a Subsidiary of the Company) of other shares of
Qualified Capital Stock of the Company; provided that the Net Cash Proceeds
from the issuance of such shares of Qualified Capital Stock are excluded
from clause (3)(C) of paragraph (a) of this "Limitation on Restricted
Payments" covenant;
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(iii) any repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness in exchange for, or out of the Net Cash Proceeds of, a
substantially concurrent issuance and sale for cash (other than to any
Subsidiary of the Company) of any Qualified Capital Stock of the Company,
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(C) of paragraph (a) of
this "Limitation on Restricted Payments" covenant; and
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (collectively, a
"refinancing") through the issuance of new Subordinated Indebtedness of the
Company, provided, that any such new Subordinated Indebtedness (A) is in an
aggregate principal amount that does not exceed the principal amount so
refinanced (or, if such Subordinated Indebtedness provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, then such lesser amount as of the date
of determination) plus the lesser of (I) the stated amount of any premium,
interest or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Subordinated Indebtedness being
refinanced or (II) the amount of premium or other payment actually paid at
such time to refinance such Subordinated Indebtedness, plus, in either
case, the amount of reasonable fees and expenses of the Company incurred in
connection with such refinancing; (B) has an Average Life to Stated
Maturity greater than the remaining Average Life to Stated Maturity of the
Notes; (C) has a Stated Maturity for its final scheduled principal payment
later than the Stated Maturity for the final scheduled principal payment of
the Notes; and (D) is expressly subordinated in right of payment to the
Notes at least to the same extent as the Subordinated Indebtedness to be
refinanced. (Section 1009).
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate of the
Company (other than the Company or a Wholly Owned Subsidiary) unless (i) such
transaction or series of related transactions is in writing on terms that are
no less favorable to the Company or such Subsidiary, as the case may be, than
would be available in a comparable transaction in arm's-length dealings with an
unrelated third party, (ii) with respect to any transaction or series of
related transactions in which the aggregate rental value, remuneration or other
consideration (including the value of a loan), together with the aggregate
rental value, remuneration or other consideration (including the value of a
loan) of all such other transactions consummated in the calendar year during
which such transaction or series of related transactions is proposed to be
consummated, exceeds $1.0 million, the Company delivers an officers'
certificate to the Trustee certifying that such transaction or series of
related transactions complies with clause (i) above, (iii) with respect to any
transaction or series of related transactions in which the aggregate rental
value, remuneration or other consideration (including the value of a loan),
together with the aggregate rental value, remuneration or other consideration
(including the value of a loan) of all such other transactions consummated in
the calendar year during which such transaction or series of related
transactions is proposed to be consummated, exceeds $2.5 million, the Company
delivers to the Trustee, in addition to the officers' certificate referred to
in clause (ii) above, a board resolution evidencing that such transaction or
series of related transactions has been approved in good faith by a majority of
the Independent Directors of the Company that are disinterested, and (iv) with
respect to any transaction or series of related transactions in which the
aggregate rental value, remuneration or other consideration (including the
value of a loan), together with the aggregate rental value, remuneration or
other consideration (including the value of a loan) of all such other
transactions consummated in the calendar year during which such transaction or
series of related transactions is proposed to be consummated, exceeds $5.0
million, the Company delivers to the Trustee, in addition
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to the officers' certificate and the board resolution referred to in clauses
(ii) and (iii) above, respectively, an opinion of an investment banking firm of
national standing, unaffiliated with the Company or such Subsidiary and the
Affiliate which is party to such transaction stating that the transaction or
series of related transactions is fair to the Company or such Subsidiary;
provided, however, that this provision shall not apply to transactions pursuant
to agreements in existence on the date of the Indenture. (Section 1010).
Limitation on Sale of Assets
(a) The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, consummate an Asset Sale unless (i) at least 85% of the
proceeds from such Asset Sale are received in cash or Cash Equivalents and (ii)
the Company or such Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares, properties or
assets sold.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any unsubordinated Indebtedness
then outstanding as required by the terms thereof, and the Company determines
not to apply such Net Cash Proceeds to the permanent prepayment of such
unsubordinated Indebtedness or if no such unsubordinated Indebtedness is then
outstanding, then the Company may within 12 months of the Asset Sale, invest
the Net Cash Proceeds thereof in other properties and assets which (as
determined in good faith by the Company's Board of Directors) replace the
properties and assets that were the subject of the Asset Sale or in properties
and assets that will be used in the businesses of the Company or its
Subsidiaries existing on the date of the Indenture or in businesses reasonably
related thereto. The amount of such Net Cash Proceeds neither used to
permanently repay or prepay unsubordinated Indebtedness nor used or invested as
set forth in this paragraph constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals $5.0 million or more,
the Company will make an irrevocable offer to purchase (an "Offer") from all
holders of the Notes in accordance with the procedures set forth in the
Indenture in the maximum principal amount (expressed as an integral multiple of
$1,000) of Notes that may be purchased with the Excess Proceeds. The purchase
price to be paid pursuant to any such Offer will be payable in cash in an
amount equal to 100% of the principal amount of the Notes, plus accrued and
unpaid interest, if any, through the repurchase date. To the extent that the
aggregate purchase price for Notes tendered pursuant to an Offer is less than
the Excess Proceeds (the amount of such shortfall, if any, constituting a
"Deficiency"), the Company may use such Deficiency for general corporate
purposes. Upon completion of the purchase of all the Notes tendered pursuant to
an Offer, the amount of Excess Proceeds, if any, will be reset to zero.
(d) Whenever the aggregate amount of Excess Proceeds received by the Company
exceeds $5.0 million, such Excess Proceeds will, prior to any purchase of Notes
described in paragraph (c) above, be set aside by the Company in a separate
account pending (i) deposit with a depositary or a paying agent of the amount
required to purchase the Notes tendered in an Offer and (ii) delivery by the
Company of the purchase price to the holders of the Notes tendered in an Offer.
Such Excess Proceeds may be invested in Cash Equivalents at the Company's
written direction, provided that the maturity date of any such investment made
after the amount of Excess Proceeds exceeds $5.0 million, will not be later
than the repurchase date. The Company will be entitled to any interest or
dividends accrued, earned or paid on such Cash Equivalents, provided that the
Company will not withdraw such interest from the separate account if an Event
of Default has occurred and is continuing.
(e) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Notes will be purchased by the Company, at the option of the holder
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 45 days and not later than 60 days from the date the notice is
given to holders, or such later date as may be necessary for the Company to
comply with the requirements under the Exchange Act, subject to proration in
the event the Excess Proceeds are less than the aggregate purchase price of all
Notes tendered.
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(f) The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with an Offer.
(g) The Company will not, and will not permit any of its Subsidiaries to,
create or permit to exist or become effective any consensual restriction (other
than restrictions not more restrictive than those in effect under Indebtedness
outstanding on the date of the Indenture and listed on a schedule thereto,
including Indebtedness under the Credit Facility) that would materially impair
the ability of the Company to comply with the provisions of this "Limitation on
Sale of Assets" covenant. (Section 1011).
Limitation on Liens
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, affirm or suffer to exist any Lien of
any kind upon any of its property or assets (including any intercompany notes),
owned at the date of the Indenture or acquired after the date of the Indenture,
or any income or profits therefrom, unless the Notes (or in the case of Liens
on property or assets of a Guarantor, the related Guarantee) are directly
secured equally and ratably with (or prior to in the case of Liens with respect
to Subordinated Indebtedness or Indebtedness of a Guarantor subordinated in
right of payment to its Guarantee) the obligation or liability secured by such
Lien, excluding, however, from the operation of the foregoing any of the
following (collectively, "Permitted Liens"):
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (i) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order have not been finally terminated or the period
within which such proceedings may be initiated has not expired; (ii) taxes
not yet delinquent or which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted, and
against which appropriate reserves have been established in accordance with
GAAP; (iii) security for payment of workers' compensation or other
insurance; (iv) good faith deposits in connection with tenders, leases or
contracts (other than contracts for the payment of money); (v) zoning
restrictions, easements, licenses, reservations, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor
irregularities of title (and with respect to leasehold interests,
mortgages, obligations, liens and other encumbrances incurred, created,
assumed or permitted to exist and arising by, through or under a landlord
or owner of the leased property, with or without consent of the lessee),
none of which materially impairs the use of any parcel of property material
to the operation of the businesses of the Company or any of its
Subsidiaries or the value of such property for the purpose of such
businesses; (vi) deposits to secure public or statutory obligations, or in
lieu of surety or appeal bonds; (vii) certain surveys, exceptions, title
defects, encumbrances, easements, reservations of, or rights of others for,
rights of way, sewers, electric lines, telegraph or telephone lines and
other similar purposes or zoning or other restrictions as to the use of
real property not materially adversely interfering with the ordinary
conduct of the businesses of the Company or any of its Subsidiaries; or
(viii) operation of law in favor of mechanics, materialmen, laborers,
employees or suppliers, incurred in the ordinary course of business for
sums which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof and against which appropriate reserves have been established;
(c) any Lien (including extensions and renewals thereof) upon real or
tangible personal property acquired or constructed in the ordinary course
of business after the date of the Indenture; provided that (i) such Lien is
created (A) solely for the purpose of securing Purchase Money Indebtedness
incurred in respect of the item of property or assets subject thereto and
such Lien is created prior to, at the time of or within 90 days after the
later of the acquisition, the completion of construction or the
commencement of full operation of such property or (B) to refinance any
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Purchase Money Indebtedness previously incurred and so secured, (ii) the
principal amount of Purchase Money Indebtedness secured by such Lien does
not exceed 100% of the lesser of the aggregate cost or the Fair Market
Value of such item of property or assets, (iii) any such Lien does not
extend to or cover any property or assets other than such item of property
or assets and any improvements on such item and (iv) any such Lien does not
extend to or cover any property or assets of the Company or any of its
Subsidiaries existing as of the date of the Indenture;
(d) any Lien now or hereafter existing on property or assets of the
Company or any of its Subsidiaries securing the Notes;
(e) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with or in contemplation of) the incurrence of such
Indebtedness by the Company or any of its Subsidiaries, in each case which
Indebtedness is permitted under the provisions described under "--
Limitation on Indebtedness"; provided that any such Lien only extends to
the assets that were subject to such Lien securing such Acquired
Indebtedness prior to the related transaction by the Company or its
Subsidiaries;
(f) any Lien securing Hedging Obligations that the Company enters into in
the ordinary course of business for the purpose of protecting against
fluctuations in the price of crude oil, other feedstocks or refined
products;
(g) any Lien on pipeline or pipeline facilities which arise out of
operation of law;
(h) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (g) so
long as no additional assets become subject to such Liens as a result of
such extension, renewal, refinancing or replacement; and
(i) any Lien on property of the Company or any of its Subsidiaries that
is subject to a Sale and Leaseback Transaction, provided that after giving
effect to such transaction the aggregate principal amount of Attributable
Indebtedness in respect of all Sale and Leaseback Transactions entered into
by the Company and its Subsidiaries then outstanding, other than any Sale
and Leaseback Transactions existing as of the date of the Indenture, does
not at the time such Lien is incurred exceed 10% of the Consolidated Net
Worth of the Company. (Section 1012).
Limitation on Issuances of Guarantees of and Pledges for Indebtedness
(a) The Company will not permit any of its Subsidiaries, directly or
indirectly, to secure the payment of any Indebtedness of the Company or pledge
any intercompany notes representing obligations of any Subsidiary of the
Company to secure the payment of any Indebtedness unless in each case (i) such
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a guarantee of payment of the Notes by such Subsidiary,
which guarantee is on the same terms as the guarantee of such Indebtedness (if
a guarantee of Indebtedness is granted by any such Subsidiary) except that the
guarantee of the Notes need not be secured and (ii) such Subsidiary waives and
will not in any manner whatsoever claim or take the benefit or advantage of any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Subsidiary of the Company as a result of any payment
by such Subsidiary under its guarantee.
(b) The Company will not permit any of its Subsidiaries, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company unless (i) such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of the Notes on the same terms as the guarantee of
such Indebtedness except that (A) such guarantee need not be secured unless
required pursuant to "-- Limitation on Liens," and (B) if such Indebtedness is
by its terms expressly subordinated to the Notes, any such assumption,
guarantee or other liability of such Subsidiary with respect to such
Indebtedness is subordinated to such Subsidiary's assumption, guarantee or
other liability with respect to the Notes to the same extent as such
Indebtedness is subordinated to the Notes and (ii) such Subsidiary waives and
will not in any
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manner whatsoever claim or take the benefit or advantage of any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Subsidiary of the Company as a result of any payment by such
Subsidiary under its guarantee.
(c) Each guarantee created pursuant to the provisions described in the
foregoing paragraph is referred to as a "Guarantee" and the issuer of each such
Guarantee is referred to as a "Guarantor." Notwithstanding the foregoing, any
Guarantee by a Subsidiary of the Company of the Notes will provide by its terms
that it will be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially all
the assets of, such Subsidiary, which is in compliance with the terms of the
Indenture or (ii) the release by all of the holders of the Indebtedness of the
Company described in clauses (a) and (b) above of their security interest or
their guarantee by such Subsidiary (including any deemed release upon payment
in full of all obligations under such Indebtedness, except a release by or as a
result of enforcement upon such security interest or payment under such
guarantee), at a time when (A) no other Indebtedness of the Company has been
secured or guaranteed by such Subsidiary, as the case may be, or (B) the
holders of all such other Indebtedness which is secured or guaranteed by such
Subsidiary also release their security interest in, or guarantee by, such
Subsidiary (including any deemed release upon payment in full of all
obligations under such Indebtedness, except a release by or as a result of
enforcement upon such security interest or payment under such guarantee).
(Section 1013).
Purchase of Notes Upon a Change of Control
If a Change of Control occurs at any time, then each holder of Notes will
have the right to require that the Company purchase such holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount of such Notes, together with accrued and unpaid interest, if
any, to the date of purchase (the "Change of Control Purchase Date"), pursuant
to the irrevocable offer described below (the "Change of Control Offer") and
the other procedures set forth in the Indenture.
Within 15 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things, (i) the purchase price
and the purchase date, which will be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed, or such later date as
is necessary to comply with requirements under the Exchange Act, (ii) that any
Note not tendered will continue to accrue interest, (iii) that, unless the
Company defaults in the payment of the purchase price, any Notes accepted for
payment pursuant to the Change of Control Offer will cease to accrue interest
after the Change of Control Purchase Date and (iv) certain other procedures
that a holder of Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance. (Section 1014).
