AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1994
REGISTRATION NO. 33-72354
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PETROLEUM HEAT AND POWER CO., INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
MINNESOTA 5983 06-1183025
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
(203) 325-5400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
IRIK P. SEVIN,
PRESIDENT
PETROLEUM HEAT AND POWER CO., INC.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
(203) 325-5400
(Name and address, including zip code and telephone number,
including area code of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN SHAPIRO, ESQ. BETH R. NECKMAN, ESQ.
PHILLIPS, NIZER, BENJAMIN, KRIM & BALLON LATHAM & WATKINS
31 W. 52ND STREET 885 THIRD AVENUE
NEW YORK, NEW YORK 10019-6167 NEW YORK, NEW YORK 10022-4802
(212) 977-9700 (212) 906-1200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER DEBENTURE(1) PRICE(1) REGISTRATION FEE
% Subordinated Debentures Due
2006......................... $75,000,000 100% $75,000,000 $25,863(2)
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
CROSS REFERENCE SHEET
PURSUANT TO S-K, ITEM 501(B)
<TABLE>
<S> <C> <C>
ITEM OF FORM S-2 PROSPECTUS LOCATION
------------------------------------------------------ ------------------------------------------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus........................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors, Ratio of Earnings
to Fixed Charges...................................... Prospectus Summary; Risk Factors; Selected Financial
and Other Data
4. Use of Proceeds....................................... Use of Proceeds
5. Determination of Offering Price....................... Underwriting
6. Dilution.............................................. Inapplicable
7. Selling Security Holders.............................. Inapplicable
8. Plan of Distribution.................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered............ Description of Debentures
10. Interests of Named Experts and Counsel................ Legal Matters; Experts
11. Information with Respect to the Registrant
(b)(1) Description of Business...................... Prospectus Summary; The Company; Business
(b)(2) Financial Statements......................... Consolidated Financial Statements of Petroleum Heat
and Power Co., Inc. and Subsidiaries
(b)(3) Industry Information......................... Business
(b)(4) Dividends and Related Stockholder Matters.... Inapplicable
(b)(5) Selected Financial Data...................... Selected Financial and Other Data
(b)(6) Supplementary Financial
Information................................. Consolidated Financial Statements of Petroleum Heat
and Power Co., Inc. and Subsidiaries
(b)(7) Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... Management's Discussion and Analysis of Results of
Operations and Financial Condition
(b)(8) Disagreements with Accountants............... Inapplicable
12. Incorporation of Certain Information by Reference..... Incorporation of Documents by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act
Liabilities......................................... Inapplicable
</TABLE>
PAGE 1
SUBJECT TO COMPLETION, DATED JANUARY 12, 1994 PROSPECTUS , 1994 $75,000,000*
PETROLEUM HEAT AND POWER CO., INC. % SUBORDINATED DEBENTURES DUE 2006 The
% Subordinated Debentures due 2006 (the "Debentures") are being offered
(the "Offering") by Petroleum Heat and Power Co., Inc. (the "Company").
Interest on the Debentures is payable semi-annually on and of
each year, commencing , 1994. The Debentures are not redeemable
prior to , 1999 . Thereafter, the Debentures are redeem-able, in
whole or in part, at the option of the Company, at the redemption prices set
forth herein, together with accrued and unpaid interest to the date of
redemption. In addition, at any time prior to , 1997, the Company
may redeem Debentures with the net proceeds of a public offering of Capital
Stock (as defined) of the Company at a redemption price of % of the
principal amount thereof, together with accrued and unpaid interest to the
date of redemption, provided that at least $50.0 million of the Debentures
remain outstanding immediately following any such redemption. Upon a Change of
Control (as defined), the Company will be obligated to make an offer to
purchase all outstanding Debentures at a price of 101% of the principal amount
thereof, together with accrued and unpaid interest to the date of purchase.
See "Description of Debentures." The Debentures will be general unsecured
obligations of the Company, subordinated in right of payment to all existing
and future Senior Debt (as defined) of the Company. As of September 30, 1993,
after giving pro forma effect to the Offering, the use of proceeds therefrom*
and the Subordinated Debt Amendments (as defined), Senior Debt of the Company*
would have been approximately $42.7 million. In addition, the Debentures will*
be effectively subordinated to all indebtedness and other liabilities and
commitments of the Company's subsidiaries which, as of September 30, 1993,
totalled approximately $9.2 million, consisting primarily of trade payables.
The Debentures will rank pari passu with other subordinated indebtedness of*
the Company, which, after giving pro forma effect to the Subordinated Debt*
Amendments, would have aggregated approximately $92.6 million as of September*
30, 1993. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD*
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES OFFERED HEREBY.
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. PRICE TO THE PUBLIC(1) Per Debenture.%% Total.$$
(1) Plus accrued interest, if any, from the date of issuance. (2) See
"Underwriting" for indemnification arrangements with the Underwriters.
(3) Before deducting expenses payable by the Company estimated at $ .
The Debentures are offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters, and subject to
various prior conditions, including their right to reject any order in whole
or part. It is expected that delivery of the Debentures will be made in New
York on or about , 1994. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION KIDDER, PEABODY & CO. INCORPORATED CHEMICAL SECURITIES
INC. MORGAN SCHIFF & CO., INC.
PAGE 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
WITH RESPECT TO SALES OF THE % SUBORDINATED DEBENTURES DUE 2006 BEING
OFFERED HEREBY TO CALIFORNIA RESIDENTS, SUCH DEBENTURES MAY BE SOLD ONLY TO THE
FOLLOWING INDIVIDUALS: (1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF
REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (2) BANKS, SAVINGS
AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT
COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND
PROFIT SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE
CORPORATION'S OR OTHER ENTITY'S AFFILIATES WHICH ARE UNDER COMMON CONTROL, HAVE
A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY
PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT
NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND
SUBSIDIARIES OF THE FOREGOING OR (3) PERSONS WHO HAVE EITHER: (I) A NET WORTH
(EXCLUSIVE OF HOME, HOME FURNISHINGS AND AUTOMOBILES) OF AT LEAST $250,000 AND
AN ANNUAL GROSS INCOME OF AT LEAST $75,000, OR (II) IRRESPECTIVE OF ANNUAL GROSS
INCOME, A NET WORTH OF AT LEAST $500,000 (EXCLUSIVE OF HOME, HOME FURNISHINGS
AND AUTOMOBILES).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning the Company can be inspected without charge at the Public Reference
Room maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. In addition, upon request, such reports, proxy
statements and other information will be made available for inspection and
copying at the Commission's public reference facilities at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be obtained at
prescribed rates upon request from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
reports, proxy statements and other information concerning the Company may be
inspected and copied at the offices of the American Stock Exchange, 20 Broad
Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-2 (the "Registration Statement") under the Securities Act of 1933 (the
"Securities Act") with respect to the Debentures. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in the
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company will furnish to holders of the Debentures annual reports
containing audited financial statements and quarterly reports containing
unaudited summary financial information for the first three quarters of each
fiscal year.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus and by the information and financial statements
appearing in the documents incorporated by reference herein. See "Risk Factors"
for a discussion of certain factors that should be considered by prospective
purchasers of the Debentures offered hereby. Unless the context otherwise
requires, all references in this Prospectus to the "Company" and "Petro" include
Petroleum Heat and Power Co., Inc. and its subsidiaries.
THE COMPANY
Petroleum Heat and Power Co., Inc. (the "Company" or "Petro") is the
largest retail distributor of home heating oil (#2 fuel oil) in the United
States, with total sales of $548.9 million for the twelve months ended September
30, 1993. Petro served approximately 421,000 customers in 26 markets in the
Northeast as of September 30, 1993, including the metropolitan areas of Boston,
New York City, Baltimore, Providence and Washington, D.C. Despite its leading
market position, Petro estimates that its customer base represents approximately
5% of the residential home heating oil customers in the Northeast. For the
twelve months ended September 30, 1993, the Company sold approximately 449.7
million gallons of home heating oil and propane.
The home heating oil business has been relatively stable principally due to
the following fundamental characteristics: (i) home heating oil demand has been
relatively unaffected by general economic conditions due to the
non-discretionary nature of home heating oil purchases, (ii) homeowners have
tended to remain with their traditional distributors and (iii) customer loss to
other energy sources, primarily natural gas, has been low due to the high cost
of conversion. While over short periods of time weather has caused some
variability in financial and operating results, the Company has typically been
able to adjust gross profit margins and operating expenses to partially offset
lower volumes associated with warmer winter temperatures. The Company
historically has been able to pass through wholesale price increases to its
customers and has minimized its exposure to oil price fluctuations by
maintaining an average of no more than a ten day inventory of home heating oil.
In addition, the Company has minimized its exposure to environmental liability
by storing its oil in third party-owned facilities.
Management, which assumed control of the Company in 1979, assesses the
Company's financial performance by, among other measures, operating income
before depreciation and amortization and the amount of non-cash expenses
associated with key employees' deferred compensation plans ("EBITDA") and
consolidated net income (loss) plus depreciation and amortization and the amount
of non-cash expenses associated with key employees' deferred compensation plans,
less accrued preferred stock dividends, excluding net income (loss) derived from
investments accounted for by the equity method, except to the extent of any cash
dividends received by the Company ("NIDA"). Although EBITDA and NIDA should not
be considered a substitute for net income (loss) as an indicator of the
Company's operating performance and NIDA should not be considered a measure of
the Company's liquidity, they are the principal bases upon which the Company
assesses its financial performance. EBITDA increased from $3.6 million in 1980
to $51.3 million in 1992, a compound annual growth rate of 24.8%. During this
same period, NIDA increased from $2.9 million in 1980 to $27.7 million in 1992,
a compound annual growth rate of 20.7%. The volume of home heating oil sold by
the Company has increased from 59.4 million gallons in 1980 to 423.1 million
gallons in 1992, a compound annual growth rate of 17.8%. The growth in EBITDA,
NIDA and volume was primarily the result of the Company's purchase of 135 home
heating oil distributors during this period and its ability to rapidly integrate
these acquisitions while achieving significant economies of scale. On a pro
forma basis, adjusted to give effect as of January 1, 1992 to, among other
things, the nine acquisitions completed during 1992 and the nine acquisitions
completed during the nine months ended September 30, 1993, EBITDA and NIDA would
have been $63.2 million and $36.4 million, respectively, for the year ended
December 31, 1992. On a
3
<PAGE>
pro forma basis, adjusted to give effect as of January 1, 1992 to, among other
things, the nine acquisitions completed during the nine months ended September
30, 1993, EBITDA and NIDA would have been $28.4 million and $8.7 million,
respectively, for the nine months ended September 30, 1993. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Overview" and Pro Forma Financial Statements included elsewhere in this
Prospectus.
As a result of abnormally warm winter weather in 1990, the Company's EBITDA
and volume of home heating oil sold decreased by 34.4% and 11.1%, respectively,
as compared to 1989. Although 1991 was also warmer than normal and home heating
oil volume declined 3.4% from 1990, EBITDA increased by 52.2% from 1990
principally due to improvement in gross profit margins and lower operating
expenses. In 1992, the weather returned to more normal levels, and EBITDA
increased by 28.2% to $51.3 million and the volume of home heating oil sold
increased by 9.7%. For the years ended December 31, 1990, 1991 and 1992, the
Company incurred net losses of $29.3 million, $16.6 million and $4.4 million,
respectively. For the nine months ended September 30, 1992 and 1993, the Company
incurred net losses of $9.5 million and $17.4 million, respectively. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." At September 30, 1993, the Company had outstanding an aggregate of
$185.4 million of long-term debt (including current portion), although $20.0
million had been deposited at that time into a cash collateral account for the
repayment of a portion of such debt.