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The occurrence of the
event described in clause (ii) of the definition of "Change of Control" below
for a period of 25 months may cause an event of default under the Credit
Facility, and, upon such event of default, all amounts outstanding under the
Credit Facility may become due and payable. There can be no assurance that in
the event of such an event of default the Company will be able to obtain the
necessary waivers from the lenders under the Credit Facility to permit such
Change of Control or to consummate a Change of Control Offer. The failure of
the Company to make or consummate the Change of Control Offer or pay the Change
of Control Purchase Price when due would result in an Event of Default under
the Indenture and would give the Trustee and the holders of the Notes the
rights described under "-- Events of Default."
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"Change of Control" is defined in the Indenture to mean the occurrence of any
of the following events; (i) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person will be deemed to have beneficial
ownership of all shares that such Person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly
or indirectly, of more than 35% of the voting power of the total outstanding
Voting Stock of the Company voting as one class; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election to such Board or whose nomination for election by the shareholders of
the Company was approved by a vote of 66 2/3% of the directors 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) for any reason
cease to constitute a majority of such Board of Directors then in office; (iii)
the Company consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any Person, or
any corporation consolidates with or merges into or with the Company, in any
such event pursuant to a transaction in which the outstanding Voting Stock of
the Company is changed into or exchanged for cash, securities or other
property, other than any such transaction where (A) the outstanding Voting
Stock of the Company is changed into or exchanged for (x) Voting Stock of the
surviving corporation which is not Redeemable Capital Stock or (y) cash,
securities and other property (other than Capital Stock of the surviving
corporation which is not Redeemable Capital Stock) in an amount which could be
paid by the Company as a Restricted Payment in accordance with the provisions
described under "-- Limitation on Restricted Payments" (and such amount will be
treated as a Restricted Payment subject to the provisions described under "--
Limitation on Restricted Payments") and (B) no "person" or "group," other than
Permitted Holders, beneficially owns immediately after such transaction,
directly or indirectly, more than 35% of the voting power of the total
outstanding Voting Stock of the surviving corporation voting as one class; or
(iv) the Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "-- Consolidation, Merger, Sale of Assets."
"Permitted Holders" means any of (i) the individuals who are members of the
ATAPCO Group on the date of the Indenture or any of their respective spouses or
lineal descendants or any trust for the benefit of any of the foregoing; (ii)
American Trading and Production Corporation, for so long as not less than 66
2/3% of the shares of Voting Stock of such corporation are beneficially owned
by any or all of the individuals or trusts referred to in the preceding clause
(i); (iii) any controlled Affiliate of any of the foregoing; or (iv) in the
event of incompetence or death of any of the individuals described in clause
(i), such individual's estate, executor, administrator, committee or other
personal representative or beneficiaries.
The term "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. As
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there would be no assurance as to how a court interpreting New York law would
interpret the phrase.
The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any of its Subsidiaries to, create
or permit to exist or become effective any restriction (other than restrictions
not more restrictive than those in effect under
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Indebtedness outstanding on the date of the Indenture and listed on a schedule
thereto, including Indebtedness under the Credit Facility) that would
materially impair the ability of the Company to make a Change of Control Offer
to purchase the Notes or, if such Change of Control Offer is made, to pay for
the Notes tendered for purchase. (Section 1014).
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Subsidiaries to, enter
into any Sale and Leaseback Transaction unless (i) immediately before and
immediately after giving effect to such transaction and the Attributable
Indebtedness in respect thereof, on a pro forma basis, the Company or such
Subsidiary could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) as described under "-- Limitation on Indebtedness," (ii)
immediately before and immediately after giving effect to such transaction, on
a pro forma basis, the Company or such Subsidiary could incur Indebtedness
secured by a Lien on property in a principal amount equal to or exceeding the
Attributable Indebtedness in respect of such Sale and Leaseback Transaction
pursuant to clause (i) of the covenant described under "-- Limitation on Liens"
had such Sale and Leaseback Transaction been structured as a secured loan
rather than a Sale and Leaseback Transaction without equally and ratably
securing the Notes, and (iii) the transfer of assets in such Sale and Leaseback
Transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the provision described under "-- Limitation on
Sale of Assets." (Section 1015).
Limitation on Subsidiary Capital Stock
The Company will not permit (a) any Subsidiary of the Company to issue any
Capital Stock, except for (i) Capital Stock issued to and held by the Company
or a Wholly Owned Subsidiary, and (ii) Capital Stock issued by a Person prior
to the time (A) such Person becomes a Subsidiary of the Company, (B) such
Person merges with or into a Subsidiary of the Company or (C) a Subsidiary of
the Company merges with or into such Person, provided that such Capital Stock
was not issued or incurred by such Person in anticipation of the type of
transaction contemplated by subclauses (A), (B) or (C), or (b) any Person
(other than the Company or a Wholly Owned Subsidiary) to own or hold any
interest in any Preferred Stock of any Subsidiary of the Company (in each of
clauses (a) and (b) above, other than directors' qualifying shares or shares
required to be owned by foreign nationals under applicable law). (Section
1016).
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Subsidiary of the Company to (i) pay dividends or make any other distribution
on its Capital Stock to the Company or any other Subsidiary of the Company,
(ii) pay any Indebtedness owed to the Company or any other Subsidiary of the
Company, (iii) make any Investment in the Company or any other Subsidiary of
the Company or (iv) transfer any of its properties or assets to the Company or
any other Subsidiary of the Company, except (A) any encumbrance or restriction
pursuant to an agreement in effect or entered into on the date of the
Indenture; (B) any encumbrance or restriction, with respect to a Subsidiary
that is not a Subsidiary of the Company on the date of the Indenture, in
existence at the time such Person becomes a Subsidiary of the Company and not
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary of the Company; and (C) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the agreements
containing the encumbrances or restrictions in the foregoing clauses (A) and
(B), or in this clause (C), provided that the terms and conditions of any such
encumbrances or restrictions are not materially less favorable to the holders
of the Notes than those under or pursuant to the agreement evidencing the
Indebtedness so extended, renewed, refinanced or replaced. (Section 1017).
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Provision of Financial Statements
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange
Act, file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) if the Company were so
subject, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required so to file such documents if the Company were so subject. The
Company will also in any event (x) within 15 days of each Required Filing Date
(i) transmit by mail to all holders of Notes, as their names and addresses
appear in the security register, without cost to such holders and (ii) file
with the Trustee copies of the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the
Company were subject to such Sections and (y) if filing such documents by the
Company with the Commission is not permitted under the Exchange Act, promptly
upon written request and payment of the reasonable cost of duplication and
delivery, supply copies of such documents to any prospective holder of Notes
at the Company's cost. (Section 1018).
Additional Covenants
The Indenture will also contain covenants with respect to the following
matters: (i) payment of principal, premium and interest; (ii) maintenance of
an office or agency in the City of New York; (iii) arrangements regarding the
handling of money held in trust; (iv) maintenance of corporate existence; (v)
payment of taxes and other claims; (vi) maintenance of properties; and (vii)
maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets as an entirety to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or transactions if such transaction or transactions, in the
aggregate, would result in a sale, assignment, conveyance, transfer, lease or
disposal of all or substantially all of the properties and assets of the
Company and its Subsidiaries on a Consolidated basis to any other Person or
group of affiliated Persons, unless at the time and after giving effect
thereto: (i) either (A) the Company is the continuing corporation or (B) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis (the "Surviving Entity") is a corporation duly organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia and such Person expressly assumes, by an indenture
supplemental to the Indenture, executed and delivered to the Trustee in a form
reasonably satisfactory to the Trustee, all the obligations of the Company
under the Notes and the Indenture, and the Indenture remains in full force and
effect; (ii) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default has occurred and is continuing;
(iii) except in the case of the consolidation or merger of any Subsidiary of
the Company with or into the Company, immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Net Worth of the Company
(or the Surviving Entity if the Company is not the continuing obligor under
the Indenture) is equal to or greater than the Consolidated Net Worth of the
Company immediately prior to such transaction; (iv) except in the case of the
consolidation or merger of any Subsidiary of the Company with or into the
Company, immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company (or the Surviving Entity if the
Company is not the continuing obligor under the Indenture) could incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
provisions described under "-- Certain Covenants -- Limitation on
Indebtedness"; (v) each Guarantor, if any, unless it is the other party to the
transactions described
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above, has by supplemental indenture confirmed that its Guarantee applies to
such Person's obligations under the Indenture and the Notes; (vi) if any of the
property or assets of the Company or any of its Subsidiaries would thereupon
become subject to any Lien, the provisions described under "-- Certain
Covenants -- Limitation on Liens" are complied with; and (vii) the Company or
the Surviving Entity 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 to the effect that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
transaction and such supplemental indenture complies with the Indenture and
that all conditions precedent therein provided for relating to such transaction
have been complied with. (Section 801).
Each Guarantor, if any, will not, and the Company will not permit a Guarantor
to, in a single transaction or through a series of related transactions merge
or consolidate with or into any other Person (other than the Company or any
other Guarantor), or sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets on a Consolidated
basis to any Person (other than the Company or any other Guarantor) unless at
the time and after giving effect thereto: (i) either (1) such Guarantor is the
continuing corporation or (2) the Person (if other than such Guarantor) formed
by such consolidation or into which such Guarantor is merged or the Person
which acquires by sale, assignment, conveyance, transfer, lease or disposition
the properties and assets of such Guarantor is a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof, the District of Columbia or the jurisdiction in which such Guarantor
was organized and such Person expressly assumes by an indenture supplemental to
the Indenture, executed and delivered to the Trustee, in a form reasonably
satisfactory to the Trustee, all the obligations of such Guarantor under its
Guarantee and the Indenture; (ii) immediately before and immediately after
giving effect to such transaction, no Default or Event of Default has occurred
and is continuing; and (iii) such Guarantor 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, assignment, conveyance, transfer, lease or
disposition and such supplemental indenture comply with the Indenture and that
all conditions precedent therein provided for relating to such transaction have
been complied with. The provisions of this paragraph will not apply to any
transaction (including any Asset Sale made in accordance with the provisions
described under "-- Certain Covenants -- Limitation on Sale of Assets") with
respect to any Guarantor if the Guarantee of such Guarantor is released in
connection with such transaction in accordance with subparagraph (b) under "--
Certain Covenants -- Limitation on Issuances of Guarantees of and Pledges for
Indebtedness." (Section 801).
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs in
which the Company or any Guarantor is not the continuing corporation, the
successor Person formed or remaining will succeed to, and be substituted for,
and may exercise every right and power of, the Company or such Guarantor, as
the case may be, and the Company or such Guarantor, as the case may be, would
be discharged from all obligations and covenants under the Indenture and the
Notes. (Section 802).
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there is a default in the payment of any interest on any Note when it
becomes due and payable, and such default continues for a period of 30
days;
(ii) there is a default in the payment of the principal of (or premium,
if any, on) any Note at its Maturity (upon acceleration, optional or
mandatory redemption, required repurchase or otherwise);
(iii) (A) there is a default in the performance, or breach, of any
covenant, or agreement of the Company or any Guarantor under the Indenture
(other than a default in the performance, or breach, of a covenant or
agreement which is specifically dealt with in clauses (i) or (ii) or in
clauses (B), (C)
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and (D) of this clause (iii)) and such default or breach continues for a
period of 30 days after written notice has been given, by certified mail,
(x) to the Company by the Trustee or (y) to the Company and the Trustee by
the holders of at least 25% in aggregate principal amount of the
outstanding Notes, specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" under the
Indenture; (B) there is a default in the performance or breach of the
provisions described in "-- Consolidation, Merger, Sale of Assets"; (C) the
Company fails to make or consummate an Offer in accordance with the
provisions described under "-- Certain Covenants -- Limitation on Sale of
Assets"; or (D) the Company fails to make or consummate a Change of Control
Offer in accordance with the provisions described under "-- Certain
Covenants-- Purchase of Notes Upon a Change of Control";
(iv) (A) one or more defaults by the Company or any of its Subsidiaries
in the payment of the principal on Indebtedness occurs aggregating $5.0
million or more, when the same becomes due and payable at the final
maturity thereof, and such default or defaults have continued after any
applicable grace period and have not been cured or waived or (B)
Indebtedness of the Company or any of its Subsidiaries in the aggregate
principal amount of $5.0 million or more has been accelerated or otherwise
declared due and payable, or required to be prepaid or repurchased, prior
to the Stated Maturity thereof;
(v) any holder of at least $5.0 million in aggregate principal amount of
Indebtedness of the Company or any of its Subsidiaries after a default
under such Indebtedness commences proceedings, or takes any action
(including by way of set-off, other than set-off or netting arising under a
single agreement with respect to regularly scheduled payments or deliveries
to be made in respect of any Hedging Obligation), to retain in satisfaction
of such Indebtedness or to collect or seize, dispose of or apply in
satisfaction of Indebtedness, assets of the Company or any of its
Subsidiaries having a Fair Market Value in excess of $1.0 million
individually or in the aggregate (including funds on deposit or held
pursuant to lock-box and other similar arrangements), and in any such case
there is a period of 60 consecutive days during which a stay of, or
injunction with respect to, such proceedings or action, by reason of an
order, decree, appeal or otherwise, is not in effect;
(vi) any Guarantee for any reason ceases to be, or is asserted in writing
by any Guarantor or the Company not to be, in full force and effect and
enforceable in accordance with its terms, except to the extent contemplated
by the Indenture and any such Guarantee;
(vii) one or more judgments, orders or decrees for the payment of money
in excess of $5.0 million either individually or in the aggregate (net of
amounts covered by insurance, bond, surety or similar instrument), are
entered against the Company, any Subsidiary of the Company or any of their
respective properties and are not discharged and either (A) there is a
period of 60 consecutive days during which a stay of enforcement of such
judgment or order, by reason of an appeal or otherwise, is not in effect or
(B) any creditor commences an enforcement proceeding upon such judgment,
order or decree and there is a period of 60 consecutive days during which a
stay of such enforcement proceeding, by reason of an appeal or otherwise,
is not in effect;
(viii) a court of competent jurisdiction enters (A) a decree or order for
relief in respect of the Company or any of its Subsidiaries in an
involuntary case or proceeding under any applicable Bankruptcy Law or (B) a
decree or order adjudging the Company or any of its Subsidiaries bankrupt
or insolvent, or seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any of its Subsidiaries
under any applicable Federal or state law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or any of its Subsidiaries or of any substantial
part of their respective properties, or ordering the winding up or
liquidation of their affairs, and any such decree or order for relief
continues to be in effect, or any such other decree or order is unstayed
and in effect, for a period of 60 consecutive days; or
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(ix) (A) the Company or any of its Subsidiaries commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (B) the Company or any
of its Subsidiaries consents to the entry of a decree or order for relief
in respect of the Company or such Subsidiary in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the commencement of
any bankruptcy or insolvency case or proceeding against it, (C) the Company
or any of its Subsidiaries files a petition or answer or consent seeking
reorganization or relief under any applicable Federal or state law, (D) the
Company or any of its Subsidiaries (x) consents to the filing of such
petition or the appointment of, or taking possession by, a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or such Subsidiary or of any substantial part of their
respective properties, (y) makes an assignment for the benefit of creditors
or (z) admits in writing its inability to pay its debts generally as they
become due or (E) the Company or any of its Subsidiaries takes any
corporate action in furtherance of any such actions described in this
paragraph (ix). (Section 501).