The home heating oil industry is large, highly fragmented and undergoing
consolidation. According to United States Bureau of Census data, there were
approximately 3,800 independently-owned and operated home heating oil
distributors in the Northeast at the end of 1990. The Company's strategy, as the
principal consolidator in the industry, is to grow through the acquisition and
integration of distributors in new and existing markets and to emphasize
customer retention and internal account growth through a variety of regionally
sensitive marketing and customer service initiatives. The Company is
continuously evaluating acquisition opportunities, and believes that the warm
winter weather in 1990 and 1991 has enhanced its potential to make acquisitions.
The Company realizes significant economies of scale from the centralization of
accounting, data processing, fuel oil purchasing, credit and marketing
functions. It operates under 86 trade names in 30 branch offices that maintain
autonomy over oil delivery, heating equipment service and customer relations.
RECENT DEVELOPMENTS
Based upon preliminary unaudited results for the year ended December 31,
1993, Petro expects to report total sales of approximately $538.5 million with a
volume of home heating oil and propane sold of approximately 443.5 million
gallons. EBITDA and NIDA are expected to range from $47.7 million to $48.7
million and $22.5 million to $23.5 million, respectively. In addition, the
Company anticipates a net loss ranging from $8.0 million to $9.0 million.
In December 1993, the Company acquired an approximate 29.5% equity interest
in Star Gas Corporation ("Star Gas") for $16.0 million in cash. Certain other
investors invested a total of $49.0 million of additional equity in Star Gas, of
which $11.0 million was in the form of cash and $38.0 million resulted from the
conversion of long-term debt and preferred stock into equity of Star Gas. In
connection with this investment, the Company entered into a management agreement
with Star Gas and acquired options to purchase all of the equity securities of
the other investors.
Star Gas is the tenth largest distributor of propane in the United States,
with sales of $154.2 million, representing over 169 million gallons of propane,
for the year ended September 30, 1993. Star Gas served approximately 200,000
customers in the midwestern, northeastern and southeastern regions of the United
States as of September 30, 1993. See "Risk Factors--Investment in Star Gas" and
"Business--Investment in Star Gas."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered..................... $75.0 million principal amount of % Subordinated Debentures due 2006
(the "Debentures").
Maturity Date.......................... , 2006.
Interest Payment Dates................. and of each year, commencing , 1994.
Optional Redemption.................... The Debentures will be redeemable at the option of the Company, in whole
or in part, at any time on or after , 1999, at the
redemption prices set forth herein, plus accrued and unpaid interest to
the date of redemption. In addition, at any time prior to , 1997, the
Company may redeem Debentures with the net proceeds of a public offering
of Capital Stock of the Company at a redemption price of % of
principal amount, together with accrued and unpaid interest to the date
of redemption, provided that at least $50.0 million of the Debentures
remain outstanding immediately following any such redemption.
Change of Control...................... Upon a Change of Control, the Company will be obligated to make an offer
to purchase all outstanding Debentures at a price of 101% of the
principal amount thereof, together with accrued and unpaid interest to
the date of purchase.
Ranking................................ The Debentures will be subordinated in right of payment to all existing
and future Senior Debt of the Company. As of September 30, 1993, after
giving pro forma effect to the Offering, the use of proceeds therefrom
and the Subordinated Debt Amendments, Senior Debt of the Company would
have totalled approximately $42.7 million. In addition, the Debentures
will be effectively subordinated to all indebtedness and other
liabilities and commitments of the Company's subsidiaries which, as of
September 30, 1993, totalled approximately $9.2 million, consisting
primarily of trade payables. The Debentures will rank pari passu with
other subordinated indebtedness of the Company, which after giving pro
forma effect to the Subordinated Debt Amendments would have aggregated
approximately $92.6 million as of September 30, 1993.
Certain Covenants...................... The Indenture relating to the Debentures (the "Indenture") will
restrict, among other things, dividends and certain other distributions,
the purchase, redemption or retirement of Capital Stock or indebtedness
that is junior to the Debentures, the incurrence of certain additional
indebtedness, the creation of certain liens, certain transactions with
Affiliates (as defined) and certain mergers and consolidations.
Use of Proceeds........................ The net proceeds from the sale of the Debentures will be used (i) to
repurchase $50 million in aggregate principal amount of the Company's
senior 9% Notes due June 1, 1994 (the "Maxwhale Notes") at a purchase
price (assuming a repurchase date of January 31, 1994) equal to 101.33%
of the principal amount thereof, plus accrued but unpaid interest
thereon, and (ii) for general corporate purposes, including the
Company's ongoing acquisition program. Pending application of the
balance of the proceeds for general corporate purposes, such balance
will be applied to reduce working capital borrowings. See "Use of
Proceeds."
</TABLE>
5
<PAGE>
SUMMARY DATA
(IN THOUSANDS, EXCEPT RATIOS)
The following tables present summary consolidated financial and operating
data subsequent to the assumption of control by the Company's current management
in 1979. Management's strategy is to maximize EBITDA and NIDA, rather than net
income. Although EBITDA and NIDA should not be considered a substitute for net
income (loss) as an indicator of the Company's operating performance and NIDA
should not be considered a measure of the Company's liquidity, they are included
in the following tables as they are the principal bases upon which the Company
assesses its financial performance, compensates management and establishes
dividends. In addition, certain covenants in the Company's borrowing
arrangements are tied to similar measures.
OPERATING DATA:
<TABLE>
<CAPTION>
DEPRECIATION INTEREST
GROSS AND EXPENSE, NET INCOME RATIO OF EARNINGS
YEAR ENDED DECEMBER 31, NET SALES PROFIT AMORTIZATION(1) NET (LOSS) TO FIXED CHARGES(2)
<S> <C> <C> <C> <C> <C> <C>
1980............................. $ 84,582 $ 11,938 $ 1,542 $ 4 $ 1,407 6.2x
1981............................. 125,946 17,229 1,336 (434) 1,612 7.2x
1982............................. 168,061 28,370 2,595 245 3,690 7.0x
1983............................. 159,794 33,806 3,633 375 4,723 9.3x
1984............................. 245,249 50,323 7,069 3,394 4,165 3.2x
1985............................. 283,493 59,241 11,016 5,053 1,427 1.5x
1986............................. 279,889 81,843 15,131 6,580 4,116 2.1x
1987............................. 354,508 96,444 20,782 9,212 194 1.0x
1988............................. 462,150 133,601 27,151 13,536 1,565 1.2x
1989............................. 541,521 139,343 32,093 17,915 (4,287) -- (3)
1990............................. 567,414 132,383 36,313 20,900 (29,267) -- (3)
1991............................. 523,243 144,471 35,575 20,728 (16,562) -- (3)
1992............................. 512,430 161,489 34,394 18,622 (4,389) -- (3)
TWELVE MONTHS ENDED
SEPTEMBER 30, 1993
Actual........................... 548,922 167,946 35,457 19,742 (12,225) -- (3)
Pro Forma(4)..................... 577,330 176,095 37,688 21,422 (13,335) -- (3)
</TABLE>
OTHER DATA:
<TABLE>
<CAPTION>
GALLONS OF HOME RATIO OF EBITDA
HEATING OIL AND TO INTEREST
YEAR ENDED DECEMBER 31, PROPANE SOLD EBITDA(5) NIDA(6) EXPENSE, NET(7)
<S> <C> <C> <C> <C>
1980................................................. 59,399 $ 3,581 $ 2,949 N/A
1981................................................. 72,653 4,351 2,947 N/A
1982................................................. 104,583 9,713 6,285 39.6x
1983................................................. 123,019 13,560 8,357 36.2x
1984................................................. 180,998 19,756 11,234 5.8x
1985................................................. 212,183 19,106 12,443 3.8x
1986................................................. 255,319 30,274 19,247 4.6x
1987................................................. 317,380 30,557 20,976 3.3x
1988................................................. 414,535 44,470 28,717 3.3x
1989................................................. 449,040 40,076 27,573 2.2x
1990................................................. 398,989 26,307 4,639 1.3x
1991................................................. 385,557 40,036 15,744 1.9x
1992................................................. 423,354 51,325 27,721 2.8x
TWELVE MONTHS ENDED SEPTEMBER 30, 1993
Actual............................................... 449,748 46,424 21,743 2.4x
Pro Forma(4)......................................... 478,101 51,176 24,817 2.4x
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AT SEPTEMBER 30, 1993
---------------------------
ACTUAL AS ADJUSTED(8)
<S> <C> <C>
Working capital (deficiency)......................................................... $ (7,489) $ 22,979
Total assets......................................................................... 216,904 240,571
Total long-term debt (before escrow deposit)(9)...................................... 157,819 210,319
Redeemable preferred stock (long-term portion)....................................... 20,833 20,833
Stockholders' equity (deficiency).................................................... (63,295) (64,628)
</TABLE>
- ------------------------------
(1) Depreciation and amortization includes depreciation and amortization of
plant and equipment and amortization of customer lists and deferred charges.
(2) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, net income (loss)
derived from investments accounted for by the equity method, and
extraordinary items, plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of debt discounts and the interest factor in
rental expense.
(3) Earnings were insufficient to cover fixed charges by $7.4 million, $31.1
million, $16.3 million, $4.0 million and $11.0 million for the years ended
December 31, 1989, 1990, 1991 and 1992 and the twelve months ended September
30, 1993, respectively. On a pro forma basis, earnings were insufficient to
cover fixed charges by $10.1 million for the twelve months ended September
30, 1993. However, if non-cash charges to income consisting of depreciation
and amortization and non-cash expenses associated with key employees'
deferred compensation plans were excluded, the Company's earnings would have
exceeded fixed charges by $24.7 million, $5.2 million, $19.3 million, $32.4
million, $26.7 million and $29.7 million, respectively, for such periods.
(4) The Pro Forma Operating and Other Data for the twelve months ended September
30, 1993 represent the historical data derived from the Company's financial
statements for the twelve months ended September 30, 1993, adjusted to give
effect to the following transactions as if each had occurred on October
1, 1992:
<TABLE>
<S> <C>
(a) the acquisitions by the Company of fourteen individually insignificant distributorships during the
twelve months ended September 30, 1993 (the "Twelve Month Acquisitions");
(b) the issuance in March 1993 of approximately $12.8 million of Subordinated Notes due March 1, 2000 in
exchange for an equal amount of the Company's 1991 Redeemable Preferred Stock (the "Preferred Stock
Exchange");
(c) the repurchase in May 1993 of approximately $12.4 million of 11.40% Subordinated Notes due July 1, 1993
and approximately $12.5 million of 14.275% Subordinated Notes due October 1, 1995 (the "Subordinated
Debt Repurchases");
(d) the repurchase of the Maxwhale Notes (the "Maxwhale Notes Repurchase");
(e) the $16.0 million investment in Star Gas resulting in an approximate 29.5% equity interest in Star Gas,
accounted for under the equity method (the "Star Gas Investment"), and the effect of concurrent
agreements entered into in connection with such investment;
(f) the release of the $20 million cash collateral account which partially secures the Maxwhale Notes for
use as unrestricted cash (the "Collateral Release");
(g) the issuance in April 1993 (the "10 1/8% Notes Issuance") of $50 million of 10 1/8% Subordinated Notes
due 2003 (the "10 1/8% Notes"); and
(h) the Offering; provided, however, that the pro forma data do not give effect to approximately $3.3
million of interest expense on, or the use of, approximately $33.3 million of the Debentures, the
proceeds of which are not required for acquisitions or refinancings.