If an Event of Default (other than as specified in clauses (viii) and (ix) of
the prior paragraph) occurs and is continuing, the Trustee or the holders of
not less than 25% in aggregate principal amount of the Notes then outstanding
may, and the Trustee at the request of such holders will, declare all unpaid
principal of, premium, if any, and accrued interest on all the Notes to be due
and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by the holders of the Notes). Thereupon such principal will
become immediately due and payable, and the Trustee may, at its discretion,
proceed to protect and enforce the rights of the holders of Notes by
appropriate judicial proceeding. If an Event of Default specified in clause
(viii) or (ix) of the prior paragraph occurs and is continuing, then all the
notes will ipso facto become and be immediately due and payable, in an amount
equal to the principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date the Notes become due and payable, without any
declaration or other act on the part of the Trustee or any holder of Notes. The
Trustee or, if notice of acceleration is given by the holders of Notes, such
holders will give notice to the agent under the Credit Facility of any such
acceleration.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes,
and (iii) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes; and (b) all Events of Default,
other than the non-payment of principal of the Notes which have become due
solely by such declaration of acceleration, have been cured or waived; and (c)
the rescission will not conflict with any judgment or decree. (Section 502).
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all the Notes waive any past
default under the Indenture and its consequences, except a default in the
payment of the principal of, premium, if any, or interest on any Note or in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each Note outstanding affected
by such modification or amendment. (Section 513).
The Company is also required to notify the Trustee within five business days
of the occurrence of any Default. (Section 1019). The Company is required to
deliver to the Trustee, on or before a date not more than 60 days after the end
of each fiscal quarter and not more than 120 days after the end of each fiscal
year, a written statement as to compliance with the Indenture, including
whether or not any Default has occurred. (Section 1019). The Trustee is 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 of the Notes unless
such holders offer to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred thereby. (Section 602).
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The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the obligations
of the Company and any Guarantor and any other obligor upon the Notes, if any,
discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company will be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Notes, except for (i)
the rights of holders of outstanding Notes to receive payments out of amounts
deposited in trust with the Trustee (as described below) in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of any office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and (iv) the defeasance provision of the
Indenture. In addition, the Company may, at its option and at any time, elect
to have the obligations of the Company and any Guarantor released with respect
to certain covenants that are described in the Indenture ("covenant
defeasance") and any omission to comply with such obligations will 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,
enforceability of any Guarantee, bankruptcy and insolvency events) described
under "-- Events of Default" will no longer constitute an Event of Default with
respect to the Notes. (Sections 1201-1203).
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States of America dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay and discharge the
principal of, premium, if any, and interest on the outstanding Notes on the
Stated Maturity of such principal or installment of principal (or on any date
after February 1, 2000 (such date being referred to as the "Defeasance
Redemption Date") if when exercising either defeasance or covenant defeasance,
the Company has delivered to the Trustee an irrevocable notice to redeem all of
the outstanding Notes on the Defeasance Redemption Date); (ii) in the case of
defeasance, the Company delivers to the Trustee an opinion of independent
counsel in the United States of America stating that (A) the Company has
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 to the effect that, and based
thereon such opinion of counsel in the United States of America confirms that,
the holders of the outstanding Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not occurred;
(iii) in the case of covenant defeasance, the Company delivers to the Trustee
an opinion of independent counsel in the United States of America to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such covenant defeasance
and will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred; (iv) no Default or Event of Default has occurred
and is continuing on the date of such deposit or insofar as clause (viii) or
(ix) under the first paragraph under "-- Events of Default" are concerned, at
any time during the period ending on the 91st day after the date of deposit;
(v) such defeasance or covenant defeasance does not cause the Trustee for the
Notes to have a conflicting interest with respect to any securities of the
Company or
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any Guarantor; (vi) such defeasance or covenant defeasance does not result in a
breach or violation of, or constitute a default under, the Indenture; (vii) the
Company delivers to the Trustee an opinion of independent counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (viii) the Company
delivers to the Trustee an officers' certificate stating that the deposit was
not made by the Company with the intent of preferring the holders of the Notes
or any Guarantee over the other creditors of the Company or any Guarantor with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company, any Guarantor or others; (ix) no event or condition exists that would
prevent the Company from making payments of the principal of, premium, if any,
and interest on the Notes on the date of such deposit or at any time ending on
the 91st day after the date of such deposit; and (x) the Company delivers to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for relating to either the defeasance or
the covenant defeasance, as the case may be, have been complied with. (Section
1204).
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (a) either (i)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been canceled or have
been delivered to the Trustee for cancellation or (ii) all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company or any
Guarantor has 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, including
principal of, premium, if any, and accrued interest at such Stated Maturity or
redemption date; (b) the Company or any Guarantor has paid or caused to be paid
all other sums payable under the Indenture by the Company or any Guarantor; and
(c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel each stating that (i) all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with and (ii) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture. (Section
401).
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of not
less than a majority in aggregate outstanding principal amount of the Notes;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby: (i) change the
Stated Maturity of the principal of, or any installment of interest on, any
Note or reduce the principal amount thereof or the rate of interest thereon or
any premium payable upon the redemption thereof, or change the coin or currency
in which the principal of any Note or any premium or the 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; (ii) amend, change or modify
the obligation of the Company to make and consummate an Offer with respect to
any Asset Sale or Asset Sales in accordance with the provisions described under
"-- Certain Covenants -- Limitation on Sale of Assets" or the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control in accordance with the provisions described under "-- Certain
Covenants -- Purchase of Notes Upon a Change of Control," including amending,
changing or modifying any definitions with respect thereto; (iii) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any such supplemental indenture, or the consent of
whose holders is required for any waiver; (iv) modify
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any of the provisions relating to supplemental indentures requiring the consent
of holders or relating to the waiver of past defaults or relating to the waiver
of certain covenants, except to increase the percentage of outstanding Notes
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 Note affected thereby; (v) except as otherwise permitted under "--
Consolidation, Merger, Sale of Assets," consent to the assignment or transfer
by the Company or any Guarantor of any of its rights and obligations under the
Indenture; or (vi) amend or modify any of the provisions of the Indenture
relating to any Guarantee in any manner adverse to the holders of the Notes or
any Guarantee. (Section 902).
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1020).
GOVERNING LAW
The Indenture, the Notes and the Guarantees (if any) will be governed by, and
construed in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary of the Company or (ii) assumed in
connection with the acquisition of assets from such Person, in each case, other
than Indebtedness incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary of the Company or such acquisition. Acquired
Indebtedness will be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Subsidiary of the Company.
"Affiliate" means, with respect to any specified Person, (i) any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person, (ii) any other Person that
beneficially owns, directly or indirectly, 5% or more of such Person's Capital
Stock or any officer or director of any such Person or other Person or with
respect to any natural Person, any Person having a relationship with such
Person by blood, marriage or adoption not more remote than first cousin or
(iii) any Person 5% or more of the Voting Stock of which is beneficially owned
or held directly or indirectly by such specified Person. For the purposes of
this definition, "control" when used with respect to any specified Person means
the power to direct the management and policies of such Person directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital
Stock of any Subsidiary of the Company (other than directors' qualifying shares
or shares required to be owned by foreign nationals, to the extent mandated by
applicable law); (ii) all or substantially all of the properties and assets of
any division or line of business of the Company or its Subsidiaries; or (iii)
any other properties or assets of the Company or any of its Subsidiaries, other
than in the ordinary course of business. For the purpose of this definition,
the term "Asset Sale" does not include (A) any transfer of inventory in the
ordinary course of business, (B) any transfer of hydrodesulphurization
equipment originally purchased by the Company to manufacture low sulphur
distillate in the Pasadena Refinery, (C) any transfer of properties and assets
that is by the Company to any Wholly Owned Subsidiary, or by any Subsidiary of
the Company to the Company or any Wholly Owned Subsidiary, in accordance with
the terms of the Indenture, (D) any transfer of properties and assets that is
governed by the provisions under "-- Consolidation, Merger and Sale of Assets"
or (E) transfers of properties and assets in any calendar year with an
aggregate Fair Market Value of less than $500,000.
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"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction, as at the time of determination, the greater of (i) the Fair
Market Value of the property subject to such arrangement and (ii) the present
value (discounted at a rate equivalent to the Company's then current weighted
average cost of funds for borrowed money, compounded on a semi-annual basis) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such transaction (including any period for which
such lease has been extended).
"Average Life to Stated Maturity" means, as of the date of determination with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar Federal or state law relating to bankruptcy,
insolvency, receivership, winding-up, liquidation, reorganization or relief of
debtors or any amendment to, succession to or change in any such law.
"Business Day" means any day on which commercial banks are not authorized or
required by law to close in New York, New York; Baltimore, Maryland; or the
state in which the principal office of the Trustee is located.
"Capital Lease Obligation" means any obligation of the Company and its
Subsidiaries on a Consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of
180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof); (ii) certificates of deposit or acceptances with a maturity
of 180 days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided
profits of not less than $250.0 million; and (iii) commercial paper with a
maturity of 180 days or less issued by a corporation that is not an Affiliate
of the Company and is organized under the laws of any state of the United
States of America or the District of Columbia and rated "A-1" (or higher) by
S&P or "P-1" (or higher) by Moody's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Company" means Crown Central Petroleum Corporation, a corporation
incorporated under the laws of Maryland, until a successor Person has become
such pursuant to the applicable provisions of the Indenture, and thereafter
"Company" will mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (a) the sum of Consolidated Net Income (Loss),
Consolidated Interest Expense, Consolidated Income Tax Expense and Consolidated
Non-cash Charges deducted in computing Consolidated Net Income (Loss), in each
case, for such period, of the Company and its Subsidiaries on a Consolidated
basis, all
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determined in accordance with GAAP to (b) the sum of (i) Consolidated Interest
Expense and (ii) cash and non-cash dividends on Preferred Stock paid by the
Company or any of its Subsidiaries (to any Person other than the Company and
its Wholly Owned Subsidiaries), in each case for such period; provided that (x)
in making such computation, the Consolidated Interest Expense attributable to
interest on any Indebtedness computed on a pro forma basis and (A) bearing a
floating interest rate, will be computed as if the rate in effect on the date
of computation had been the applicable rate for the entire period and (B) which
was not outstanding during the period for which the computation is being made
but which bears, at the option of the Company, a fixed or floating rate of
interest, will be computed by applying at the option of the Company, either the
fixed or floating rate and (y) in making such computation, the Consolidated
Interest Expense of the Company attributable to interest on any Indebtedness
under a revolving credit facility computed on a pro forma basis will be
computed based upon the average daily balance of such Indebtedness during the
applicable period; provided further that, notwithstanding the foregoing, the
interest rate with respect to any Indebtedness covered by any Hedging
Obligation will be deemed to be the effective interest rate with respect to
such Indebtedness after taking into account such Hedging Obligation.
"Consolidated Income Tax Expense" means for any period, as applied to the
Company, the provision for Federal, state, local and foreign income and
franchise taxes of the Company and its Consolidated Subsidiaries for such
period as determined in accordance with GAAP on a Consolidated basis.
"Consolidated Interest Expense" of the Company means, without duplication,
for any period, the sum of (a) the interest expense of the Company and its
Consolidated Subsidiaries for such period, on a Consolidated basis, including,
without limitation or duplication, (i) amortization of debt discount, (ii) the
net cost or payments under Hedging Obligations (including fees and amortization
of discounts), (iii) the interest portion of any deferred payment obligation,
(iv) payments or fees with respect to letters of credit, bankers' acceptances
or similar facilities, and (v) accrued interest plus (b) (i) the interest
component of the Capital Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company during such period and (ii) all capitalized
interest of the Company and its Consolidated Subsidiaries, in each case as
determined in accordance with GAAP on a Consolidated basis.
"Consolidated Net Income (Loss)" of the Company means, for any period, the
net income (or loss) of the Company and its Consolidated Subsidiaries for such
period as determined in accordance with GAAP on a Consolidated basis, adjusted,
to the extent included in calculating such net income (loss), by excluding,
without duplication, (i) all extraordinary gains or losses (less all fees and
expenses relating thereto), (ii) the portion of net income (or loss) of the
Company and its Consolidated Subsidiaries allocable to minority interests owned
by the Company and its Consolidated Subsidiaries in unconsolidated Persons, to
the extent that cash dividends or distributions have not actually been received
by the Company or one of its Consolidated Subsidiaries, (iii) net income (or
loss) of any Person combined with the Company or any of its Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes realized upon the termination
of any employee pension benefit plan, (v) net gains (but not losses) (less all
fees and expenses relating thereto) in respect of dispositions of assets other
than in the ordinary course of business, and (vi) the net income of any
Subsidiary of the Company to the extent that the declaration of dividends or
similar distributions by such Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to such Subsidiary or its stockholders.
"Consolidated Net Worth" of any Person means the Consolidated stockholders'
equity (excluding Redeemable Capital Stock) of such Person and its
Subsidiaries, as determined in accordance with GAAP on a Consolidated basis.
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"Consolidated Non-cash Charges" of the Company means, for any period, the
aggregate depreciation, amortization and other non-cash charges of the Company
and its Consolidated Subsidiaries for such period, as determined in accordance
with GAAP on a Consolidated basis (including the writedown to an estimated net
realizable salvage value of hydrodesulphurization equipment originally
purchased by the Company to manufacture low sulphur distillate in the Pasadena
Refinery, but excluding any non-cash charge which requires an accrual or
reserve for cash charges for any future period), and as adjusted for the impact
of the application of the LIFO Accounting Method for such period as determined
in accordance with GAAP on a Consolidated basis, which adjustment will be made
by (x) adding to the amount of "Consolidated Non-cash Charges" for such period
the amount of LIFO provision, if any, which had the effect of decreasing the
Consolidated Net Income (Loss) of the Company for such period or (y)
subtracting from the amount of "Consolidated Non-cash Charges" for such period
the amount of LIFO recovery, if any, which had the effect of increasing the
Consolidated Net Income (Loss) of the Company for such period.
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its Subsidiaries if and to the extent the
accounts of such Person and each of its Subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" has a similar meaning.
"Credit Facility" means the unsecured Credit Agreement, dated as of May 10,
1993, among the Company and the lenders named therein and The Chase Manhattan
Bank, N.A., as agent, and any successor lenders and/or agents party thereto,
including any ancillary documents executed in connection therewith, as such
agreement may be amended, renewed, extended, substituted, refinanced,
restructured, replaced, supplemented or otherwise modified from time to time
(including, without limitation, any successive amendments, renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplementations or other modifications of the foregoing). For all purposes
under the Indenture, "Credit Facility" includes any amendments, renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplements or any other modifications that increase the principal amount of
the Indebtedness or the commitments to lend thereunder and have been made in
compliance with the provisions described under "-- Certain Covenants --
Limitation on Indebtedness." If all or a portion of the Credit Facility
becomes available to the Company as liquidity support or credit enhancement for
a commercial paper program established by the Company, the amount of
Indebtedness thereunder in respect of such support or enhancement will be the
aggregate principal amount thereunder that is then available to support or
enhance outstanding commercial paper of the Company, and the aggregate face
amount of such commercial paper which is outstanding that equals the aggregate
principal amount thereunder that is then available for support or enhancement
of such commercial paper will not be considered to be outstanding for purposes
of the operation of the covenant described under "-- Certain Covenants --
Limitation on Indebtedness."
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Excess Proceeds" has the meaning described under "-- Certain Covenants --
Limitation on Sale of Assets."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no undue pressure or compulsion to sell and an
informed and willing buyer under no undue pressure or compulsion to buy. Fair
Market Value of assets or property in excess of $1.0 million will be determined
by a majority of the members of the Board of Directors of the Company, and a
majority of the disinterested members of
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such Board of Directors, if any, acting in good faith and of assets or property
in excess of $1.0 million be evidenced by a duly and properly adopted
resolution of the Board of Directors; except that any determination of Fair
Market Value made with respect to any real property or personal property which
is customarily appraised shall be made by an independent qualified appraiser
selected by the Company.
"GAAP" means generally accepted accounting principles in the United States of
America, consistently applied, which are in effect from time to time.
"Guarantee" means the guarantee by any Guarantor of the Company's obligations
under the Indenture pursuant to a guarantee given in accordance with the
Indenture, including any Guarantee delivered pursuant to provisions of "--
Certain Covenants -- Limitation on Issuances of Guarantees of and Pledges for
Indebtedness."
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a
creditor against loss; provided that the term "guarantee" does not include
endorsements for collection or deposit, in either case in the ordinary course
of business.
"Guarantor" means a Subsidiary of the Company that guarantees the Company's
obligations under the Indenture.
"Hedging Obligations" means the obligation of any Person pursuant to any swap
or cap agreement, collar agreement, option, futures or forward hedging
contract, derivative instrument or other similar agreement or arrangement
designed to protect such Person against fluctuations in interest rates or in
the price of crude oil, other feed stocks and refined products, as the case may
be.
"incur" has the meaning ascribed thereto in the "Limitation on Indebtedness"
covenant; provided that with respect to any Indebtedness of any Subsidiary of
the Company that is owing to the Company or another Subsidiary of the Company,
(a) any disposition, pledge or transfer of such Indebtedness to any Person
(other than the Company or a Wholly Owned Subsidiary) will be deemed to be an
incurrence of such Indebtedness and (b) any transaction pursuant to which a
Wholly Owned Subsidiary (which is an obligor on Indebtedness) ceases to be a
Wholly Owned Subsidiary will be deemed to be an incurrence of such
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments,
(iii) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property 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),
but excluding trade payables arising in the ordinary course of business, (iv)
all Hedging Obligations of such Person, (v) all Capital Lease Obligations of
such Person, (vi) all Indebtedness referred to in clauses (i)
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through (v) above of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien upon
or with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness, (vii) all Guaranteed
Debt of such Person, and (viii) all Redeemable Capital Stock valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price will be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on
any date on which Indebtedness is required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the Fair Market
Value of such Redeemable Capital Stock, such Fair Market Value is to be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock. As used herein, Indebtedness with respect to any
Hedging Obligation shall mean, with respect to any specified Person on any
date, the net amount (if any) that would be payable by such specified Person
upon the liquidation, close-out or early termination on such date of such
Hedging Obligation. For purposes hereof, any settlement amount payable upon the
liquidation, close-out or early termination of a Hedging Obligation will be
calculated by the Company in good faith and in a commercially reasonable manner
on the basis that such liquidation, close-out or early termination results from
an event of default or other similar event with respect to such specified
Person.
"Independent Director" means a director of the Company other than a director
(i) who (apart from being a director of the Company or any of its Subsidiaries)
is an employee, insider, associate or Affiliate of the Company or any of its
Subsidiaries or has held any such position during the previous five years or
(ii) who is a director, an employee, insider, associate or Affiliate of another
party to the transaction in question.
"Investments" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees) or other extension of credit or capital
contribution to any other Person (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase, acquisition or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities issued by any other
Person and all other items that would be classified as investments on a balance
sheet prepared in accordance with GAAP.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind (including any conditional sale or other title
retention agreement, any leases in the nature thereof, and any agreement to
give any security interest), real or personal, movable or immovable, now owned
or hereafter acquired.
"LIFO Accounting Method" means the last-in, first-out (LIFO) accounting
method used by the Company to value its crude oil, refined products,
convenience store merchandise and gasoline and other inventory.
"Maturity" when used with respect to any Note means the date on which the
principal of such Note becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
Redemption Date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control, call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. or any successor rating
agency.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or Cash Equivalents (except
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to the extent that such obligations are financed or sold with recourse to the
Company or any of its Subsidiaries) net of (i) brokerage commissions and other
actual fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a
result of such Asset Sale, (iii) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets or properties the subject
of such Asset Sale, (iv) amounts required to be paid to any Person (other than
the Company or any of its Subsidiaries) owning a beneficial interest in the
assets subject to such Asset Sale and (v) appropriate amounts to be provided by
the Company or any of its Subsidiaries, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset Sale
and retained by the Company or any of its Subsidiaries, as the case may be,
after such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee and (b) with respect to any issuance or sale of Capital Stock or
options, warrants or rights to purchase Capital Stock, or debt securities or
Capital Stock that have been converted into or exchanged for Capital Stock, as
referred to under "-- Certain Covenants -- Limitation on Restricted Payments,"
the proceeds of such issuance or sale in the form of cash or Cash Equivalents,
including payments in respect of deferred payment obligations when received in
the form of, or stock or other assets when disposed for, cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any of its Subsidiaries), net of attorneys'
fees, accountants' fees and brokerage, consultation, underwriting and other
fees and expenses actually incurred in connection with such issuance or sale
and net of taxes paid or payable as a result thereof.
"Permitted Indebtedness" has the meaning described under "-- Certain
Covenants -- Limitation on Indebtedness."
"Permitted Investments" means (i) Investments in any of the Notes; (ii)
Temporary Cash Investments; (iii) Investments in existence on the date of the
Indenture; (iv) intercompany notes permitted under the definition of "Permitted
Indebtedness"; (v) Investments in any Wholly Owned Subsidiary or any Person
which, as a result of such Investment, becomes a Wholly Owned Subsidiary;
provided that such Wholly Owned Subsidiary is engaged in a business that is
reasonably related to the business of the Company and its Consolidated
Subsidiaries on the date of the Indenture; and (vi) other Investments that do
not exceed $15.0 million at any one time outstanding in joint ventures,
corporations, limited liability companies or partnerships engaged in a business
that is reasonably related to the business of the Company and its Consolidated
Subsidiaries on the date of the Indenture.
"Permitted Liens" has the meaning described under "-- Certain Covenants --
Limitation on Liens."
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred stock whether now outstanding or issued after the date of
the Indenture, and including, without limitation, all classes and series of
preferred or preference stock.
"Public Equity Offering" means an underwritten sale of common stock of the
Company pursuant to a registration statement (other than Form S-8 or a
registration statement relating to securities issuable by any benefit plan of
the Company or any of its Subsidiaries) that is declared effective by the
Commission.
74
<PAGE>
"Purchase Money Indebtedness" means (i) Indebtedness of a Person incurred to
finance the cost (including the cost of improvement) of acquisition or
construction in the ordinary course of business of real or tangible personal
property or (ii) Indebtedness of such Person incurred to refinance Indebtedness
described in clause (i) of this definition.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity, or is convertible or exchangeable for debt securities
at any time prior to any such Stated Maturity at the option of the holder
thereof.
"Sale and Leaseback Transaction" with respect to any Person, means any
arrangement with another Person for the leasing of any real or tangible
personal property, which property has been or is to be sold or transferred by
such Person to such other Person in contemplation of such leasing.
"Securities Act" means the Securities Act of 1993, as amended.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw-Hill
Inc., or any successor rating agency.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes or a Guarantee, as the case may
be.
"Subsidiary" means, with respect to any Person, (i) any corporation of which
at least a majority of the shares of Voting Stock is at the time owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof, or (ii) any
other Person of which at least a majority of voting interest is at the time,
directly or indirectly, owned by such Person or by one or more other
Subsidiaries of such Person or by such Person and one or more Subsidiaries
thereof.
"Temporary Cash Investments" means (i) any evidence of Indebtedness, maturing
not more than one year after the date of acquisition, issued by the United
States of America or an instrumentality or agency thereof and guaranteed fully
as to principal, premium, if any, and interest by the United States of America,
(ii) any certificate of deposit, maturing not more than one year after the date
of acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of at least $250.0 million, whose debt has a
rating, at the time as of which any investment therein is made, of "P-2" (or
higher) according to Moody's or "A-2" (or higher) according to S&P, (iii)
commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-2" (or higher) according to Moody's or "A-2" (or higher) according to
S&P, (iv) any money market deposit accounts issued or offered by a domestic
commercial bank having combined capital and surplus of at least $250.0 million,
(v) Eurodollar time deposits rated "P-2" (or higher) according to Moody's or
"A-2" (or higher) according to S&P in an amount not exceeding $10.0 million;
(vi) municipal bonds or notes with maturities of six months or less
75
<PAGE>
rated "A" (or higher) according to Moody's or S&P or guaranteed by one or more
banks rated "Aaa" according to Moody's or "AAA" according to S&P; and (vii) any
shares in an open-end mutual fund organized by a bank or financial institution
having combined capital and surplus of at least $100.0 million investing solely
in Investments permitted by the foregoing clauses (i), (ii), (iii), (v) and
(vi).
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Voting Stock" means Capital Stock of a Person of the class or classes
pursuant to which the holders thereof have voting power under ordinary
circumstances for the election of directors, managers or trustees of such
Person (irrespective of whether or not at the time stock of any other class or
classes has or might have voting power by reason of the happening of any
contingency).
"Wholly Owned Subsidiary" means a Subsidiary of the Company all the Capital
Stock of which (other than directors' qualifying shares or shares required to
be owned by foreign nationals under applicable law) is owned by the Company or
another Wholly Owned Subsidiary.
CONCERNING THE TRUSTEE
The First National Bank of Boston ("FNBB") will be the Trustee under the
Indenture. FNBB is also a lender under the Credit Facility.
UNDERWRITING
Chase Securities, Inc. and NationsBanc Capital Markets, Inc. (together, the
"Underwriters") have each agreed, subject to the terms and conditions set forth
in an underwriting agreement (the "Underwriting Agreement") between the Company
and the Underwriters, to purchase the principal amount of the Notes set forth
opposite its name below. Pursuant to the Underwriting Agreement, the
Underwriters will be obligated to purchase all of the Notes if they purchase
any of them.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------------
<S> <C>
Chase Securities, Inc...................................... $ 81,250,000
NationsBanc Capital Markets, Inc........................... 43,750,000
------------
Total.................................................... $125,000,000
============
</TABLE>
The several Underwriters propose to offer the Notes to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of 1.00% of the
principal amount of the Notes. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of 0.25% of the principal of the Notes to
certain other dealers. After the initial public offering, the public offering
price concession and discount may be changed.
There is currently no public market for the Notes, and the Company does not
intend to apply for listing of the Notes on any national securities exchange,
or for inclusion of the Notes on any automated inter-dealer quotation system.
The Underwriters have advised the Company that, following the completion of the
offering of the Notes, the Underwriters presently intend to make a market in
the Notes, but they are not obligated to do so, and any such market making may
be discontinued at any time, without notice. Accordingly, there is no assurance
that any market will develop for the Notes or, if developed, that any trading
market will be sustained. If an active public market does not develop or is not
maintained, the market price and liquidity of the Notes may be adversely
affected.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed that, without prior written consent of Chase
Securities, Inc., it will not for a period of 180 days after the date of this
Prospectus issue or sell debt securities, other than the Notes.
76
<PAGE>
The Chase Manhattan Bank, N.A., an affiliate of Chase Securities, Inc. is a
lender and agent under the Credit Facility. Michael F. Dacey, a director of
the Company, was formerly an Executive Vice President of The Chase Manhattan
Corporation and The Chase Manhattan Bank, N.A. In the ordinary course of
business, the Company and its subsidiaries maintain relationships and enter
into transactions with The Chase Manhattan Bank, N.A., including bank
accounts, borrowings and interest rate swaps. NationsBank of Texas, N.A. and
NationsBank, N.A., affiliates of NationsBanc Capital Markets, Inc., are
lenders under the Credit Facility. William L. Jews, a director of the Company,
is a director of NationsBank, N.A.
The Underwriters have advised the Company that they do not intend to confirm
sales in excess of 5% of the Notes offered hereby to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for the Company
by McGuire, Woods, Battle & Boothe, L.L.P., Baltimore, Maryland. McGuire,
Woods, Battle & Boothe, L.L.P. has from time to time represented, and is
currently representing, several affiliates of NationsBanc Capital Markets,
Inc. on unrelated matters. John S. Graham, III, a partner of McGuire, Woods,
Battle & Boothe, L.L.P., is a director of ATAPCO, the controlling stockholder
of the Company. Members of McGuire, Woods, Battle & Boothe, L.L.P.
beneficially own in the aggregate 200 shares of Class A Common Stock of the
Company. Certain legal matters in connection with the offering of the Notes
will be passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy,
New York, New York.