The historical and pro forma net loss and the historical and pro forma NIDA for the twelve months ended September
30, 1993 include an extraordinary loss of approximately $0.9 million representing the premium paid and deferred
charges written of in connection with the Subordinated Debt Repurchases. Had the Subordinated Debt Repurchases and
the Maxwhale Notes Repurchase occurred on October 1, 1992, the pro forma extraordinary loss would have been
approximately $4.3 million. See the Pro Forma Financial Statements included elsewhere in this Prospectus.
</TABLE>
(Footnotes continued on following page)
7
<PAGE>
(Footnotes continued from preceding page)
(5) EBITDA is defined as operating income before depreciation and amortization
and non-cash expenses associated with key employees' deferred compensation
plans.
(6) NIDA is defined as the sum of consolidated net income (loss), plus
depreciation and amortization of plant and equipment and amortization of
customer lists and deferred charges, plus non-cash expenses associated with
key employees' deferred compensation plans, less dividends accrued on
preferred stock, excluding net income (loss) derived from investments
accounted for by the equity method, except to the extent of any cash
dividends received by the Company.
(7) The ratio of EBITDA to interest expense, net is calculated by dividing
EBITDA by interest expense, net for such period. Pursuant to the Indenture,
the Company may incur additional Funded Debt (as defined) only if its ratio
of EBITDA to interest expense, net exceeds 2.0 to 1.0, subject to certain
exceptions. See "Description of Debentures--Certain Covenants--Limitation on
Funded Debt."
(8) As adjusted to give effect to the Offering, the Maxwhale Notes Repurchase,
the Star Gas Investment and the Subordinated Debt Amendments; provided,
however, that the as adjusted data includes approximately $21.0 million of
working capital and principal amount of the Debentures, the proceeds of
which are not required for the Maxwhale Notes Repurchase.
(9) The Company has escrowed certain amounts to partially secure the repayment
of the Maxwhale Notes. The amount on deposit was $20.0 million at September
30, 1993, and $0 at September 30, 1993, as adjusted.
FINANCIAL SUMMARY
From 1980 through 1989, as indicated above, the Company's volume and EBITDA
increased at compound annual growth rates of 25.2% and 30.8%, respectively. The
growth in EBITDA and volume was interrupted in 1990 and 1991 by the warmest and
third warmest years of this century in the Northeast. The weather affected
financial and operating results, which, in turn, constrained the Company's
access to capital and limited its acquisition program.
In order to partially offset the impact of the warm winter weather, the
Company adjusted its operating strategy in 1991 and 1992. This adjustment
resulted in the improvement of gross profit margins, the consolidation of 37 of
its branch operations into 28 and the reduction of 12% of its personnel by March
31, 1992 from December 31, 1990. As a result, while volume decreased slightly in
1991 compared to 1990 due to the elimination of a number of low margin
commercial and industrial accounts, EBITDA and NIDA increased 52.2% and 239.4%,
respectively, and the Company's net loss was reduced from $29.3 million in 1990
to $16.6 million in 1991. For the year ended December 31, 1992, EBITDA and NIDA
also increased 28.2% and 76.1%, respectively, over the prior year and the
Company's net loss decreased from $16.6 million in 1991 to $4.4 million in 1992,
as a result of a return to more normal temperatures and the Company's cost
saving programs.
For the twelve months ended September 30, 1993, volume increased 6.2%
compared to the twelve months ended December 31, 1992 due primarily to the
Company's acquisition program. EBITDA and NIDA declined, however, due to lower
than expected home heating oil gross profit margins in the first quarter of
1993, which was reversed in the second and third quarters, and a planned
increase in heating equipment repair and maintenance expenses and marketing
costs designed to improve the Company's customer retention rate. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Although the Company recorded net income from 1980 through 1988, since 1989
the Company has reported net losses in each year and expects to report a net
loss for 1993.
8
<PAGE>
THE COMPANY
The Company is the largest retail distributor of home heating oil in the
United States, with total sales of $548.9 million for the twelve months ended
September 30, 1993. As of September 30, 1993, Petro served approximately 421,000
customers in 26 markets in the Northeast, including the metropolitan areas of
Boston, New York City, Baltimore, Providence and Washington, D.C. For the twelve
months ended September 30, 1993, the Company sold approximately 449.7 million
gallons of home heating oil and propane.
In addition to sales of home heating oil and propane, the Company installs
and repairs heating equipment and, to a limited extent, markets other petroleum
products to commercial customers, including #4 fuel oil, #6 fuel oil, diesel
fuel, kerosene and gasoline.
The Company is a Minnesota corporation. Its principal executive offices are
located at 2187 Atlantic Street, Stamford, Connecticut 06902 and its telephone
number is (203) 325-5400. The Company operates directly and through its
subsidiaries in nine states and the District of Columbia.
RISK FACTORS
Investors should carefully consider the factors set forth below as well as
the other information set forth in this Prospectus before purchasing the
Debentures offered hereby.
LEVERAGE; ABILITY TO SERVICE DEBT
At September 30, 1993 (after giving effect to the Offering and the
application of the net proceeds therefrom as described under "Use of Proceeds"),
the Company would have had outstanding an aggregate of $210.4 million of
long-term debt (including the current portion) and stockholders' deficiency of
$64.6 million. Of such outstanding obligations, there are no maturities or
sinking fund requirements for 1994 and 1995 and the 1996 requirement is $2.1
million. Approximately $4.2 million of the Company's 1989 Cumulative Redeemable
Exchangeable Preferred Stock (the "Redeemable Preferred Stock") is subject to
mandatory redemption in each of 1994, 1995 and 1996. Prior to redemption, the
Company has the right to exchange shares of Redeemable Preferred Stock, in whole
or in part, for subordinated notes due August 1, 1999 (the "1999 Notes"),
subject to meeting certain debt incurrence tests. See "Capitalization." In
addition, the Company may incur further indebtedness from time to time to
finance expansion, either through capital expenditures or acquisitions, or for
other general corporate purposes. The degree to which the Company is leveraged
could have important consequences to holders of the Debentures, including the
following: (i) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of interest, principal and other repayment
obligations, thereby reducing the funds available to the Company for its
operations and future acquisitions, (ii) the Company's ability to obtain
additional financing in the future may be impeded, and (iii) the Company's
degree of leverage may make it vulnerable to a downturn in its business or of
the economy generally. The Company believes that it will be able to meet its
obligations as they come due and will not be required to refinance or
restructure its debt obligations, although it may elect to do so.
The Company's earnings were insufficient to cover fixed charges by $7.4
million, $31.1 million, $16.3 million, $4.0 million and $11.0 million for the
years ended December 31, 1989, 1990, 1991 and 1992 and the twelve months ended
September 30, 1993, respectively. On a pro forma basis, earnings were
insufficient to cover fixed charges by $10.1 million for the twelve months ended
September 30, 1993. However, if non-cash charges to income consisting of
depreciation and amortization and non-cash expenses associated with key
employees' deferred compensation plans were excluded, the Company's earnings
would have exceeded fixed charges by $24.7 million, $5.2 million, $19.3 million,
$32.4 million, $26.7 million and $29.7 million, respectively, for such periods.
See "--Recent Net Losses."
9
<PAGE>
SUBORDINATION
The Debentures will be subordinated to the prior payment of all existing
and future Senior Debt of the Company. In the event of bankruptcy, liquidation
or reorganization of the Company, the assets of the Company will be available to
pay obligations on the Debentures only after all Senior Debt has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Debentures then outstanding. See "Description of
Debentures--Ranking."
SENSITIVITY TO WEATHER; SEASONALITY
Because the Company's business is directly related to heating, weather
patterns during the winter months can have a material effect on the Company's
sales of heating oil. Although temperature levels for the heating season have
been relatively stable over time, variations can occur from time to time, and
warmer than normal winter weather will adversely affect the Company's results.
1990 was the warmest year of this century and, as a result, volume declined for
the first time since 1980. 1991 was the third warmest year of this century.
Average daily temperatures in the Northeast for the year ended December 31, 1992
and for the nine months ended September 30, 1993 returned to more normal levels.
The seasonal nature of the Company's business results in the sale by the
Company of approximately 50% of its volume in the first quarter and 30% in the
fourth quarter of each year. The Company generally realizes positive NIDA in
both of these quarters and negative NIDA during the warmer quarters ending June
and September.
COMPETITION FROM ALTERNATE ENERGY SOURCES
In all of its markets, the Company competes for customers with suppliers of
alternate energy products, principally natural gas and electricity. Over the
past five years, the conversion by the Company's customers from fuel oil to
other sources, primarily natural gas, has averaged approximately 1% per annum of
the homes served by the Company. This rate of conversion is largely a function
of the cost of replacing an oil fired heating system with one that uses natural
gas and the relative retail prices of fuel oil and natural gas. During 1980 and
1981, when there were government controls on the price of natural gas, and for a
short time in 1990 and 1991, during the Persian Gulf crisis, the Company's
customers converted to gas at approximately a 2% annual rate as oil prices
increased relative to the price of natural gas. See "Business--Fundamental
Characteristics." However, beginning in the spring of 1991, gas conversions by
the Company's customers returned to their approximate 1% historical annual rate
as the prices for the two products returned to parity. As fuel oil is a less
expensive heating source than electricity, the Company believes that an
insignificant number of its customers switch to electric heat from oil heat. See
"Business--Fundamental Characteristics."
COMPETITION FOR NEW RETAIL CUSTOMERS
The Company's business is highly competitive. The Company competes with
fuel oil distributors offering a broad range of services and prices, from full
service distributors, like the Company, to those offering delivery only.
Competition with other companies in the fuel oil industry is based primarily on
customer service and price. Long-standing customer relationships are typical in
the retail home heating oil industry. Many companies in the industry, including
Petro, deliver home heating oil to their customers based upon weather conditions
and historical consumption patterns without the customer having to make an
affirmative purchase decision each time oil is needed. In addition, most
companies, including Petro, provide home heating equipment repair service on a
24-hour per day basis, which tends to build customer loyalty. As a result, the
Company may experience difficulty in acquiring new retail customers due to
existing relationships between potential customers and other home heating oil
distributors. In addition, in certain instances, homeowners have formed buying
cooperatives which seek to purchase fuel oil from distributors at a price lower
than individual customers are otherwise able to obtain. To date, these buying
groups have not had a material impact on the Company's operations.
10
<PAGE>
GROWTH DEPENDENT UPON ACQUISITIONS
In recent years, home heating oil demand has been affected by conservation
efforts and conversions to natural gas. In addition, as the number of new homes
that use oil heat has not been significant, there has been virtually no increase
in the customer base due to housing starts. As a result, the size of the home
heating oil market is likely to be stagnant and may even decline in the future.
The Company's growth in the past decade has been directly tied to the success of
its acquisition program, and its future growth will depend on its ability to
continue to identify and successfully consummate acquisitions. There is no
assurance that the Company will be able to continue to identify new acquisitions
or that it will have the access to capital necessary to consummate such
acquisitions. As occurred in 1990 and 1991, warm winter weather can adversely
affect the Company's operating and financial results which, in turn, may limit
the Company's access to capital and its acquisition activities. In addition, the
Company loses approximately 90% of customers acquired in an acquisition within
the first six years following an acquisition; however, approximately 40% of the
Company's customer losses are as a result of homeowners moving out, in which
cases the Company acquires as new customers approximately 70% of the homeowners
moving in. The Company's actual net loss of customers has averaged approximately
3% per annum over the past five years, as the loss of such purchased customers
has been partially offset by new customers obtained through internal marketing.