EXPERTS
The consolidated financial statements of Crown Central Petroleum Corporation
and subsidiaries appearing or incorporated by reference (including schedules
incorporated by reference) in this Prospectus and elsewhere in the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, to the extent indicated in their reports thereon also appearing
elsewhere herein and in the Registration Statement or incorporated by
reference. Such consolidated financial statements have been included herein or
incorporated herein by reference (including schedules incorporated by
reference) in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
Crown Central Petroleum Corporation is subject to the informational
requirements of the Exchange Act, and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports,
proxy statements and other information filed by the Company can be inspected
and copied at the Public Reference Room of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at the Commission's regional offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Reports, proxy statements and other information concerning the
Company can also be inspected and copied at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
This Prospectus constitutes a part of a Registration Statement filed by the
Company with the Commission under the Securities Act. This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and to the exhibits
77
<PAGE>
relating thereto for further information with respect to the Company and the
securities offered hereby. Any statement contained or incorporated by
reference herein concerning the provisions of any document is not necessarily
complete, and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference
in this Prospectus: (i) the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and (ii) the Company's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1994 and June 30, 1994, and the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994 as amended on Form 10-Q/A.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference herein. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person or by anyone in any jurisdiction
in which it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any date subsequent to the date hereof.
The Company will provide without charge to any person to whom this
Prospectus is delivered, at the request of such person, a copy of any or all
of the foregoing documents incorporated herein by reference (other than
exhibits to such documents unless such exhibits are incorporated by reference
therein). Requests should be directed to the attention of Dolores B. Rawlings,
Secretary, Crown Central Petroleum Corporation, One North Charles Street,
Baltimore, Maryland 21201, or by telephone at (410) 539-7400.
78
<PAGE>
GLOSSARY
The following are definitions of certain terms used in this Prospectus:
<TABLE>
<C> <S>
alkylation.............. A process of combining hydrocarbon molecules to form
alkylates, which are used as a gasoline blending
component
aromatics............... Pleasant smelling hydrocarbon fractions that form the
basis of most organic chemicals
atmospheric column...... Also known as an atmospheric distillation unit, this
refinery unit is a tall, cylindrical steel column
into which heated crude oil is pumped and separated
into various fractions through distillation
barrel.................. Common unit of measure in the oil industry equal to
42 U.S. gallons
bbl..................... Barrel
benzene................. An aromatic solvent
BPD or bbl/day.......... Barrels per day
coking unit............. A refinery unit which takes the lowest value
component of crude oil remaining after most higher
value products are removed, further extracts more
valuable products and converts the remainder into
petroleum coke
depropanizer unit....... A refinery unit where propane, a liquid hydrocarbon,
is separated from natural gas
distillates............. Refined petroleum products including diesel, home
heating oil, jet fuel and kerosene
downstream margin....... The combined gross margin attributable to refinery
and retail petroleum marketing operations
EBITDAAL................ Represents operating income (loss) before
depreciation and amortization, and (gain) loss on
sales and abandonments of property, plant and
equipment, including the impact on operating income
(loss) of accounting for inventory under the LIFO
valuation method as compared to the FIFO valuation
method
ethanol................. An oxygenated compound which can be blended with
gasoline to lower carbon monoxide emissions
feedstocks.............. Hydrocarbon compounds, which are purchased for input
into various refinery units to produce refined
products
fluid catalytic cracking
unit................... This unit takes low grade products from the crude
unit and converts them to higher margin
transportation fuels through a chemical process using
catalysts
gal..................... U. S. gallon
high-conversion
refinery............... A refinery that is capable of converting a high
percentage of a barrel of crude oil into higher
margin fuels, such as transportation fuels
</TABLE>
79
<PAGE>
<TABLE>
<C> <S>
highway diesel.......... Diesel fuel that meets environmental requirements for
on-highway use
hydrotreating or
hydrodesulphurization.. A process which purifies petroleum products by
removing sulphur and nitrogen compounds
isomerization........... A reforming process in which hydrocarbon molecules
are rearranged to form isobutane and other feedstocks
m....................... Thousands
mm...................... Millions
mm bbls................. One million barrels
m gals.................. One thousand gallons
naphtha................. Natural or unrefined gasoline with a low octane
rating that is separated out of the crude oil during
the refining process
oxygenate............... A compound such as methyl tertiary-butyl ether, ethyl
tertiary-butyl ether, or ethanol which contains high
levels of oxygen and which, when blended with
gasoline, produces relatively low carbon monoxide
emissions
propane................. An odorless, colorless, and highly volatile gas used
as a household fuel
propylene............... A flammable gaseous hydrocarbon obtained by cracking
petroleum hydrocarbons
rated crude capacity.... The crude oil processing capacity of a refinery that
is established by engineering design
reforming............... A process in which heat and catalysts are used to
rearrange hydrocarbon molecules to convert low-octane
gasoline fractions or naphthas into higher-octane
stocks suitable for blending into finished gasoline
slurry oil.............. Heavy black oil remaining at the end of certain
refining processes
sour crude oil.......... A crude oil that is relatively high in sulphur
content and requires more processing to remove
sulphur
sweet crude oil......... A crude oil that is relatively low in sulphur content
and requires less processing to remove sulphur
tank bottoms............ Heavy residual product which accumulates at the
bottom of storage tanks and processing units
throughput.............. The volume of crude oil and/or feedstocks processed
through a refinery
turnaround.............. A periodically required standard procedure to
refurbish and maintain a refinery that involves the
shutdown and inspection of major processing units and
occurs generally every two and one-half to five years
vacuum distillation..... A process by which reduced crude oil is distilled
under a vacuum
West Texas Intermediate
crude oil.............. A light, sweet crude oil that is used as a benchmark
for the other crude oil types; typically abbreviated
"WTI"
yield................... The percentage of refined products produced from
crude oil and feedstocks
</TABLE>
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets as of December 31, 1993 and 1992............ F-4
Consolidated Statements of Operations for the years ended December 31,
1993, 1992 and 1991.................................................... F-6
Consolidated Statements of Changes in Common Stockholders' Equity for
the years ended December 31, 1993, 1992 and 1991....................... F-7
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991.................................................... F-8
Notes to Consolidated Financial Statements.............................. F-9
UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of September 30, 1994
(Unaudited) and December 31, 1993...................................... F-20
Unaudited Consolidated Condensed Statements of Operations for the three
and nine months ended September 30, 1994 and 1993...................... F-22
Unaudited Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1994 and 1993............................... F-23
Notes to Unaudited Consolidated Condensed Financial Statements.......... F-24
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Crown Central Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Crown Central
Petroleum Corporation and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of operations, changes in common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1993. 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 consolidated financial position
of Crown Central Petroleum Corporation and subsidiaries at December 31, 1993
and 1992, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Notes D and F of the consolidated financial statements,
effective January 1, 1992, the Company changed its method of accounting for
income taxes and postretirement benefits other than pensions.
Ernst & Young LLP
Baltimore, Maryland
February 24, 1994
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1993 1992
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................. $ 52,021 $ 55,504
Accounts receivable, less allowance for doubtful accounts
(1993--$1,760; 1992--$1,392).............................. 91,413 112,920
Recoverable income taxes................................... 2,690
Inventories................................................ 86,811 73,454
Other current assets....................................... 762 1,403
-------- --------
Total Current Assets..................................... 231,007 245,971
Investments and Deferred Charges............................. 42,908 53,616
Property, Plant and Equipment
Land....................................................... 44,433 45,251
Petroleum refineries....................................... 428,567 409,832
Marketing facilities....................................... 182,473 177,911
Pipelines and other equipment.............................. 20,932 19,247
-------- --------
676,405 652,241
Less allowance for depreciation........................... 294,142 276,491
-------- --------
Net Property, Plant and Equipment........................ 382,263 375,750
-------- --------
$656,178 $675,337
======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
CONSOLIDATED BALANCE SHEETS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1993 1992
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable:
Crude oil and refined products................................ $104,166 $134,416
Other......................................................... 20,500 17,787
Accrued liabilities............................................ 50,145 48,522
Income taxes payable........................................... 3,264
Current portion of long-term debt.............................. 1,094 357
-------- --------
Total Current Liabilities.................................... 179,169 201,082
Long-Term Debt................................................... 65,579 61,220
Deferred Income Taxes............................................ 81,217 81,588
Other Deferred Liabilities....................................... 31,860 28,173
Common Stockholders' Equity
Class A Common Stock--par value $5 per share:
Authorized--8,500,000 shares; issued and outstanding shares--
4,817,392 in 1993 and 1992................................... 24,087 24,087
Class B Common Stock--par value $5 per share:
Authorized--6,500,000 shares; issued and outstanding shares--
5,015,206 in 1993 and 1992................................... 25,076 25,076
Additional paid-in capital..................................... 91,870 91,870
Retained earnings.............................................. 157,320 162,241
-------- --------
Total Common Stockholders' Equity............................ 298,353 303,274
-------- --------
$656,178 $675,337
======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Sales and operating revenues (including
excise taxes of 1993--$296,228; 1992--
$218,944; 1991--$214,716).............. $1,747,411 $1,795,259 $1,857,711
Operating Costs and Expenses
Costs and operating expenses............ 1,604,696 1,659,796 1,718,066
Selling and administrative expenses..... 91,714 102,805 112,131
Depreciation and amortization........... 41,873 41,526 33,346
Sales of property, plant and equipment.. 2,331 1,264 (20)
---------- ---------- ----------
1,740,614 1,805,391 1,863,523
---------- ---------- ----------
Operating Income (Loss)................... 6,797 (10,132) (5,812)
Interest and other income................. 1,461 3 4,713
Non-operating gains....................... 3,674
Interest expense.......................... (7,451) (6,826) (7,908)
---------- ---------- ----------
Income (Loss) Before Income Taxes and
Cumulative Effect of Changes in
Accounting Principles.................... 807 (16,955) (5,333)
Income Tax Expense (Benefit).............. 5,107 (3,677) 693
---------- ---------- ----------
(Loss) Before Cumulative Effect of Changes
in Accounting Principles................. (4,300) (13,278) (6,026)
Cumulative Effect to January 1, 1992 of
Change in Accounting for Postretirement
Benefits Other Than Pensions (Net of Tax
Benefit of $3,308)....................... (5,631)
Cumulative Effect to January 1, 1992 of
Change in Accounting for Income Taxes.... 13,403
---------- ---------- ----------
Net (Loss)................................ $ (4,300) $ (5,506) $ (6,026)
========== ========== ==========
Net (Loss) Per Share:
(Loss) Before Cumulative Effect of Changes
in Accounting Principles................. $ (.44) $ (1.35) $ (.61)
Cumulative Effect to January 1, 1992 of
Change in Accounting for Postretirement
Benefits Other Than Pensions............. (.57)
Cumulative Effect to January 1, 1992 of
Change in Accounting for Income Taxes.... 1.36
---------- ---------- ----------
Net (Loss) Per Share...................... $ (.44) $ (.56) $ (.61)
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
----------------- ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
--------- ------- --------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1991................... 4,817,392 $24,087 5,015,206 $25,076 $91,870 $183,606
Net (loss) for 1991..... (6,026)
Cash dividends:
Class A Common Stock--
$.80 per share....... (3,854)
Class B Common Stock--
$.80 per share....... (4,012)
--------- ------- --------- ------- ------- --------
Balance at December 31,
1991................... 4,817,392 24,087 5,015,206 25,076 91,870 169,714
Net (loss) for 1992..... (5,506)
Cash dividends:
Class A Common Stock--
$.20 per share....... (964)
Class B Common Stock--
$.20 per share....... (1,003)
--------- ------- --------- ------- ------- --------
Balance at December 31,
1992................... 4,817,392 24,087 5,015,206 25,076 91,870 162,241
Net (loss) for 1993..... (4,300)
Adjustment to record
minimum pension
liability, net of
deferred income tax
benefit of $335........ (621)
--------- ------- --------- ------- ------- --------
Balance at December 31,
1993................... 4,817,392 $24,087 5,015,206 $25,076 $91,870 $157,320
========= ======= ========= ======= ======= ========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net (loss)...................................... $ (4,300) $ (5,506) $ (6,026)
Reconciling items from net (loss) to net cash
provided by operating activities:
Depreciation and amortization................. 41,873 41,526 33,346
Loss (gain) on sales of property, plant and
equipment.................................... 2,331 1,264 (20)
Equity (earnings) loss in unconsolidated sub-
sidiaries.................................... (651) 1,028 (237)
Deferred income taxes......................... (36) (841) 11,125
Other deferred items.......................... 830 715 5,608
Cumulative effect of changes in accounting
principles................................... (7,772)
Changes in assets and liabilities
Accounts receivable........................... 21,507 (1,506) 50,001
Recoverable income taxes...................... 2,690 6,742 (9,432)
Inventories................................... (13,357) 31,953 5,832
Other current assets.......................... 641 330 (1,130)
Crude oil and refined products payable........ (30,250) (13,303) (76,562)
Other accounts payable........................ 2,713 (2,555) 1,335
Accrued liabilities........................... 1,623 876 (5,155)
Income taxes payable.......................... 3,264 (8,156)
-------- -------- --------
Net Cash Provided by Operating Activities... 28,878 52,951 529
-------- -------- --------
Cash Flows From Investment Activities
Capital expenditures.......................... (40,860) (38,003) (64,782)
Contract settlement regarding acquisition of
La Gloria Oil and Gas Company................ 8,000
Proceeds from sales of property, plant and
equipment.................................... 5,515 4,072 4,619
Investment in subsidiaries.................... (4) (177) 742
Deferred turnaround maintenance and other..... (4,678) (19,675) (21,333)
-------- -------- --------
Net Cash (Used in) Investment Activities.... (40,027) (45,783) (80,754)
-------- -------- --------
Cash Flows From Financing Activities
Net (repayments) borrowings on loan agree-
ments........................................ (376) (27,339) 86,333
Proceeds from purchase money lien............. 5,472
Proceeds from interest rate swap terminations. 2,403
Net repayments (issuances) of long-term notes
receivable................................... 167 (499) (2,637)
Cash dividends................................ (1,967) (7,866)
-------- -------- --------
Net Cash Provided by (Used in) Financing Ac-
tivities................................... 7,666 (29,805) 75,830
-------- -------- --------
Net (Decrease) in Cash and Cash Equivalents..... (3,483) (22,637) (4,395)
Cash and Cash Equivalents at Beginning of Year.. 55,504 78,141 82,536
-------- -------- --------
Cash and Cash Equivalents at End of Year........ $ 52,021 $ 55,504 $ 78,141
======== ======== ========
Supplemental Disclosures of Cash Flow Informa-
tion
Cash paid during the year for:
Interest (net of amount capitalized).......... $ 4,249 $ 5,610 $ 3,824
Income taxes.................................. 4,329 1,023 5,858
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Description of Business: Crown Central Petroleum Corporation and subsidiaries
(the Company) operates primarily in one business segment as an independent
refiner and marketer of petroleum products, including petrochemical feedstocks.