However, there can be no assurance that the Company will be able to maintain or
reduce this average customer attrition rate in the future.
RECENT NET LOSSES
The Company incurred net losses in 1989, 1990, 1991, 1992, the twelve
months ended September 30, 1993 and for the nine months ended September 31, 1993
of $4.3 million, $29.3 million, $16.6 million, $4.4 million, $12.2 million and
$17.4 million, respectively, primarily as a result of the amortization expense
associated with the numerous acquisitions consummated since 1980. In connection
with each acquisition, the Company amortizes for book purposes 90% of the amount
allocated to customer lists over a six year period and the balance over a 25
year period. In addition, the Company depreciates fixed assets on average over
an eight year period. The aggregate amortization of customer lists and deferred
charges and depreciation and amortization of property and equipment in 1989,
1990, 1991, 1992, the twelve months ended September 30, 1993 and for the nine
months ended September 30, 1993 amounted to $32.1 million, $36.3 million, $35.6
million, $34.4 million, $35.5 million and $26.7 million, respectively.
Management's strategy is to maximize EBITDA and NIDA, rather than net income,
and net losses may continue in the near term. Continued net losses could
adversely affect the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
SUPPLY OF HOME HEATING OIL
Home heating oil is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Company purchases home heating oil from a variety of suppliers pursuant to
supply contracts or on the spot market. While there can be no assurance that
there will be no foreign crude oil disruptions which may adversely affect the
Company's business, past disruptions have affected the price but not the
availability of home heating oil to the Company. The Company historically has
been able to pass through wholesale price increases to its customers and has
minimized its exposure to oil price fluctuations by maintaining an average of no
more than a ten day inventory. However, there can be no assurance that the
Company will be able to pass on such increases in the future.
CONSERVATION AND TECHNOLOGY
The national trend toward increased conservation and technological
advances, including installation of improved insulation and the development of
more efficient furnaces and other heating devices, has caused a decline in
demand for home heating oil by retail customers. Although the Company believes
that current oil prices, which are lower than in recent periods, have resulted
in decreased incentive to conserve and that most conservation efforts have
already been implemented, the Company
11
<PAGE>
cannot predict the impact of future conservation measures. The Company is also
unable to predict the effect that any technological advances in heating,
conservation, energy generation or other devices might have on the Company's
operations.
INVESTMENT IN STAR GAS
In December 1993, the Company acquired an approximate 29.5% equity interest
in Star Gas for $16.0 million in cash. Certain other investors invested a total
of $49.0 million of additional equity, of which $11.0 million was in the form of
cash and $38.0 million resulted from the conversion of long-term debt and
preferred stock into equity of Star Gas (the "Star Gas Recapitalization"). After
giving effect to the Star Gas Recapitalization, on a pro forma basis, as of
September 30, 1993, Star Gas would have had total long-term debt of $70.0
million and stockholders' equity of $51.1 million. In connection with this
investment, the Company entered into a management agreement with Star Gas and
acquired options to purchase all of the equity securities of the other
investors.
The propane industry is highly competitive. For the fiscal years ended
September 30, 1991, 1992 and 1993, Star Gas had net losses of $5.3 million, $7.3
million and $47.1 million (which includes an impairment of long-lived assets
aggregating $33.0 million) and EBITDA of $24.7 million, $22.2 million and $18.6
million, respectively. Continued net losses could adversely affect the Company's
investment in Star Gas. For the fiscal years ended September 30, 1991, 1992 and
1993, Star Gas had a ratio of EBITDA to interest expense of 1.3 to 1.0, 1.3 to
1.0 and 1.1 to 1.0, respectively. After giving effect to the Star Gas
Recapitalization, Star Gas' ratio of EBITDA to interest expense on a pro forma
basis would have been 2.3 to 1.0 for the fiscal year ended September 30, 1993.
See "Business--Investment in Star Gas."
DEPENDENCE ON KEY PERSON
The Company is dependent on the continued services of its President, Irik
P. Sevin, principally in its acquisition program. If Mr. Sevin were no longer to
serve as an employee of the Company, the Company's prospects for future growth
could be adversely affected. The Company does not maintain key man life
insurance with respect to Mr. Sevin.
CONTROL BY PRINCIPAL STOCKHOLDERS
The directors of the Company and certain affiliated parties own 100% of the
Class C Common Stock of the Company. Each share of Class A Common Stock is
entitled to one vote per share and each share of Class C Common Stock is
entitled to ten votes per share. The shares of Class C Common Stock owned by the
directors and such affiliated parties represent, in the aggregate, 57.3% of the
voting power of all of the outstanding shares of Common Stock. In addition, the
directors own 34.5% of the Class A Common Stock of the Company. Consequently,
the directors have the ability to control the business and affairs of the
Company by virtue of their ability to elect a majority of the Company's board of
directors and by virtue of their voting power with respect to other actions
requiring stockholder approval.
ABSENCE OF PUBLIC MARKET
There is no existing market for the Debentures and there can be no
assurance as to the liquidity of any markets that may develop for the
Debentures, the ability of holders of the Debentures to sell their Debentures or
the price at which holders will be able to sell their Debentures. If such a
market were to develop, the Debentures could trade at prices that may be higher
or lower than the initial offering price thereof depending on many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Donaldson, Lufkin & Jenrette Securities
Corporation, Kidder, Peabody & Co. Incorporated and Chemical Securities Inc.
have advised the Company that they currently intend to make a market in the
Debentures; however, they are not obligated to do so and any market making may
be discontinued at any time without notice. The Company does not intend to apply
for listing of the Debentures on any securities exchange.
12
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Debentures are estimated to be
approximately $72.3 million. The Company intends to use approximately $50.7
million of such net proceeds to repurchase $50 million in aggregate principal
amount of Maxwhale Notes at a purchase price (assuming a repurchase date of
January 31, 1994) equal to 101.33% of the principal amount thereof, plus accrued
but unpaid interest thereon. The Maxwhale Notes bear interest at a rate of 9%
per annum and are due and payable on June 1, 1994. The Company will use the
balance of the net proceeds for general corporate purposes, including the
Company's ongoing acquisition program. While the Company regularly considers and
evaluates acquisitions as part of such acquisition program, the Company does not
have any present agreements or commitments with respect to any acquisitions at
this time. Pending application of the balance of the proceeds for general
corporate purposes, such balance will be applied to reduce working capital
borrowings.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1993 and as adjusted to give effect to the Offering, the Maxwhale
Notes Repurchase and the Subordinated Debt Amendments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1993
------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
<S> <C> <C>
Short-term obligations:
Working capital borrowings(1)........................................................ $ -- $ --
Current maturities of long-term debt................................................. 33 33
Current maturities of Maxwhale Notes(2).............................................. 27,500 --
Current maturities of Redeemable Preferred Stock(3).................................. 4,167 4,167
----------- -----------
Total short-term obligations.................................................... $ 31,700 $ 4,200
----------- -----------
----------- -----------
Long-term debt:
Maxwhale Notes(2).................................................................... $ 22,500 $ --
Other long-term debt................................................................. 55 55
Senior notes(4)...................................................................... -- 42,632
% Subordinated Debentures due 2006................................................ -- 75,000
Subordinated notes payable........................................................... 135,264 92,632
----------- -----------
Total long-term debt............................................................ 157,819 210,319
----------- -----------
Redeemable Preferred Stock:
Cumulative redeemable exchangeable preferred stock, par value $.10 per share; 409,722
shares authorized, 250,000 shares outstanding, of which 41,667 are reflected as
current(3)............................................................................. 20,833 20,833
----------- -----------
Stockholders' equity (deficiency):
Preferred stock, par value $.10 per share; 5,000,000 shares authorized, none
outstanding............................................................................ -- --
Class A Common Stock, par value $.10 per share; 40,000,000 shares authorized,
18,992,579 shares outstanding.......................................................... 1,899 1,899
Class B Common Stock; par value $.10 per share; 6,500,000 shares authorized, 216,901
shares outstanding..................................................................... 22 22
Class C Common Stock; par value $.10 per share; 5,000,000 shares authorized,
2,545,139 shares outstanding........................................................... 255 255
Additional paid-in capital........................................................... 54,416 54,416
Deficit(5)........................................................................... (118,607) (119,940)
Note receivable from stockholder..................................................... (1,280) (1,280)
----------- -----------
Total stockholders' equity (deficiency)......................................... (63,295) (64,628)
----------- -----------
Total capitalization......................................................... $ 115,357 $ 166,524
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(1) The Company has available $75 million under an amended and restated credit
agreement dated as of December 31, 1992 (the "Credit Agreement"). No
borrowings were outstanding under the Credit Agreement at September 30,
1993. The seasonal nature of the Company's business results in the sale by
the Company of approximately 50% of its volume in the first quarter and 30%
in the fourth quarter of each year with corresponding increases in working
capital borrowings during these periods.
(2) As of September 30, 1993, $20 million of U.S. Treasury Notes were held in a
cash collateral account to partially secure the Maxwhale Notes. Pursuant to
the Credit Agreement, an additional $7.5 million is scheduled to be escrowed
on May 15, 1994 for this same purpose. Assuming the consummation of the
Offering and the Maxwhale Notes Repurchase, this payment will not have to be
made and the $20 million cash collateral account will be released to the
Company for use as unrestricted funds.
(3) 41,667 shares of Redeemable Preferred Stock are subject to mandatory
redemption in each of 1994 through 1997. Prior to redemption, the Company
has the right to exchange shares of Redeemable Preferred Stock, in whole or
in part, for 1999 Notes, subject to meeting certain debt incurrence tests.
At September 30, 1993, the Company was not able to exchange any shares of
Redeemable Preferred Stock for 1999 Notes pursuant to such tests.
(4) In connection with the Subordinated Debt Amendments, the Company has agreed
to cause approximately $42.6 million in aggregate principal amount of
outstanding subordinated debt to be ranked as Senior Debt. See "Description
of Other Indebtedness and Redeemable Preferred Stock-- Subordinated Debt."
(5) Assuming a repurchase date of September 30, 1993, the Company would have
recorded an approximate $1.3 million extraordinary loss on the early payment
of the Maxwhale Notes.
14
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of the
Company and should be read in conjunction with the more detailed financial
statements included elsewhere in this Prospectus. The financial data at the end
of and for each of the years in the five year period ended December 31, 1992 are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick, independent
auditors. The financial data at September 30, 1993 and for the nine month
periods ended September 30, 1992 and September 30, 1993 are derived from the
unaudited consolidated financial statements of the Company but include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The pro forma
financial data for the year ended December 31, 1992 and for the nine months
ended September 30, 1993 are derived from the historical consolidated financial
statements of the Company. The Company typically generates net income and NIDA
in the quarters ending in March and December and experiences net losses and
negative NIDA during the non-heating season quarters ending in June and
September; thus the results for interim periods are not indicative of the
results that may be obtained for the entire fiscal year. Although EBITDA and
NIDA should not be considered a substitute for net income (loss) as an indicator
of the Company's operating performance and NIDA should not be considered a
measure of the Company's liquidity, they are included in the following table as
they are the bases upon which the Company assesses its financial performance,
compensates management and establishes dividends. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and the Pro Forma
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------------- ----------------------
PRO
FORMA(1)
1988 1989 1990 1991 1992 1992 1992 1993
(IN THOUSANDS, EXCEPT RATIOS)
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 462,150 $ 541,521 $ 567,414 $ 523,243 $ 512,430 $ 604,491 $ 340,892 $ 377,384
Cost of sales.............. 328,549 402,178 435,031 378,772 350,941 416,073 232,333 262,368
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Gross profit........ 133,601 139,343 132,383 144,471 161,489 188,418 108,559 115,016
Operating expenses......... 89,131 99,267 106,076 104,435 110,165 125,185 77,821 89,180
Amortization of customer
lists...................... 21,646 24,604 25,571 24,840 23,496 29,018 17,470 18,236
Depreciation and
amortization of plant and
equipment.................. 4,209 5,127 5,796 5,550 5,534 7,228 4,153 4,368
Amortization of deferred
charges.................... 1,296 2,362 4,946 5,185 5,363 5,953 4,054 4,137
Provision for supplemental
benefit(3)................. -- -- -- -- 1,974 1,974 -- 193
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Operating income (loss).... 17,319 7,983 (10,006) 4,461 14,957 19,060 5,061 (1,098)
Interest expense--net...... 13,536 17,915 20,900 20,728 18,622 21,864 14,027 15,147
Other income
(expense)--net............. (126) 2,568 (228) (45) (324) (314) (339) (29)
Equity in (share of loss
of) Star Gas............... -- -- -- -- -- 167 -- --
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income (loss) before income
taxes and extraordinary
item....................... 3,657 (7,364) (31,134) (16,312) (3,989) (2,951) (9,305) (16,274)
Income taxes (benefit)..... 1,584 (3,077) (1,867) 250 400 400 218 218
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income (loss) before
extraordinary item......... 2,073 (4,287) (29,267) (16,562) (4,389) (3,351) (9,523) (16,492)
Extraordinary item......... (508) -- -- -- -- -- -- (867)
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income (loss).......... $ 1,565 $ (4,287) $ (29,267) $ (16,562) $ (4,389) $ (3,351) $ (9,523) $ (17,359)
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Ratio of earnings to fixed
charges(4)................. 1.2x --(5) --(5) --(5) --(5) --(5) --(5) --(5)
<CAPTION>
PRO
FORMA(2)
1993
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 392,005
Cost of sales.............. 272,676
-----------
Gross profit........ 119,329
Operating expenses......... 90,929
Amortization of customer
lists...................... 18,971
Depreciation and
amortization of plant and
equipment.................. 4,546
Amortization of deferred
charges.................... 4,268
Provision for supplemental
benefit(3)................. 193
-----------
Operating income (loss).... 422
Interest expense--net...... 16,131
Other income
(expense)--net............. (29)
Equity in (share of loss
of) Star Gas............... (3,213)
-----------
Income (loss) before income
taxes and extraordinary
item....................... (18,951)
Income taxes (benefit)..... 218
-----------
Income (loss) before
extraordinary item......... (19,169)
Extraordinary item......... --
-----------
Net income (loss).......... $ (19,169)
-----------
-----------
Ratio of earnings to fixed
charges(4)................. --(5)
<CAPTION>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------------- ----------------------
PRO
FORMA(1)
1988 1989 1990 1991 1992 1992 1992 1993
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6).................. $ 44,470 $ 40,076 $ 26,307 $ 40,036 $ 51,325 $ 63,233 $ 30,737 $ 25,836
Interest expense, net...... 13,536 17,915 20,900 20,728 18,622 21,864 14,027 15,147
NIDA(7).................... 28,717 27,573 4,639 15,744 27,721 36,398 12,232 6,254
Ratio of EBITDA to interest
expense, net(8).......... 3.3x 2.2x 1.3x 1.9x 2.8x 2.9x 2.2x 1.7x
Gallons of home heating oil
and propane sold........... 414,535 449,040 398,989 385,557 423,354 492,524 280,853 307,247
EBITDA per gallon of home
heating oil and propane
sold....................... $ 0.11 $ 0.09 $ 0.07 $ 0.10 $ 0.12 $ 0.13 $ 0.11 $ 0.08
<CAPTION>
PRO
FORMA(2)
1993
OTHER DATA:
EBITDA(6).................. $ 28,400
Interest expense, net...... 16,131
NIDA(7).................... 8,701
Ratio of EBITDA to interest
expense, net(8).......... 1.8x
Gallons of home heating oil
and propane sold........... 318,739
EBITDA per gallon of home
heating oil and propane
sold....................... $ 0.09
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30, 1993
---------------------------------------------------------- ----------------------
AS
1988 1989 1990 1991 1992 ACTUAL ADJUSTED(9)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)............. $ 12,070 $ 13,544 $ (5,520) $ (12,038) $ (6,744) $ (7,489) $ 22,979
Total assets............................. 231,151 286,435 260,665 220,010 252,783 216,904 240,571
Senior long-term debt and capital lease
obligations (before escrow deposit)
(long-term portion)(10).................. 51,260 51,570 50,847 50,217 50,080 22,555 42,687
Subordinated notes (long-term
portion)............................... 77,376 92,418 95,346 91,613 84,978 135,264 167,632
Redeemable preferred stock (long-term
portion)................................. -- 10,000 25,000 30,023 37,718 20,833 20,833
Stockholders' equity (deficiency)........ 9,448 (3,287) (40,087) (61,444) (33,917) (63,295) (64,628)
</TABLE>
- ------------------------------
(1) The Pro Forma Statement of Operations and Other Data for the year ended
December 31, 1992 represent the historical data derived from the Company's
financial statements for 1992, adjusted to give effect to the following
transactions as if each had occurred as of January 1, 1992:
(a) the acquisitions by the Company of nine individually insignificant
distributorships during 1992 (the "1992 Acquisitions") and nine
individually insignificant distributorships during the nine months
ended September 30, 1993 (the "1993 Acquisitions");
(b) the Preferred Stock Exchange;
(c) the Subordinated Debt Repurchases;
(d) the Maxwhale Notes Repurchase;
(e) the Star Gas Investment and the effect of concurrent
agreements entered into in connection with such
investment;
(f) the Collateral Release;
(g) the 10 1/8% Notes Issuance; and
(h) the Offering; provided, however, that the
pro forma data do not give effect to
approximately $2.7 million of interest
expense on, or the use of, approximately
$27.4 million of the Debentures, the
proceeds of which are not required for
acquisitions or refinancings.
The historical and pro forma net loss and
the historical and pro forma NIDA for the
year ended December 31, 1992 do not include
any extraordinary losses. Had the
Subordinated Debt Repurchases and the
Maxwhale Notes Repurchase occurred on
January 1, 1992, the pro forma
extraordinary loss would have been
approximately $6.2 million.
(2) The Pro Forma Statement of Operations and Other Data for the nine months
ended September 30, 1993 represent the historical data derived from the
Company's financial statements for the nine months ended September 30,
1993, adjusted to give effect to the following transactions as if each had
occurred as of January 1, 1992:
(a) the 1993 Acquisitions;
(b) the Preferred Stock Exchange;
(c) the Subordinated Debt Repurchases;
(Footnotes continued on following page)
16
<PAGE>
(Footnotes continued from preceding page)
(d) the Maxwhale Notes Repurchase;
(e) the Star Gas Investment and the effect of concurrent
agreements entered into in connection with such
investment;
(f) the Collateral Release;
(g) the 10 1/8% Notes Issuance; and
(h) the Offering; provided, however, that the
pro forma data do not give effect to
approximately $2.6 million of interest
expense on, or the use of, approximately
$34.4 million of the Debentures, the
proceeds of which are not required for
acquisitions or refinancings.
The historical net loss and the historical
NIDA for the nine months ended September
30, 1993 include an extraordinary loss of
approximately $0.9 million representing the
premium paid in connection with the
Subordinated Debt Repurchases. Had the
Subordinated Debt Repurchases and the
Maxwhale Notes Repurchase occurred on
January 1, 1992, the pro forma
extraordinary loss would have been
approximately $6.2 million.
(3) Represents the present value of supplemental retirement benefits.
(4) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, net income (loss)
derived from investments accounted for by the equity method, and
extraordinary items, plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of debt discount and the interest factor in
rental expense.
(5) Earnings were insufficient to cover fixed charges by $7.4 million, $31.1
million, $16.3 million, $4.0 million, $9.3 million and $16.3 million for
the years ended December 31, 1989, 1990, 1991 and 1992 and the nine months
ended September 30, 1992 and 1993, respectively. On a pro forma basis,
earnings were insufficient to cover fixed charges by $3.1 million and $15.7
million for the year ended December 31, 1992 and the nine months ended
September 30, 1993, respectively. However, if non-cash charges to income
consisting of depreciation and amortization and non-cash expenses
associated with key employees' deferred compensation plans were excluded,
the Company's earnings would have exceeded fixed charges by $24.7 million,
$5.2 million, $19.3 million, $32.4 million, $16.4 million, $10.7 million,
$41.1 million and $12.2 million, respectively, for such periods.
(6) EBITDA is defined as operating income before depreciation and amortization
and non-cash expenses associated with key employees' deferred compensation
plans.
(7) NIDA is defined as the sum of consolidated net income (loss), plus
depreciation and amortization of plant and equipment and amortization of
customer lists and deferred charges, plus non-cash expenses associated with
key employees' deferred compensation plans, less dividends accrued on
preferred stock, excluding net income (loss) derived from investments
accounted for by the equity method, except to the extent of any cash
dividends received by the Company.
(8) The ratio of EBITDA to interest expense, net is calculated by dividing
EBITDA by interest expense, net for such period. Pursuant to the Indenture,
the Company may incur additional Funded Debt (as defined) only if its ratio
of EBITDA to interest expense, net exceeds 2.0 to 1.0, subject to certain
exceptions. See "Description of Debentures--Certain Covenants--Limitation
on Funded Debt."
(9) As adjusted to give effect to the Offering, the Maxwhale Notes Repurchase,
the Star Gas Investment and the Subordinated Debt Amendments; provided,
however, that the as adjusted data includes approximately $21.0 million of
working capital and principal amount of the Debentures, the proceeds of
which are not required for the Maxwhale Notes Repurchase.
(10) The Company has escrowed certain amounts to partially secure the repayment
of the Maxwhale Notes. The amounts on deposit at the dates indicated were
as follows: $11.5 million at December 31, 1988, $0 at December 31, 1989, $0
at December 31, 1990, $5.0 million at December 31, 1991, $15.0 million at
September 30, 1992, $15.0 million at December 31, 1992, $20.0 million at
September 30, 1993 and $0 at September 30, 1993, as adjusted.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
In analyzing the Company's results, investors should consider the Company's
active acquisition program, the rapid rate of amortization of customer lists
purchased in acquisitions, the seasonal nature of the heating oil business and
the general ability of heating oil distributors to pass on variations in
wholesale heating oil costs to their customers. Therefore, although a company's
net income (loss) calculated in accordance with generally accepted accounting
principles is generally considered by investors to be an indicator of a
company's operating performance, management believes that in evaluating the
Company's results, two additional measures should be considered to supplement
the net income (loss) analysis. The first such measure is operating income
before depreciation and amortization and non-cash expenses associated with key
employees' deferred compensation plans (referred to herein as EBITDA) and the
second such measure is the sum of consolidated net income (loss), plus
depreciation and amortization of plant and equipment and amortization of
customer lists and deferred charges, plus non-cash expenses associated with key
employees' deferred compensation plans, less dividends accrued on preferred
stock, excluding net income (loss) derived from investments accounted for by the
equity method, except to the extent of any cash dividends received from the
Company (referred to herein as NIDA). Although EBITDA and NIDA should not be
considered a substitute for net income (loss) as an indicator of the Company's
operating performance and NIDA should not be considered a measure of the
Company's liquidity, it is important for an investor to understand these
concepts since management's strategy is to maximize EBITDA and NIDA, rather than
net income. The computations of EBITDA and NIDA are derived from the Company's
financial statements as a supplement to the Company's traditional financial
statements. Because of management's acquisition and other strategies, it
believes that EBITDA is an important indicator as a measure of earnings derived
from operations before non-cash expenses and non-operating expenses, such as
other expenses and income taxes. The following expands on the above and
enumerates other factors that investors should consider.