The Company operates two refineries, one located near Houston, Texas with a
rated capacity of 100,000 barrels per day and another in Tyler, Texas with a
rated capacity of 50,000 barrels per day. Its principal business is the
wholesale and retail sale of its products in the Mid-Atlantic, Southeastern and
Midwestern United States.
Locot Corporation, a wholly-owned subsidiary of the Company, is the parent
company of La Gloria Oil and Gas Company (La Gloria) which operates the Tyler
refinery, a pipeline gathering system in Texas and product terminals located
along the Texas Eastern Pipeline system.
F Z Corporation, a wholly-owned subsidiary of the Company, is the parent
company of two convenience store chains operating in seven states, retailing
both merchandise and gasoline.
The following summarizes the significant accounting policies and practices
followed by the Company:
Principles of Consolidation: The consolidated financial statements include
the accounts of Crown Central Petroleum Corporation and all significant
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Due to immateriality, the Company's
investment in Tongue, Brooks & Company, Inc. and Tiara Insurance Company, two
wholly-owned insurance subsidiaries, are accounted for using the equity method.
Cash and Cash Equivalents: Cash in excess of daily requirements is invested
in marketable securities with maturities of three months or less. Such
investments are deemed to be cash equivalents for purposes of the statements of
cash flows. The carrying amount reported in the balance sheet for cash and cash
equivalents represents its fair value.
Accounts Receivable: The majority of the Company's accounts receivable relate
to sales of petroleum products to third parties operating in the petroleum
industry. The carrying amount reported in the balance sheet for accounts
receivable represents its fair value.
Inventories: The Company's crude oil, refined products, and convenience store
merchandise and gasoline inventories are valued at the lower of cost (last-in,
first-out) or market with the exception of crude oil inventory held for resale
which is valued at the lower of cost (first-in, first-out) or market. Materials
and supplies inventories are valued at cost. Incomplete exchanges of crude oil
and refined products due the Company or owing to other companies are reflected
in the inventory accounts.
Property, Plant and Equipment: Property, plant and equipment is carried at
cost. Costs assigned to property, plant and equipment of acquired businesses
are based on estimated fair value at the date of acquisition. Depreciation and
amortization of plant and equipment are primarily provided using the straight-
line method over estimated useful lives. Construction in progress is recorded
in property, plant and equipment.
Expenditures which materially increase values, change capacities or extend
useful lives are capitalized in property, plant and equipment. Routine
maintenance, repairs and replacement costs are charged against current
operations. At intervals of two or more years, the Company conducts a
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
complete shutdown and inspection of significant units (turnaround) at its
refineries to perform necessary repairs and replacements. Costs associated with
these turnarounds are deferred and amortized over the period until the next
planned turnaround.
Upon sale or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the respective accounts and any resulting gain
or loss is included in income.
Environmental Costs: The Company conducts environmental assessments and
remediation efforts at multiple locations, including operating facilities, and
previously owned or operated facilities. The Company accrues environmental and
clean-up related costs of a non-capital nature when it is both probable that a
liability has been incurred and that the amount can be reasonably estimated.
Costs are charged to expense if they relate to the remediation of existing
conditions caused by past operations or if they are not expected to contribute
to future operations. Estimated costs are recorded at undiscounted amounts
based on experience and assessments, and are adjusted periodically as
additional or new information is available.
Sales and Operating Revenues: Sales and operating revenues include excise and
other similar taxes. Resales of crude oil are recorded net of the related crude
oil cost (first-in, first-out) in sales and operating revenues.
Income Taxes: As discussed in Note D of Notes to Consolidated Financial
Statements, effective January 1, 1992, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires a liability approach for measuring deferred taxes based
on temporary differences between the financial statement and tax bases of
assets and liabilities existing at each balance sheet date using enacted tax
rates for years in which taxes are expected to be paid or recovered. In 1993
and 1992, deferred tax liabilities reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Interest Capitalization: Interest costs incurred during the construction and
preoperating stages of significant construction or development projects is
capitalized and subsequently amortized by charges to earnings over the useful
lives of the related assets.
Amortization of Goodwill: The excess purchase price of acquisitions of
businesses over the estimated fair value of assets acquired is being amortized
on a straight-line basis over 20 years.
Forward and Option Contracts: The Company selectively enters into forward
hedging and option contracts to minimize price fluctuations for a portion of
its crude oil and refined products. All realized and unrealized gains and
losses on such hedging and option contracts are deferred and recognized in the
period when the hedged materials are sold. Cash flows from forward hedging and
option contracts are classified as operating activities for purposes of the
statements of cash flows.
Non-operating Gains and Losses: Non-operating gains and losses include
significant transactions that, in the judgement of management, are not directly
related to normal current operations.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTE B--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Crude oil............................................ $ 38,989 $ 40,897
Refined products..................................... 60,519 72,915
----------- -----------
Total inventories at FIFO (approximates current
costs)............................................ 99,508 113,812
LIFO allowance....................................... (25,828) (53,298)
----------- -----------
Total crude oil and refined products............... 73,680 60,514
----------- -----------
Merchandise inventory at FIFO (approximates current
cost)............................................... 7,200 7,509
LIFO allowance....................................... (2,387) (2,569)
----------- -----------
Total merchandise.................................. 4,813 4,940
----------- -----------
Materials and supplies inventory at FIFO............. 8,318 8,000
----------- -----------
Total Inventory.................................... $ 86,811 $ 73,454
=========== ===========
</TABLE>
In 1992, inventory quantities were reduced. This reduction resulted in a
liquidation of LIFO inventory quantities carried at higher costs prevailing in
prior years as compared with the cost of 1992 purchases. As a result of this
liquidation in 1992, the net (loss) increased $1,406,000 ($.14 per share).
NOTE C--LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Unsecured 10.42% Senior Notes.......................... $ 60,000 $ 60,000
Purchase Money Lien.................................... 5,472
Other obligations...................................... 1,201 1,577
----------- -----------
66,673 61,577
Less current portion................................... 1,094 357
----------- -----------
Long-Term Debt......................................... $ 65,579 $ 61,220
=========== ===========
</TABLE>
The aggregate maturities of long-term debt through 1998 are as follows (in
thousands): 1994--$1,094; 1995--$9,694; 1996--$9,730; 1997--$9,798; 1998--
$9,849.
The unsecured 10.42% Senior Notes dated January 3, 1991, as amended (Notes)
limit the payment of cash dividends on common stocks and require the
maintenance of various covenants including minimum working capital, minimum
fixed charge coverage ratio, and minimum consolidated tangible net worth, all
as defined. The principal will be repaid in seven equal annual installments
commencing January 3, 1995. The Notes are repayable, at a premium, in whole or
in part at any time at the option of the Company.
As of December 31, 1993, the Company has entered into interest rate swap
agreements to effectively convert $17,500,000 of its 10.42% Notes to variable
interest rates with maturities ranging
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
from 1996 to 1998. During 1993, the Company terminated certain interest rate
swap agreements associated with its 10.42% Notes resulting in deferred gains of
$1.9 million at December 31, 1993, which will be recognized as a reduction of
interest expense over the remaining swap periods, which range from 1996 to
1997. As a result of its interest rate swap program, the Company's effective
interest rate on the Notes for 1993 was reduced from approximately 10.5% to
approximately 9.2% per annum. The Company is exposed to credit risk to the
extent of nonperformance by the counterparties to the interest rate swap
agreements; however, management considers the risk of default to be remote.
Under the terms of the Unsecured Credit Agreement dated May 10, 1993, (Credit
Agreement) nine banks have committed a maximum of $125,000,000 to the Company
for cash borrowings and letters of credit. There is a limitation of $50,000,000
for cash borrowings under the agreement. The Credit Agreement, which expires
May 10,1996, but contains a one year renewal option, allows for interest on
outstanding borrowings to be computed under one of three methods based on the
Base Rate, the London Interbank Offered Rate, or the Certificates of Deposit
Rate (all as defined). The Credit Agreement limits the Company's borrowings
outside the Agreement to a maximum of $90,000,000 in unsecured senior notes.
The Credit Agreement limits indebtedness (as defined), cash dividends on common
stocks and capital expenditures and requires the maintenance of various
covenants including, but not limited to, minimum working capital, minimum
consolidated tangible net worth, and a borrowing base, all as defined. Under
the terms of the Notes and Credit Agreement, at December 31, 1993, the Company
was limited to paying additional cash dividends of $9,833,000.
At December 31, 1993, the Company was in compliance with all covenants and
provisions of the Notes and Credit Agreement. The Company expects to continue
to be in compliance with the covenants imposed by the Notes and Credit
Agreement over the next twelve months. Meeting the covenants imposed by the
Notes and Credit Agreement is dependent, among other things, upon the level of
future earnings and the rate of capital spending.
As of December 31, 1993, the Company had outstanding irrevocable standby
letters of credit in the principal amount of $30,709,000 and an outstanding
documentary letter of credit in the principal amount of $12,600,000 for normal
operations. Unused commitments under the terms of the Credit Agreement totaling
$81,691,000 were available for future borrowings (subject to the $50,000,000
limitation described above) and issuance of letters of credit at December 31,
1993. The Company pays an annual commitment fee on the unused portion of the
credit line.
Effective December 1, 1993, the Company entered into a Purchase Money Lien
(Money Lien) for the financing of certain service station and terminal
equipment and office furnishings. The effective rate for the Money Lien is
6.65%. Ninety percent of the principal is repayable in 60 monthly installments
and a balloon payment of 10% of the principal is payable in January 1999. The
Money Lien is secured by the service station equipment and office furnishings
having a cost basis of $5,472,000. The Money Lien allows for a maximum drawdown
of $6,500,000 by January 31, 1994 and it is the Company's intention to draw the
remaining balance.
The following interest costs were charged to pretax income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1993 1992 1991
-------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Total interest costs incurred...................... $ 7,712 $ 7,754 $ 8,190
Less: Capitalized interest......................... 261 928 282
-------- ------- -------
Interest Expense............................... $ 7,451 $ 6,826 $ 7,908
======== ======= =======
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
The approximate fair value of the Company's Long-term Debt at December 31,
1993 was $65,929,000, which was estimated using a discounted cash flow
analysis, based on the Company's assumed incremental borrowing rates for
similar types of borrowing arrangements. The fair value at December 31, 1993 of
the Company's interest rate swap agreements is estimated to be $207,000 which
was estimated using a discounted cash flow analysis, based on current interest
rates.
NOTE D--INCOME TAXES
As discussed in Note A of Notes to Consolidated Financial Statements,
effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
1991 financial statements have not been restated for the effects of applying
SFAS 109.
The $13,403,000 cumulative effect benefit of applying SFAS 109 reduced the
net loss for 1992. One of the requirements of SFAS 109 is that deferred taxes
be recorded for the tax effects of differences between assigned values and the
tax bases of assets acquired in purchase business acquisitions. Previously,
under the provisions of Accounting Principles Board Opinion No. 11 "Accounting
for Income Taxes", acquired assets were recorded net of such tax effects. The
adoption of SFAS 109 in 1992 resulted in total increases in inventory and net
property, plant and equipment of $38 million relating to the acquisitions of
the Fast Fare and Zippy Mart convenience store chains and La Gloria Oil and Gas
Company, with related increases in the liability for deferred income taxes. The
write-up of net property, plant and equipment is depreciated over the remaining
life of the related assets and such depreciation is offset by a credit to the
deferred tax provision. The adoption of SFAS 109 resulted in a decrease of
$2,335,000 in the 1993 income before income taxes and cumulative effect of
changes in accounting principles and an increase of $2,388,000 in the 1992 loss
before income taxes and cumulative effect of changes in accounting principles,
respectively, due to increased depreciation expense for the write-up of
property, plant and equipment.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization...................... $ (58,095) $ (59,015)
Difference between book and tax basis of property,
plant and equipment............................... (30,945) (32,499)
Other.............................................. (16,768) (10,012)
----------- -----------
Total deferred tax liabilities................... (105,808) (101,526)
Deferred tax assets:
Postretirement and pension obligations............. 5,596 4,672
Environmental, litigation and other accruals....... 9,734 6,982
Tax credits, contribution and net operating loss
carryover......................................... 379 1,893
Construction and inventory cost not currently
deductible........................................ 1,436 1,344
Other.............................................. 7,446 5,047
----------- -----------
Total deferred tax assets........................ 24,591 19,938
----------- -----------
Net deferred tax liabilities................... $ (81,217) $ (81,588)
=========== ===========
</TABLE>
No valuation allowance is considered necessary for the above deferred tax
assets. The company has tax credit carryforwards of $109,269 which expire in
the year 2005.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
Significant components of the income tax provision (benefit) for the years
ended December 31 follows. With the passage of the Tax Act of 1993, the
Company's federal statutory income tax rate increased from 34% to 35% effective
January 1, 1993. The effect of the change in statutory rate was to increase the
1993 net (loss) for 1993 by $2,252,000 or $.23 per share.
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
---------------- --------
1993 1992 1991
------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal........................................ $5,278 $(3,230) $(4,103)
State.......................................... 1,779 872 (462)
------- ------- -------
Total Current................................ 7,057 (2,358) (4,565)
Deferred:
Federal........................................ (3,642) (1,485) 5,278
State.......................................... (560) 166 (20)
------- ------- -------
Total Deferred............................... (4,202) (1,319) 5,258
Federal tax rate increase........................ 2,252
------- ------- -------
Income Tax Expense (Benefit)................... $5,107 $(3,677) $ 693
======= ======= =======
</TABLE>
Current state tax provision includes franchise taxes of $1,275,000,
$1,300,000 and $1,146,000 for the years 1993, 1992 and 1991, respectively.
The components of the deferred income tax provision for the year ended
December 31, 1991 is as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C>
Refinery turnaround costs............................ $ 4,789
Difference between book and tax depreciation and am-
ortization.......................................... 4,342
Gain on disposal..................................... 588
State income taxes................................... (20)
Litigation and accruals.............................. (66)
Difference between book and tax basis of property
disposals........................................... (478)
Effect of tax leases................................. (1,427)
Unrealized insurance proceeds........................ (1,540)
Other................................................ (930)
-------
Deferred income tax provision...................... $ 5,258
=======
</TABLE>
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
-------------- --------
1993 1992 1991
------ ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income tax expense (benefit) calculated at the
statutory federal income tax rate................ $ 282 $(5,765) $(1,813)
Amortization of goodwill and purchase adjustments. 330 321 1,927
State taxes (net of federal benefit).............. 798 685 291
Federal tax rate increase......................... 2,252
Other............................................. 1,445 1,082 288
------ ------- -------
Income Tax Expense (Benefit).................... $5,107 $(3,677) $ 693
====== ======= =======
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTE E--CAPITAL STOCK AND NET INCOME PER COMMON SHARE
Class A Common stockholders are entitled to one vote per share and have the
right to elect all directors other than those to be elected by other classes of
stock. Class B Common stockholders are entitled to one-tenth vote per share and
have the right to elect two directors. Net (loss) per share for 1993, 1992 and
1991 is based upon the 9,832,598 common shares outstanding for all years.