First, the financial results of a given year do not reflect the full impact
of that year's acquisitions. Most acquisitions are made during the non-heating
season because many sellers desire to retain winter profits but avoid summer
losses. Therefore, the effect of acquisitions made after the heating season are
not fully reflected in the Company's sales volume and operating and financial
results until the following calendar year.
Second, as stated above, the Company's objective is to maximize NIDA and
EBITDA, rather than net income. The large disparity between NIDA and net income
(loss) is primarily attributable to the substantial amortization of customer
lists and other intangibles in connection with acquisitions. Customer lists and
other intangibles acquired in connection with acquisitions represent the
allocation of acquisition costs which are amortized over the future periods
benefitted by such acquisitions. In general, costs are allocated to assets based
upon the fair market value of the assets purchased, as determined by arms'
length negotiations between the Company and the seller. Substantially all
purchased intangibles are comprised of customer lists and covenants not to
compete. Amortization of customer lists is a non-cash expense which represents
the write-off of the amount paid for customers acquired in connection with
acquisitions who later terminate their relationship with the Company. Based on
the Company's analysis of historical purchased customer attrition rates, these
lists are amortized 90% over a six-year period (on average, 15% per annum) and
the balance over a 25-year period. However, the Company's net loss of customers
has only averaged approximately 3% per annum over the past five years, as the
loss of purchased accounts has been partially offset by new customers obtained
through internal marketing. See "Business--Customers and Sales." The covenants
not to compete are amortized over the lives of the covenants, which generally
range from five to seven years.
18
<PAGE>
Third, the seasonal nature of the Company's business results in the sale by
the Company of approximately 50% of its volume in the first quarter and 30% in
the fourth quarter of each year. The Company generally realizes positive NIDA in
both of these quarters and negative NIDA during the warmer quarters ending June
and September. As a result, acquisitions made during the spring and summer
months generally have a negative effect on earnings and a limited impact on NIDA
in the calendar year in which they are made. Most of the costs associated with
an acquired distributor are incurred evenly throughout the remainder of the
year, whereas a smaller percentage of the purchased company's annual volume and
gross profit is realized during the same period.
Finally, changes in total dollar sales do not necessarily affect the
Company's gross profit, EBITDA, net income or NIDA. Since the Company adds a per
gallon margin onto its wholesale costs, variability in wholesale oil prices will
affect net sales but generally do not affect EBITDA, net income, NIDA or any
other measure of earnings. As a result, the Company's margins are most
meaningfully measured on a per gallon basis and not as a percentage of sales.
While fluctuations in wholesale prices have not significantly affected demand to
date, it is possible that significant wholesale price increases over an extended
period of time could have the effect of encouraging conservation. If demand were
reduced and the Company was unable to increase its gross profit margin or reduce
its operating expenses, the effect of the decrease in volume would be to reduce
EBITDA, net income, NIDA and any other measure of earnings.
Given the Company's operating strategy to maximize EBITDA and NIDA as
described above, an investor should also be aware of certain risks that are
inherent in such a strategy. Although an increased level of acquisitions (which
in turn adds to the Company's plant and equipment and customer lists) is
expected to have a positive impact on the long term viability of the business,
the near term effect of acquisitions would be to increase EBITDA and NIDA by a
significantly greater amount than would be the increase, if any, of net income
because of the substantial impact of depreciation and amortization expense,
items which generally do not impact EBITDA or NIDA, but which do materially
impact net income. A reduced level of acquisitions, which would be expected to
have an adverse impact on the long term growth of the business, could lead to
decreased EBITDA and NIDA, while possibly increasing net income.
In the year of an acquisition, depending on the month it is consummated, it
is possible that EBITDA and NIDA would not be affected, while net income could
be negatively impacted.
To the extent future acquisitions are financed with debt, the interest
expense associated with such debt would not impact EBITDA, but would reduce NIDA
and net income. If the Company were to finance future acquisitions by issuing
new preferred stock, the preferred stock dividends associated with the new
preferred stock would not affect EBITDA or net income, but would reduce NIDA and
increase the Company's stockholders' deficiency.
Since EBITDA and NIDA are not affected by depreciation and amortization,
the Company's failure to replace long lived assets or its decision to delay
needed capital expenditures could have the short term effect of improving net
income (by minimizing depreciation and amortization expense), but could have a
negative impact on the long term viability of the business. Because management
is concerned with the Company's long term viability, and measures its operating
performance by EBITDA and NIDA, it intends to continue making capital
improvements as required.
Factors that impact the Company's ability to continue following its current
operating strategy in the foreseeable future include its ability to continue to
grow through acquisitions, while continuing to replace lost customers through
internal marketing.
19
<PAGE>
RESULTS OF OPERATIONS AND OTHER DATA
Nine Months Ended September 30, 1993 Compared to Nine Months Ended September
30, 1992
Net sales increased for the first nine months of 1993 to $377.4 million
from $340.9 million in the same period in 1992. The $36.5 million increase was
attributable primarily to volume growth associated with acquisitions ($40.3
million or 11.8%) and, to a lesser extent, to higher home heating oil prices
($6.2 million or 1.8%), offset by attrition in the Company's customer base and
slightly warmer weather, which was 2.3% warmer than in the prior period.
During the first nine months of 1993, home heating oil volume, including
propane, increased to 307.2 million gallons, 9.4% greater than the number of
gallons delivered in the nine months ended September 30, 1992, due to the impact
of the nine acquisitions completed in 1992 whose nine month volume was fully
reflected for the first time in 1993, and to a lesser extent, the nine
acquisitions completed in the nine months ended September 30, 1993. However,
seven of the current period's acquisitions were completed in the spring and
summer months and provided no meaningful impact on volume growth compared to the
prior year. The positive impact of the acquisitions was offset by slightly
warmer temperatures and by attrition in the Company's customer base. The Company
continues to focus its marketing efforts on smaller, service-sensitive
residential accounts and has reduced its customer attrition rate by
approximately 25% from a year ago.
Gross profit increased $6.5 million (5.9%), a 3.4% decrease on a per gallon
basis, from $108.6 million (38.7 per gallon) for the nine months ended 1992 to
$115.0 million (37.4 per gallon) for the nine months ended 1993. While home
heating oil margins increased 0.5 per gallon, which was less than historically
experienced, this increase was more than offset by the higher net cost of
providing heating equipment repair and maintenance service to a larger customer
base and utilizing this service as part of the Company's internal marketing
program. The lower than historically experienced increases in home heating oil
margins was due to lower than expected home heating oil margins in the first
quarter of 1993 which was reversed in the second and third quarters of 1993.
Operating expenses increased $11.4 million (14.6%) from $77.8 million in
the first nine months of 1992 to $89.2 million for the first nine months of
1993. On a per gallon basis, these expenses increased 4.7% from 27.7 per gallon
for the first nine months of 1992 to 29.0 for the comparable period in 1993.
This increase was attributable to the expansion of the Company's marketing
program, which has resulted in a significant reduction in the Company's rate of
account attrition, and the severe weather conditions experienced in March 1993
that temporarily increased operating costs, primarily delivery expenses, during
that month.
Provision for supplemental benefit for the nine months ended September 30,
1993 represents the present value of supplemental retirement benefits ($0.2
million).
Amortization of customer lists and deferred charges increased 3.9%, or $0.8
million, to $22.4 million. These non-cash expenses increased less than volume
growth as certain customer lists and capitalized expenses became fully
amortized. Depreciation and amortization of plant and equipment increased 5.2%,
or $0.2 million, to $4.4 million for the nine months ended September 30, 1993
due to the acquisitions.
The operating loss for the first nine months of 1993 was $1.1 million as
compared to operating income of $5.1 million for the same period of 1992, as the
9.4% increase in volume and the slight increase in home heating oil margins were
offset by higher residential service related costs, increased delivery and
marketing expenses and higher non-cash expenses.
Net interest expense for the nine months ended September 30, 1993 increased
$1.1 million, 8.0%, to $15.1 million. A reduction in the average borrowing rate
was offset by a $28.6 million increase in long-term borrowings from $148.9
million, at an average interest rate of 11.9%, to $177.5 million, at an
20
<PAGE>
average interest rate of 11.4%. This increase in long-term borrowing was due to
the conversion in March 1993 of $12.8 million of Redeemable Preferred Stock into
Subordinated Notes due in 2000 and the issuance in April 1993 of $50 million of
10 1/8% Notes due in 2003. The proceeds of this public issue were used to repay
$25.0 million of long-term obligations maturing in 1993 and 1995 with the
balance being used to fund, in part, the Company's acquisition program.
Offsetting the increase in long-term borrowings was a decline in short-term
borrowings from $22.1 million, at an average interest rate of 5.8%, for the
first nine months of 1992 to $11.8 million, at an average interest rate of 5.1%,
for the comparable period of 1993. In addition, the Company reduced bank fees
and generated interest income on higher cash balances in 1993 compared to 1992.
The loss before income taxes and extraordinary items increased 75%, or $7.0
million, to $16.3 million due to the reduction in operating income and the
increase in interest expense. Income taxes of $0.2 million were the same for
both periods and represent certain state income taxes applicable to profitable
subsidiaries that are not included in consolidated state returns. The Company
had losses for federal income tax purposes in each of these periods.
In May 1993, the Company recorded an extraordinary charge against earnings
of $0.9 million. This represented the cash premium paid of $0.4 million to
retire $25.0 million of the Company's long-term obligations maturing in 1993 and
1995 and the write-off of $0.5 million in debt discount and deferred charges
associated with these obligations.
The net loss increased from $9.5 million for the first nine months of 1992
to $17.4 million for the comparable period of 1993 due to the increase in the
operating loss, higher interest expense and the extraordinary charge. EBITDA
decreased from $30.7 million for the nine months ended September 30, 1992 to
$25.8 million for the comparable period in 1993 as the 9.4% increase in volume
and the slight increase in home heating oil margins were offset by higher
residential service related costs and increased marketing expenses.
1992 Compared to 1991
Net sales decreased in 1992 to $512.4 million from $523.2 million in 1991.
This $10.8 million decrease was due to lower home heating oil prices ($37.9
million or 7.2%) as a result of lower per gallon wholesale costs, as well as to
reductions in sales of products other than home heating oil to commercial
accounts ($17.0 million or 3.3%), which were partially offset by an increase in
home heating oil volume ($41.0 million or 7.8%). The average price of home
heating oil in 1992 was approximately 14.8% below the 1991 levels, when prices
were affected by the Persian Gulf crisis.