NOTE F--EMPLOYEE BENEFIT OBLIGATIONS
In 1993, the Company merged its two defined benefit pension plans covering
the majority of full-time employees into one plan. The Company also has several
defined benefit plans covering only certain senior executives. Plan benefits
are generally based on years of service and employees' average compensation.
The Company's policy is to fund the pension plans in amounts which comply with
contribution limits imposed by law. Plan assets consist principally of fixed
income securities and stocks.
Net periodic pension costs consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1993 1992 1991
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost--benefit earned during the year...... $ 4,002 $ 3,672 $ 3,221
Interest cost on projected benefit obligations.... 6,326 5,895 5,595
Actual (return) loss on plan assets............... (11,738) (10,217) (10,626)
Total amortization and deferral................... 5,324 4,875 6,376
-------- -------- --------
Net periodic pension costs........................ $ 3,914 $ 4,225 $ 4,566
======== ======== ========
</TABLE>
Assumptions used in the accounting for the defined benefit plans as of
December 31 were:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rates............................... 7.25% 8.25% 8.25%
Rates of increase in compensation levels...................... 4.00% 5.00% 5.00%
Expected long-term rate of return on assets................... 9.50% 9.50% 9.50%
</TABLE>
The following table sets forth the funded status of the plans in which assets
exceed accumulated benefits:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.......................... $ 68,817 $ 58,064
----------- -----------
Accumulated benefit obligation..................... $ 71,552 $ 60,226
----------- -----------
Projected benefit obligation....................... $ 86,728 $ 73,863
Plan assets at fair value............................ 78,573 69,081
----------- -----------
Projected benefit obligation (in excess of) plan as-
sets................................................ (8,155) (4,782)
Unrecognized net loss................................ 9,532 2,872
Prior service (benefit) cost not yet recognized in
net periodic pension cost........................... (1,081) 2,132
Unrecognized net (asset) at beginning of year, net of
amortization........................................ (2,495) (2,762)
----------- -----------
Net pension liability................................ $ (2,199) $ (2,540)
=========== ===========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
The following table sets forth the funded status of the plans in which
accumulated benefits exceed assets:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.......................... $ 5,339 $ 4,146
----------- -----------
Accumulated benefit obligation..................... $ 5,339 $ 4,154
----------- -----------
Projected benefit obligation....................... $ 5,376 $ 4,300
Plan assets at fair value............................ 0 0
----------- -----------
Projected benefit obligation (in excess of) plan
assets.............................................. (5,376) (4,300)
Unrecognized net loss................................ 1,224 335
Prior service (benefit) cost not yet recognized in
net periodic pension cost........................... (231) (248)
Unrecognized net obligation at beginning of year, net
of amortization..................................... 1,834 2,064
Adjustment required to recognize minimum liability... (2,790) (2,004)
----------- -----------
Net pension liability................................ $ (5,339) $ (4,153)
=========== ===========
</TABLE>
In addition to the defined benefit pension plan, the Company provides certain
health care and life insurance benefits for eligible employees who retire from
active service. The postretirement health care plan is contributory, with
retiree contributions consisting of copayment of premiums and other cost
sharing features such as deductibles and coinsurance. Beginning in 1998, the
Company will "cap" the amount of premiums that it will contribute to the
medical plans. Should costs exceed this cap, retiree premiums would increase to
cover the additional cost. Effective January 1, 1992, the Company adopted
Statement of Financial Accounting Standards No. 106 "Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). SFAS 106 requires the
accrual of the expected costs of providing these postretirement benefits during
the years that the employee renders the necessary service. Prior year financial
statements have not been restated for the effects of applying SFAS 106.
The $5,631,000 cumulative effect charge of adoption of SFAS 106 on prior
years (after reduction for the income tax benefit of $3,308,000) is included in
the net loss for 1992. The adoption of SFAS 106 resulted in increases in the
1993 and 1992 loss before cumulative effect of changes in accounting principles
of $167,000 ($.02 per share) and $300,000 ($.03 per share), respectively, and
increases in the 1993 and 1992 net loss of $167,000 ($.02 per share) and
$5,931,000 ($.60 per share), respectively.
The following table sets forth the accrued postretirement benefit cost of
these plans recognized in the Company's Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees............................................ $ 5,491 $ 6,076
Fully eligible active plan participants............. 1,460 1,419
Other active plan participants...................... 2,186 1,836
Unrecognized net loss (gain)........................ 4 (109)
Unrecognized prior service cost..................... 353
----------- -----------
Accrued postretirement benefit cost............... $ 9,494 $ 9,222
=========== ===========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
The weighted average discount rate used in determining the APBO was 7.25% and
8.5% in 1993 and 1992, respectively.
Net periodic postretirement benefit cost include the following components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------
1993 1992
----- -----
(THOUSANDS
OF DOLLARS)
<S> <C> <C>
Service cost................................................... $161 $161
Interest cost on accumulated postretirement benefit obligation. 765 756
----- -----
Net periodic postretirement benefit cost..................... $926 $917
===== =====
</TABLE>
For 1991, the expense for postretirement benefits, which was recorded on a
pay-as-you-go basis and has not been restated, was approximately $631,000. The
Company's policy is to fund postretirement costs on a pay-as-you-go basis as in
prior years.
A 13% increase in the cost of medical care was assumed for 1993. This medical
trend rate is assumed to decrease 1% annually to 9% in 1997, and decrease to 0%
thereafter as a result of the expense cap in 1998. The medical trend rate
assumption affects the amounts reported. For example, a 1% increase in the
medical trend rate would increase the APBO by $674,000, and the net periodic
cost by $72,000 for 1993.
In 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits" (SFAS 112). SFAS 112 requires the accrual of the expected costs of
providing certain benefits after employment, but before retirement, such as
health care continuation coverage. The adoption of SFAS 112 did not materially
affect the 1993 net loss.
NOTE G--LITIGATION AND CONTINGENCIES
The Company has been named as a defendant in various matters of litigation,
some of which are for substantial amounts, and involve alleged personal injury
and property damage from prolonged exposure to petroleum, petroleum related
products and substances used at its refinery or in the petroleum refining
process. The Company is a co-defendant with numerous other defendants in a
number of these suits. The Company is vigorously defending these actions,
however, the process of resolving these matters could take several years. The
liability, if any, associated with these cases was either accrued in accordance
with generally accepted accounting principles or was not determinable at
December 31, 1993. The Company has consulted with counsel with respect to each
such preceding or large claim which is pending or threatened. While litigation
can contain a high degree of uncertainty and the risk of an unfavorable
outcome, in the opinion of management, there is no reasonable basis to believe
that the eventual outcome of any such matter or group of related matters will
have a material adverse effect on the Company.
The Company's income tax returns for the 1988 and 1989 fiscal years are
currently under examination by the Internal Revenue Service. The Company's
income tax returns for the 1984 to 1987 fiscal years have been examined by the
Internal Revenue Service and a Revenue Agent's Report has
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
been received. The Company has filed a written protest in response to certain
proposed adjustments with the Office of Regional Director of Appeals relating
to these proposed adjustments. In management's opinion, the ultimate
disposition of the Report will not have a material adverse effect on the
Company.
Like other petroleum refiners and marketers, the Company's operations are
subject to extensive and rapidly changing federal and state environmental
regulations governing air emissions, waste water discharges, and solid and
hazardous waste management activities. The Company's policy is to accrue
environmental and clean-up related costs of a non-capital nature when it is
both probable that a liability has been incurred and the amount can be
reasonably estimated. While it is often extremely difficult to reasonably
quantify future environmental related expenditures, the Company anticipates
that a substantial capital investment will be required over the next several
years to comply with existing regulations. The Company had recorded a liability
of approximately $16.8 million as of December 31, 1993 relative to the
estimated costs of compliance with environmental regulations.
Environmental liabilities are subject to considerable uncertainties which
affect the Company's ability to estimate its ultimate cost of remediation
efforts. These uncertainties include the exact nature and extent of the
contamination at each site, the extent of required cleanup efforts, varying
costs of alternative remediation strategies, changes in environmental
remediation requirements, the number and financial strength of other
potentially responsible parties at multi-party sites, and the identification of
new environmental sites. As a result, charges to income for environmental
liabilities could have a material effect on results of operations in a
particular quarter or year as assessments and remediation efforts proceed or as
new claims arise. However, management is not aware of any matters which would
be expected to have a material adverse effect on the Company.
NOTE H--NONCANCELLABLE LEASE COMMITMENTS
The Company has noncancellable operating lease commitments for refinery
equipment, service station and convenience store properties, autos, trucks, an
airplane, office and other equipment. Lease terms range from 60 to 96 months
for automotive and transportation equipment. Property leases typically have a
five-year term with renewal options for additional periods. Certain other
leases also carry renewal provisions. The Corporate Headquarters office
building lease which commenced in 1993 has a lease term of 10 years. The
airplane lease which commenced in 1992 has a lease term of 7 years. The
majority of service station properties have a lease term of 20 years. The
average lease term of convenience stores is approximately 12 years.
Future minimum rental payments under noncancellable operating lease
agreements as of December 31, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
1994................................................................. $10,799
1995................................................................. 9,835
1996................................................................. 9,547
1997................................................................. 8,407
1998................................................................. 8,062
After 1998........................................................... 48,644
-------
Total Minimum Rental Payments.................................... $95,294
=======
</TABLE>
Rental expense for the years ended December 31, 1993, 1992 and 1991 was
$14,620,000, $16,487,000 and $16,438,000, respectively.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTE I--INVESTMENTS AND DEFERRED CHARGES
Investments and deferred charges consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred turnarounds................................. $15,844 $24,454
Goodwill............................................. 10,883 11,859
Investments in subsidiaries.......................... 6,601 5,976
Long-term notes receivable........................... 2,969 3,136
Intangible pension asset............................. 1,834 2,004
Deferred financing costs............................. 1,121 1,324
Deferred proceeds--tax exchanges..................... 1,067 2,428
Other................................................ 2,589 2,435
----------- -----------
Investments and Deferred Charges................... $42,908 $53,616
=========== ===========
</TABLE>
Accumulated amortization of goodwill was $5,974,000 and $4,998,000 at
December 31, 1993 and 1992, respectively. The fair value of the Company's long-
term notes receivable at December 31, 1993 was $2,913,000, which was estimated
using a discounted cash flow analysis, based on the assumed interest rates for
similar types of arrangements.
NOTE J--NON-OPERATING GAINS
Non-operating gains in 1991 consist of litigation and insurance settlements.
There were no material net non-operating gains or losses which impacted income
in 1993 and 1992.
F-19
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1994 1993
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................ $ 21,165 $ 52,021
Accounts receivable--net............................. 81,670 91,413
Recoverable income taxes............................. 14,996
Inventories.......................................... 90,440 86,811
Other current assets................................. 3,412 762
-------- --------
Total Current Assets............................... 211,683 231,007
Investments and Deferred Charges....................... 29,766 42,908
Property, Plant and Equipment.......................... 689,427 676,405
Less allowance for depreciation...................... 326,632 294,142
-------- --------
Net Property, Plant and Equipment................... 362,795 382,263
-------- --------
$604,244 $656,178
======== ========
</TABLE>
See notes to unaudited consolidated condensed financial statements
F-20
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1994 1993
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable:
Crude oil and refined products..................... $ 97,879 $104,166
Other.............................................. 16,604 20,500
Accrued liabilities................................. 46,787 50,145
Income taxes payable................................ 3,264
Current portion of long-term debt................... 10,053 1,094
-------- --------
Total Current Liabilities......................... 171,323 179,169
Long-Term Debt........................................ 56,955 65,579
Deferred Income Taxes................................. 73,960 81,217
Other Deferred Liabilities............................ 31,621 31,860
Common Stockholders' Equity
Common stock, Class A--par value $5 per share:
Authorized 7,500,000 shares; issued and outstanding
shares--4,817,392 in 1994 and 1993................ 24,087 24,087
Common stock, Class B--par value $5 per share:
Authorized 7,500,000 shares; issued and outstanding
shares--4,984,806 in 1994 and 5,015,206 in 1993... 24,924 25,076
Additional paid-in capital.......................... 91,014 91,870
Retained earnings................................... 132,086 157,320
Unearned restricted stock........................... (1,726)
-------- --------
Total Common Stockholders' Equity................. 270,385 298,353
-------- --------
$604,244 $656,178
======== ========
</TABLE>
See notes to unaudited consolidated condensed financial statements
F-21
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ----------------------
1994 1993 1994 1993
--------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Sales and operating revenues
(including excise taxes of
$97,012, $69,003, $295,131 and
$207,289)...................... $ 468,275 $455,691 $1,315,284 $1,316,770
--------- -------- ---------- ----------
Operating Costs and Expenses:
Costs and operating expenses.... 456,997 421,714 1,234,556 1,222,371
Selling and administrative ex-
penses......................... 21,379 23,693 62,564 69,723
Depreciation and amortization... 12,665 10,537 33,734 31,307
Sales and abandonments of prop-
erty, plant and equipment...... 16,899 169 16,554 (108)
--------- -------- ---------- ----------
507,940 456,113 1,347,408 1,323,293
--------- -------- ---------- ----------
Operating (Loss).................. (39,665) (422) (32,124) (6,523)
Interest and other income......... 283 179 1,152 398
Interest expense.................. (1,979) (1,894) (5,836) (5,514)
--------- -------- ---------- ----------
(Loss) Before Income Taxes........ (41,361) (2,137) (36,808) (11,639)
Income Tax (Benefit) Expense...... (14,753) 1,119 (11,574) (397)
--------- -------- ---------- ----------
Net (Loss)........................ $ (26,608) $ (3,256) $ (25,234) $ (11,242)
========= ======== ========== ==========
Net (Loss) Per Share.............. $ (2.71) $ (.33) $ (2.57) $ (1.14)
========= ======== ========== ==========
</TABLE>
See notes to unaudited consolidated condensed financial statements
F-22
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------
1994 1993
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net Cash Flows From Operating Activities
Net cash from operations before changes in
working
capital................................... $ 17,888 $ 20,060
Net changes in working capital............. (28,337) (10,713)
--------------- ---------------
Net Cash (Used in) Provided by Operating
Activities.............................. (10,449) 9,347
--------------- ---------------
Cash Flows From Investment Activities
Capital expenditures....................... (21,121) (29,797)
Proceeds from sale of property, plant and
equipment................................. 3,369 2,782
Deferred turnaround maintenance and other.. (103) (3,522)
--------------- ---------------
Net Cash (Used in) Investment Activities. (17,855) (30,537)
--------------- ---------------
Cash Flows From Financing Activities
Net cash flows from long-term debt......... (101) (255)
Net proceeds from purchase money lien...... 437
Proceeds from interest rate swap termina-
tions..................................... 2,403
Net cash flows from long-term notes receiv-
able...................................... (154) (53)
Purchases of Class B Common Stock.......... (2,734)
--------------- ---------------
Net Cash (Used in) Provided by Financing
Activities.............................. (2,552) 2,095
--------------- ---------------
Net (Decrease) in Cash and Cash Equivalents.. $ (30,856) $ (19,095)
=============== ===============
</TABLE>
See notes to unaudited consolidated condensed financial statements
F-23
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1994
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments considered necessary for a fair and comparable presentation have
been included. Operating results for the three and nine months ended September
30, 1994 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1994. The enclosed financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1993.
Cash and Cash Equivalents--Cash in excess of daily requirements is invested
in marketable securities with maturities of three months or less. Such
investments are deemed to be cash equivalents for purposes of the statements of
cash flows.
Inventories--The Company's crude oil, refined products, and convenience store
merchandise and gasoline inventories are valued at the lower of cost (last-in,
first-out) or market with the exception of crude oil inventory held for resale
which is valued at the lower of cost (first-in, first-out) or market. Materials
and supplies inventories are valued at cost. Incomplete exchanges of crude oil
and refined products due the Company or owing to other companies are reflected
in the inventory accounts.
At September 30, 1994, approximately .4 million barrels of crude oil and
refined products, or approximately $7.5 million of inventory, were held in
excess of anticipated quantities and were valued at the lower of cost (first-
in, first-out) or market. An actual valuation of inventory under the LIFO
method can be made only at the end of each year based on the inventory levels
and costs at that time. Accordingly, interim LIFO projections must be based on
Management's estimates of expected year-end inventory levels and values.
Environmental Costs--The Company conducts environmental assessments and
remediation efforts at multiple locations, including operating facilities, and
previously owned or operated facilities. Estimated closure and post-closure
costs for active, operated refinery and finished product terminal facilities
are not recognized until a decision for closure is made. Estimated closure and
post-closure costs for active and operated retail marketing facilities and
costs of environmental matters related to ongoing refinery, terminal and retail
marketing operations are recognized as described below. Expenditures for
equipment necessary for environmental issues relating to ongoing operations are
capitalized. The Company accrues environmental and clean-up related costs of a
non-capital nature when it is both probable that a liability has been incurred
and that the amount can be reasonably estimated. Accruals for losses from
environmental remediation obligations generally are recognized no later than
completion of the remedial feasibility study. Estimated costs, which are based
upon experience and assessments, are recorded at undiscounted amounts without
considering the impact of inflation, and are adjusted periodically as
additional or new information is available.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." The income tax provision for the three and nine months ended September
30, 1994 has been computed based upon the Company's estimated effective tax
rate for the year, after recognizing permanent tax differences, to which the
F-24
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1994
federal statutory rate of 35%, state income taxes of approximately 4% and state
franchise taxes have been applied. Certain state franchise taxes are calculated
based on the Company's net assets and not as a percentage of income.
Financial Instruments and Hedging Activities--The Company periodically enters
into interest rate swap agreements to effectively manage the cost of
borrowings. All interest rate swaps are only subject to market risk as interest
rates fluctuate. For interest rate swaps designated to the Company's long-term
debt and accounted for as a hedge, the net amounts payable or receivable from
periodic settlements under outstanding interest rate swaps are included in
interest expense. Realized gains and losses from terminated interest rate swaps
are deferred and amortized into interest expense over the remaining term of the
original swap agreement. Settlement of interest rate swaps involves the receipt
or payment of cash on a periodic basis during the duration of the contract, or
upon the Company's termination of the contract, for the differential of the
interest rates swapped over the term of the contract.
Other instruments are used to minimize the exposure of the Company's refining
margins to crude oil and refined product price fluctuations. Hedging strategies
used to minimize this exposure include fixing a future margin between crude oil
and certain finished products and also hedging fixed price purchase and sales
commitments of crude oil and refined products. Futures, forwards and exchange
traded options entered into with commodities brokers and other integrated oil
and gas companies are utilized to execute the Company's strategies. These
instruments generally allow for settlement at the end of their term in either
cash or product.
Net realized gains and losses from these hedging strategies are recognized in
costs and operating expenses when the associated refined products are sold.
Unrealized gains and losses represent the difference between the market price
of refined products and the price of the instrument, inclusive of refining
costs. Individual transaction unrealized gains and losses are deferred in
inventory and other current assets and liabilities to the extent that the
associated refined products have not been sold. A hedging strategy position
generating an overall net unrealized loss is recognized in costs and operating
expenses. While the Company's hedging activities are intended to reduce
volatility while providing an acceptable profit margin on a portion of
production, the use of such a program can limit the Company's ability to
participate in an improvement in related product profit margins.
The Company is exposed to credit risk in the event of non-performance by
counterparties on interest rate swaps, and futures, forwards and exchange
traded options for crude and finished products, but the Company does not
anticipate non-performance by any of these counterparties. The amount of such
exposure is generally the unrealized gains in such contracts.
Statements of Cash Flows--Net changes in working capital items presented in
the Consolidated Condensed Statements of Cash Flows reflects changes in all
current assets and current liabilities with the exception of cash and cash
equivalents and the current portion of long-term debt.
Reclassifications--Deferred gains from interest rate swap terminations for
the nine months ended September 30, 1993 have been reclassified on the
Consolidated Condensed Statements of Cash Flows as a cash inflow from financing
activities consistent with the presentation in the Consolidated Statements of
Cash Flows in the Annual Report on Form 10-K for the fiscal year ended December
31, 1993. These deferred gains had previously been reported as a cash inflow
from operations in the Company's Form 10-Q for the period ended September 30,
1993. This reclassification had no effect on the net decrease in cash and cash
equivalents for the nine months ended September 30, 1993.
F-25
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1994
NOTE B--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1994 1993
------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Crude oil............................................. $ 47,859 $ 38,989
Refined products...................................... 73,152 60,519
-------- --------
Total inventories at FIFO (approximates current
cost).............................................. 121,011 99,508
LIFO allowance........................................ (43,756) (25,828)
-------- --------
Total crude oil and refined products................ 77,255 73,680
-------- --------
Merchandise inventory at FIFO (approximates current
cost)................................................ 7,662 7,200
LIFO allowance........................................ (2,387) (2,387)
-------- --------
Total merchandise................................... 5,275 4,813
-------- --------
Materials and supplies inventory at FIFO.............. 7,910 8,318
-------- --------
Total Inventory..................................... $ 90,440 $ 86,811
======== ========
</TABLE>
NOTE C--LONG-TERM DEBT AND CREDIT ARRANGEMENTS
As of September 30, 1994, the Company has entered into interest rate swap
agreements with various financial institutions to effectively convert $47.5
million of its fixed rate debt to variable interest rate debt for remaining
periods ranging from 1996 to 1998.
The following is a summary, by year of maturity, of the Company's outstanding
interest rate swap agreements:
<TABLE>
<CAPTION>
INSTRUMENTS EXPECTED TO
MATURE IN
-------------------------
1996 1997 1998
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Interest rate swaps................................. $17,500 $15,000 $15,000
Average pay rates assuming current market
conditions......................................... 5.86% 5.70% 5.73%
Average fixed rate received......................... 5.14% 5.36% 5.67%
</TABLE>
The variable interest rates to be paid by the Company are reset on various
predetermined dates which range from November 1994 to March 1998 and are based
upon the London Interbank Offered Rate (LIBOR).
The termination of existing interest rate swap agreements as of September 30,
1994 would result in a loss of approximately $2 million. During 1993, the
Company terminated certain other interest rate swap agreements resulting in
deferred gains of $1.4 million at September 30 1994, which will be recognized
as a reduction of interest expense over the remaining portion of the original
swap periods which range from 1996 to 1997.
Effective as of September 30, 1994, the Company executed amendments to the
Credit Agreement dated as of May 10, 1993 and the Note Purchase Agreement dated
January 3, 1991. These amendments, which are included as Exhibits 4(a) and 4(b)
to the Company's Quarterly Report on Form
F-26
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1994
10-Q for the quarter ended September 30, 1994, establish new financial
covenants which became necessary due to decreased refining margins in 1994, and
the write-down of the refinery equipment as discussed in the Results of
Operations section of Management's Discussion and Analysis of Financial
Condition and Results of Operations. In addition, subject to certain
conditions, the amendment to the Credit Agreement increases the limit of
additional indebtedness which can be incurred by the Company in the form of
notes in an aggregate principal amount not exceeding $125.0 million.
At September 30, 1994, the Company was in compliance with all amended
covenants and provisions of the Credit and Note Purchase Agreements. Meeting
the covenants imposed by the Credit and Note Purchase Agreements is dependent,
among other things, upon the level of future earnings and the rate of capital
spending. The Company reasonably expects to continue to be in compliance with
the covenants imposed by the Credit and Note Purchase Agreements over the next
twelve months.
NOTE D--CRUDE OIL AND REFINED PRODUCT HEDGING ACTIVITIES
The net deferred loss from hedging strategies at September 30, 1994 was $.2
million. Included in these hedging strategies are contracts maturing from
October 1994 through January 1995. The effect of these contracts was
effectively to hedge approximately 31% of its crude requirements, and
approximately 22% of its refined products, for the aforementioned period, at
current related market prices. The Company is exposed to credit risk to the
extent of counterparty non-performance on forward contracts. Management
monitors this credit risk by evaluating counterparties prior to and during
their contractual obligation. Management considers non-performance credit risk
to be remote.
NOTE E--LONG-TERM INCENTIVE PLAN
At the Annual Meeting held April 24, 1994, stockholders approved the 1994
Long-Term Incentive Plan (Plan). Under the Plan, the Company may distribute to
selected employees restricted shares of the Company's Class B Common Stock and
options to purchase Class B Common Stock. Up to 1.1 million shares of Class B
Common Stock may be distributed under the Plan over a five year period. During
the second quarter of 1994, the Company acquired 135,000 shares of Class B
Common Stock at a cost of $2,734,000 which could be required for use in
connection with the awards of stock and options under the Plan during the first
year. The balance sheet caption "Unearned restricted stock" is charged for the
market value of restricted shares issued, and is shown as a reduction of
stockholders' equity.
NOTE F--CALCULATION OF NET (LOSS) PER COMMON SHARE
Net (loss) per common share for the three and nine months ended September 30,
1994 is based upon the number of common shares outstanding of 9,802,198. Net
(loss) per common share for the three and nine months ended September 30, 1993
is based upon the number of common shares outstanding of 9,832,598.
NOTE G--LITIGATION AND CONTINGENCIES
Like other petroleum refiners and marketers, the Company's operations are
subject to extensive and rapidly changing federal and state environmental
regulations governing air emissions, waste water discharges, and solid and
hazardous waste management activities. The Company's policy is to accrue
environmental and clean-up related costs of a non-capital nature when it is
both probable that a liability has been incurred and that the amount can be
reasonably estimated. While it is often extremely difficult to reasonably
quantify future environmental related expenditures, the Company anticipates
that a substantial capital investment will be required over the next several
years to comply with existing
F-27
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CROWN CENTRAL PETROLEUM CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1994
regulations. The Company had recorded a liability of approximately $16.3
million as of September 30, 1994 relative to the estimated costs of a non-
capital nature related to compliance with environmental regulations. This
liability is anticipated to be expended over the next five years and is
included in the balance sheet as a noncurrent liability. No amounts have been
accrued as receivables for potential reimbursement or recoveries to offset this
liability. Included in costs and operating expenses in the statements of
operations for the nine months ended September 30, 1994 and 1993 were costs
related to environmental remediation in the amount of $2.4 million and $3.5
million, respectively.
Environmental liabilities are subject to considerable uncertainties which
affect the Company's ability to estimate its ultimate cost of remediation
efforts. These uncertainties include the exact nature and extent of the
contamination at each site, the extent of required cleanup efforts, varying
costs of alternative remediation strategies, changes in environmental
remediation requirements, the number and strength of other potentially
responsible parties at multi-party sites, and the identification of new
environmental sites. It is possible that the ultimate cost, which cannot be
determined at this time, could exceed the Company's recorded liability. As a
result, charges to income for environmental liabilities could have a material
effect on results of operations in a particular quarter or year as assessments
and remediation efforts proceed or as new claims arise. However, management is
not aware of any matters which would be expected to have a material adverse
effect on the Company.
As disclosed in Note G of Notes to Consolidated Financial Statements in the
Annual Report on Form 10-K for the fiscal year ended December 31, 1993, the
Company's federal income tax returns for the years 1988 and 1989 are currently
being examined by the Internal Revenue Service. In conjunction with this
examination, certain Notices of Proposed Adjustments have been received
recently. The Company is currently evaluating these matters, but while an
estimate cannot be determined at this time, the Company does not believe that
the ultimate resolution of these matters will have a material adverse effect on
the Company. There have been no other material changes in the status of
contingencies as discussed in Note G.
F-28
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
THE NOTES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Investment Considerations................................................. 9
The Company............................................................... 12
Use of Proceeds........................................................... 12
Capitalization............................................................ 13
Selected Financial and Other Data......................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 25
Management................................................................ 43
Principal Stockholders.................................................... 48
Description of Other Indebtedness......................................... 49
Description of the Notes.................................................. 50
Underwriting.............................................................. 76
Legal Matters............................................................. 77
Experts................................................................... 77
Available Information..................................................... 77
Incorporation of Certain Documents by Reference........................... 78
Glossary.................................................................. 79
Index to Financial Statements............................................. F-1
</TABLE>
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$125,000,000
[LOGO OF CROWN CENTRAL PETROLEUM CORPORATION]
CROWN CENTRAL
PETROLEUM CORPORATION
10 7/8% SENIOR NOTES DUE 2005
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PROSPECTUS
-------------------
CHASE SECURITIES, INC.
NATIONSBANC CAPITAL MARKETS, INC.
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