In 1992, home heating oil volume increased to 423.1 million gallons, 9.7%
greater than the 385.6 million gallons delivered in 1991 due to colder
temperatures (45.3 million gallons) and the impact of the nine acquisitions
completed in 1991 whose full annual volume was realized for the first time in
1992 and from a portion of the annual volume associated with the nine additional
acquisitions completed in 1992 (19.2 million gallons). The impact of the
acquisitions was offset in part by attrition in the Company's customer base, as
well as the loss of certain of its high volume, low margin commercial accounts,
as the Company continued to focus its marketing efforts on smaller, higher
margin, more service-sensitive residential customers.
Gross profit increased $17.0 million (11.8%), or 1.9% per gallon, from
$144.5 million in 1991 (37.5 per gallon) to $161.5 million in 1992 (38.2 per
gallon). This increase exceeded the percentage increase in home heating oil
volume due to improved per gallon gross profit margins attributable to the
Company's ability to add an increasing gross margin onto its wholesale costs,
designed to offset the impact of inflation, account attrition and weather.
Operating expenses increased 5.5% compared to the 9.7% increase in volume
and declined 3.9% on a per gallon basis from 27.1 in 1991 to 26.1 in 1992. The
per gallon reduction in operating expenses
21
<PAGE>
reflects the savings from the Company's cost reduction program which was begun
in April 1991 and economies of scale realized from the Company's acquisition
program.
Amortization of customer lists declined 5.4%, or $1.3 million, to $23.5
million in 1992 as certain customer lists became fully amortized and a greater
portion of the purchase price in more recent acquisitions was allocated to
restrictive covenants and included in deferred charges. As a result of this
allocation, amortization of deferred charges increased 3.5% to $5.4 million in
1992. On a combined basis, amortization of customer lists and deferred charges
declined 3.9% as the annual amortization associated with assets that became
fully amortized was greater than the amount associated with the limited number
of acquisitions in 1991 and the impact of the 1992 acquisitions was not fully
realized in the current year.
Depreciation and amortization of plant and equipment was $5.5 million for
1992, approximately the same as in 1991, as reductions related to assets that
became fully depreciated were offset by increases associated with assets
purchased in 1991 and 1992.
Provision for supplemental benefit in 1992 represents the present value of
a supplemental retirement benefit ($2.0 million) which is being paid over 10
years.
Operating income increased to $15.0 million from $4.5 million in 1991. This
improvement was due to an increase in home heating oil volume and an improvement
in per gallon operating income associated with higher gross profit margins,
lower per gallon operating expenses and the decline in non-cash expenses,
partially offset by the provision for the supplemental benefit in 1992.
Net interest expense in 1992 decreased $2.1 million, 10.2% below 1991, due
to a decline in average outstanding borrowings from 1991 to 1992 of $15.6
million, which caused a reduction of $1.7 million in interest expense and to an
increase in interest income ($0.4 million), generated primarily by a higher
average balance in U.S. Treasury Notes held in the cash collateral account. The
Company's average borrowing rate increased from 11.2% in 1991 to 11.3% in 1992.
Average working capital borrowings dropped from $35.0 million in 1991 at an
average interest rate of 8.2% to $17.9 million in 1992 at an average interest
rate of 5.9%. Average fixed rate borrowings increased from $147.0 million in
1991 to $148.5 million in 1992 with an average interest rate of 11.9% for both
years.
Pretax loss decreased $12.3 million in 1992 from 1991 due to the increase
in operating income and the reduction in interest expense, partially offset by
the increase in other expenses. Taxes increased from $0.3 million in 1991 to
$0.4 million in 1992. Despite the pretax loss, the Company was required to pay
certain state income taxes in 1992 on profitable subsidiaries that are not
included in consolidated state returns. The 1992 loss, while not providing any
Federal tax benefits in 1992, will increase the Company's tax loss carryforwards
to approximately $43.0 million as of December 31, 1992.
Net loss decreased to $4.4 million in 1992, a $12.2 million improvement
over the $16.6 million net loss in 1991.
EBITDA increased 28.2% to $51.3 million in 1992 from $40.0 million in 1991.
This improvement was primarily the result of the 9.7% home heating oil volume
increase and a 1.7 per gallon EBITDA margin improvement.
1991 Compared to 1990
Net sales decreased in 1991 to $523.2 million from $567.4 million in 1990.
This $44.2 million decrease was due to lower home heating oil prices ($25.1
million or 4.4%), which reflected lower wholesale cost and lower volume ($19.1
million or 3.4%). Total home heating oil volume declined in 1991 to 385.6
million gallons, despite an increase in gallonage sold to residential customers,
as the Company eliminated a number of low margin commercial and industrial
accounts. Home heating oil volume sold to residential homeowners increased in
1991 due primarily to the incremental 18 million gallon impact of 12
acquisitions in 1990, the entire annual volume of which was fully realized in
1991,
22
<PAGE>
and from a portion of the volume associated with nine acquisitions in 1991. The
volume increase associated with the acquisitions was less than historically
experienced, due to the limited number of acquisitions made in 1990 and 1991.
While 1991 was the third warmest year of this century in the Northeast, it
was 3.8% colder than in 1990. This had a positive effect on 1991's sales volume
compared with the prior year. Offsetting the acquisition and weather impact on
the year to year comparison was the fact that the volume in 1990 was inflated by
certain sales attributable to December 1989 (the second coldest December in the
century) which could not be delivered in that month, but which were ultimately
sold in January 1990.
1991 home heating oil volume was also negatively affected by attrition in
the Company's customer base. This rate increased from historical levels due, in
part, to gas conversions increasing from a normal 1.0% to 1.4% per annum, caused
by the temporary but significant price advantage of natural gas over home
heating oil during the Persian Gulf crisis. With the return to normal market
conditions, the two products are again at parity and conversions have returned
to their historical 1% annual rate. Also affecting this attrition rate was an
increase from 1.2% to 1.9% of customers who did not meet the Company's credit
criteria, due partially to poor economic conditions in the Northeast. While
application of these standards increased the number of canceled accounts, it
enabled the Company to maintain a bad debt rate of only 0.3% of sales.
Gross profit increased 9.1% from $132.4 million (33.2 per gallon) for 1990
to $144.5 million (37.5 per gallon) in 1991, attributable primarily to the
Company's ability to increase per gallon gross profit margins to offset the
impact the warmer than normal winter weather had on volume and per gallon
operating costs.
Operating expenses decreased 1.6% to $104.4 million from the prior year but
increased on a per gallon basis from 26.6 in 1990 to 27.1 in 1991, which
increase was less than the rate of inflation for 1991. While these expenses
declined in total in 1991, due primarily to the Company's cost reduction
program, on a per gallon basis they were higher than the prior year as costs
could not be further reduced in the short term to offset the decline in volume
resulting from the warmer than normal weather.
Amortization of customer lists declined 2.9%, or $0.7 million, to $24.8
million, as certain customer lists became fully amortized in 1991 and 1990 and
as a greater portion of the purchase price in more recent acquisitions was
allocated to restrictive covenants and included in deferred charges. Primarily
as a result of this allocation, amortization of deferred charges increased by
$0.2 million, or 4.8%, to $5.2 million. On a combined basis, amortization of
customer lists and deferred charges declined 1.6% as the value of assets that
became fully amortized was greater than the amount associated with new
acquisitions.
Depreciation and amortization of plant and equipment declined 4.2% from
$5.8 million in 1990 to $5.6 million in 1991. Depreciation expense decreased
more significantly than volume as certain assets became fully depreciated in
1990.
Operating income increased $14.5 million from a loss of $10.0 million in
1990 to a profit of $4.5 million in 1991, due to the $12.1 million increase in
gross profit and the reduction in operating and non-cash expenses.
Net interest expense in 1991 declined $0.2 million due to a decrease in the
Company's average working capital borrowings which declined from $36.9 million
in 1990 at an average interest rate of 9.4% to $35.0 million in 1991 at an
average interest rate of 8.2%. In addition, interest income rose as earnings
were generated on an escrow deposit made into the cash collateral account in
April 1991. The Company's average fixed rate borrowings decreased from $148.0
million in 1990 at an average interest rate of 11.6% to $147.0 million in 1991
at an average interest rate of 11.9%.
23
<PAGE>
Pretax loss decreased $14.8 million in 1991 from 1990 due to improved gross
profit margins and lower operating expenses, depreciation and amortization,
interest and other expenses. The Company incurred a pretax loss of $16.3 million
due to the $35.6 million of non-cash charges. Taxes increased from a $1.9
million benefit in 1990 to a $0.3 million expense in 1991. Despite the pretax
loss, the Company was required to pay certain state income taxes in 1991. Unlike
1990, none of the 1991 losses could be carried back for Federal income tax
purposes. The $16.3 million pretax loss, while not providing any Federal tax
benefits in 1991, increased the Company's tax loss carryforward.
Net loss decreased to $16.6 million in 1991, a 43.4% improvement as
compared to 1990.
EBITDA increased 52.2% to $40.0 million in 1991 from $26.3 million in 1990
as a result of the improvement in gross profit margins and lower operating
expenses, which offset the impact of the volume decline.
LIQUIDITY AND FINANCIAL CONDITION
The Company has financed its growth through a combination of internally
generated capital, the sale of common stock, and the issuance of Redeemable
Preferred Stock and debt. As indicated in the table below, the Company has
financed acquisitions and other asset requirements made from January 1, 1988 to
December 31, 1992, 62.6% with internally generated cash and funds from a 1992
offering of 4.3 million shares of Class A Common Stock, 20.0% with Redeemable
Preferred Stock and 17.4% with long-term debt and working capital. As a result,
for the year ended December 31, 1992, EBITDA was 2.8 times net interest expense.
<TABLE>
<CAPTION>
FUNDING SOURCES
-------------------------------------------------------------------
ACQUISITIONS INTERNALLY GENERATED REDEEMABLE PREFERRED LONG-TERM DEBT AND
AND FIXED ASSET FUNDS AND ADDITIONAL NET
YEAR PURCHASES EQUITY(1) STOCK WORKING CAPITAL(2)
- ------------------------- --------------- ---------------------- -------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1988..................... $ 39,403 $ 14,392 36.5% $ -- --% $ 25,011 63.5%
1989..................... 42,900 20,643 48.1 9,140 21.3 13,117 30.6
1990..................... 33,077 (544) (1.6) 15,000 45.3 18,621 56.3
1991..................... 16,399 13,834 84.4 4,449 27.1 (1,884) (11.5)
1992..................... 48,478 64,431 132.9 7,500 15.5 (23,453) (48.4)
--------------- ----------- --------- ----------
Total.................... $ 180,257 $ 112,756 62.6% $ 36,089 20.0% $ 31,412 17.4%
--------------- ----------- --------- ----------
--------------- ----------- --------- ----------
</TABLE>
- -----------------------------
(1) Internally generated funds consist of net income plus depreciation and
amortization less dividends. Additional equity consisted of $42.7 million
from the sale of Class A Common Stock in 1992.
(2) Net working capital was used for purposes other than acquisitions and
long-term requirements. This column reflects only that portion of net
working capital utilized to make acquisitions and purchase fixed assets.
The Company's cash flow from operations, as well as its ability to access
long-term debt and equity in both the public and private markets, has provided
sufficient capital to fund the Company's acquisition program. In April 1993, the
Company realized net proceeds of $48.1 million from an offering of its 10 1/8%
Notes and it is estimated that the net proceeds of the Offering will be $72.3
million. To the extent that internally generated funds are insufficient to fund
the Company's acquisition program, it may use such net proceeds for
acquisitions. As the Company continues to expand or the opportunity to refinance
existing debt arises because of interest rate considerations or maturity, the
Company will utilize both the public and private markets to raise capital when
it deems appropriate.
Net cash provided by operating activities of $47.2 million for the nine
months ended September 30, 1993, net of repayments of working capital borrowings
of $32.0 million, along with the $48.1 million of net proceeds from the April
1993 public offering of the 10 1/8% Notes amounted to $63.3 million. These
24
<PAGE>
funds were utilized in investing activities for acquisitions and the purchase of
fixed assets of $17.4 million and in financing activities to pay dividends of
$11.5 million, to repurchase subordinated debt, including premium, of $25.4
million, to deposit $5.0 million into a cash collateral account to partially
secure the Maxwhale Notes, and to make principal payments on other long-term
obligations of $0.4 million.
Net cash provided by operating activities of $26.7 million for the year
ended December 31, 1992, net of repayments of working capital borrowings of $7.8
million, amounted to $18.9 million. These funds, along with $42.7 million of net
proceeds from the sale of common stock, the $6.8 million of proceeds from the
sale of subordinated notes and the $7.5 million of proceeds from the sale of
Redeemable Preferred Stock, were utilized in investing activities for
acquisitions and the purchase of fixed assets of $49.1 million and in financing
activities to retire $6.8 million of subordinated notes, to deposit $10.0
million into a cash collateral account to partially secure the Maxwhale Notes,
to pay cash dividends of $8.3 million and to make principal payments on other
long term obligations of $0.6 million.
A consortium of banks has historically provided the Company with credit
facilities, currently consisting of a $75 million credit line pursuant to the
Credit Agreement. The Credit Agreement was amended in October 1993 to include a
$20 million letter of credit facility for use in connection with acquisitions,
which letter of credit facility expires on October 20, 1994. As of December 31,
1992, $32 million of borrowings were outstanding, but as of September 30, 1993,
due in part to the seasonal nature of the Company's business, the Company did
not require any working capital borrowings.
The Company's working capital deficiency at September 30, 1993 of
approximately $7.5 million was generated primarily by the inclusion of $27.5
million of the Maxwhale Notes as a current liability, offset in part by the
inclusion of $20 million that has been deposited in a cash collateral account as
a current asset. Adjusted to give effect to the Offering, the Maxwhale Notes
Repurchase, the Star Gas Investment and the Subordinated Debt Amendments, the
Company's working capital would have been approximately $23.0 million at
September 30, 1993.
For the remainder of 1993, the Company's financing obligations included
making its investment of $16.0 million in Star Gas, principal payments on other
long-term obligations of $0.1 million and paying common stock dividends of
approximately $3.1 million. For 1994, after giving effect to the completion of
the Offering and the application of the net proceeds therefrom, the Company's
financing obligations include redeeming $4.2 million of Redeemable Preferred
Stock and paying $2.8 million in dividends for such stock. In addition, the
Company anticipates paying $12.0 million in Common Stock dividends. Based on the
Company's current cash position, bank credit availability and expected net cash
to be provided by operating activities for the remainder of 1993 and for 1994,
the Company expects to be able to meet all of the above mentioned obligations in
1993 and 1994, as well as meet all of its other current obligations as they
become due.
TAX MATTERS
Federal tax legislation, passed on August 10, 1993, will affect the manner
in which the Company amortizes intangible assets, primarily customer lists and
restrictive covenants associated with acquisitions for Federal income tax
purposes. For financial reporting purposes, the Company historically has
amortized 90% of acquired customer lists over a six year period and the balance
over a 25 year period, and has followed substantially the same policy for
Federal income tax reporting purposes.
The new tax legislation will require amortization of all intangible assets
on a straight line basis over 15 years for Federal income tax reporting
purposes, beginning with acquisitions made after the date of enactment. The
legislation has no effect on the Company's historic results for financial
reporting or for Federal income tax reporting purposes. For financial reporting
purposes, the Company periodically reviews the appropriate allocation of
purchase price among the assets acquired. No changes are currently contemplated
in the various amortization lives for the intangible assets acquired; however
the
25
<PAGE>
Company periodically reviews such periods from time to time. The legislation
will reduce the Company's annual Federal income tax deduction attributable to
future acquisitions by requiring the amortization of such intangibles for
Federal income tax purposes over a longer period than the Company currently
utilizes. This could cause the Company to pay income taxes in advance of
recording financial statement income in the future after utilization of the
Company's available net operating loss carryforwards.
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standard No. 106 ("SFAS No. 106"), "Employers' Accounting
for Post Retirement Benefits Other Than Pensions." This statement requires that
the expected cost of post retirement benefits be fully accrued by the first date
of full benefit eligibility, rather than expensing the benefit when payment is
made. As the Company generally does not provide for post retirement benefits,
other than pensions, the adoption of the new statement did not have any material
effect on the Company's financial condition or results of operations.
During the first quarter of 1993, the Company also adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This statement requires that deferred income taxes be recorded following
the liability method of accounting and adjusted periodically when income tax
rates change. Adoption of the new statement did not have any effect on the
Company's financial condition or results of operations since the Company did not
carry any deferred tax accounts on its balance sheet at December 31, 1992 and
any net deferred tax asset set up as a result of applying SFAS No. 109 has been
fully reserved.
26
<PAGE>
BUSINESS
The Company is the largest retail distributor of home heating oil in the
United States, with total sales of $548.9 million for the twelve months ended
September 30, 1993. As of September 30, 1993, Petro served approximately 421,000
customers in 26 markets in the Northeast, including the metropolitan areas of
Boston, New York City, Baltimore, Providence and Washington, D.C. Despite its
market position, the Company's customer base is estimated to represent
approximately 5% of the residential home heating oil customers in the Northeast.
For the twelve months ended September 30, 1993, the Company sold approximately
449.7 million gallons of home heating oil and propane.
In addition to sales of home heating oil and propane, the Company installs
and repairs heating equipment and, to a limited extent, markets other petroleum
products to commercial customers, including #4 fuel oil, #6 fuel oil, diesel
fuel, kerosene and gasoline.
Installation and repair of heating equipment is provided as a service by
the Company to its heating oil customers, and has represented approximately 11%
per year of the Company's net sales for the last three fiscal years. The Company
considers the provision of service and installation services to be an integral
part of its basic fuel oil business. Accordingly, the Company regularly provides
various service incentives to obtain and retain fuel oil customers and such
services are not designed to generate profits. Except in isolated instances, the
Company does not provide service to any person who is not a heating oil
customer.
For the years ended December 31, 1990, 1991 and 1992, and for the nine
months ended September 30, 1992 and 1993, sales of home heating oil and propane
(not including related installation and service) constituted approximately 78%,
80%, 83%, 82% and 83%, respectively, of the Company's net sales.
FUNDAMENTAL CHARACTERISTICS
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles. As home
heating oil is such a basic necessity, variations in the amount purchased as a
result of general economic conditions have been limited.
Customer Stability
The Company has a relatively stable customer base due to the tendency of
homeowners to remain with their traditional distributors and a majority of
homebuyers tending to remain with the previous homeowner's distributor. As a
result, the Company's customer base each year includes approximately 90% of the
prior year's customers and homebuyers who have purchased their homes from prior
Petro customers. In an acquisition, while the Company loses approximately 90% of
the acquired customers within the first six years, the retention of a majority
of the homes underlying such customers make the homes included in the customer
list similar to the prior year.
Like many other companies in its industry, the Company delivers home
heating oil to each of its customers an average of approximately six times
during the year, depending upon weather conditions and historical consumption
patterns, without the customer having to make an affirmative purchase decision
each time oil is needed. Approximately 85% of the Company's customers receive
their fuel oil pursuant to an automatic delivery system. In addition, the
Company provides home heating equipment repair service on a seven days a week,
52 weeks a year basis, generally within four hours of request. Each customer
requires such service an average of twice a year.
Weather Stability
Average temperatures over time have varied to a very limited extent
notwithstanding the warm winter weather experienced in 1990 and 1991.
27
<PAGE>
The following table presents the average daily temperature (in degrees
Fahrenheit) in the metropolitan New York City area for January through March and
October through December of the year indicated (which are considered to be the
heating season months):
<TABLE>
<CAPTION>
AVERAGE
YEAR TEMPERATURE
<S> <C>
1960................ 40.4
1961................ 41.9
1962................ 40.0
1963................ 41.1
1964................ 42.1
1965................ 41.5
1966................ 41.9
1967................ 40.5
1968................ 40.2
1969................ 40.4
1970................ 39.8
1971................ 41.9
1972................ 40.5
1973................ 43.8
1974................ 41.9
1975................ 43.5
1976................ 39.3
1977................ 40.1
1978................ 39.5
1979................ 43.0
1980................ 39.8
1981................ 41.1
1982................ 42.6
1983................ 42.9
1984................ 43.4
1985................ 42.5
1986................ 42.5
1987................ 42.1
1988................ 41.1
1989................ 40.8
1990................ 47.0
1991................ 44.3
1992................ 41.9
</TABLE>
- ------------------------------
Source: National Oceanic and Atmospheric Administration
Based upon the average temperatures experienced since 1960, the Company
does not believe that the 1990 and 1991 weather is necessarily indicative that
higher than normal winter temperatures will prevail in the future. This belief
is based in part on the fact that the weather in 1992 and for the nine months
ended September 30, 1993 has returned to relatively normal levels and that the
four warmest years in this century other than 1990 and 1991 occurred in 1953,
1949, 1946 and 1913.
Insulation from Oil Price Volatility
The Company has been insulated from the volatility of wholesale oil prices
due to its policy of maintaining on average no more than a ten day inventory of
home heating oil and by limiting its activities to the retail distribution of
home heating oil. Although the price of crude oil has been volatile, this has
not materially affected the Company's performance. As a retailer, the Company
has been able to add an increasing gross margin onto its wholesale costs,
whatever their level, designed to offset the impact of inflation, account
attrition and weather.
Oil Supply
Petro's policy of contracting for a majority of its oil supply with a
diverse group of domestic sources minimizes the potential impact of foreign
supply disruptions. This diversity, along with purchasing a certain portion of
its needs on the spot market, enables the Company to obtain supplies at the
lowest possible cost without jeopardizing product security. In addition, given
the low proportion of crude oil that is refined into fuel oil and the importance
of home heating oil during cold periods, the Company believes that, in the event
of foreign oil supply disruptions, the level of production of home heating oil
will generally continue unaffected compared to other oil products.
Conversions to Natural Gas
The rate of conversion from the use of home heating oil to natural gas is
primarily affected by the relative prices of the two products and the cost of
replacing an oil fired heating system with one that uses natural gas. The
Company believes that approximately 1% of its customer base annually converts
from home heating oil to natural gas. Even when natural gas had a significant
price advantage over home heating oil, such as in 1980 and 1981 when there were
government controls on natural gas prices or, for a short time in 1990 and 1991,
during the Persian Gulf crisis, the Company's customers converted to natural gas
at only a 2% annual rate. During the latter part of 1991 and through 1992,
natural gas
28
<PAGE>
conversions have returned to their approximate 1% historical annual rate as the
prices for the two products have been at parity.
In 1992, the Iroquois natural gas pipeline, which extends from Canada to
Long Island, New York commenced operations. This pipeline serves the Northeast
and has the capacity for transporting more than 600 million cubic feet of
natural gas per day.
The following table presents the percentage of the Company's customers that
have converted to natural gas annually from 1982-1992:
NATURAL GAS CONVERSIONS
<TABLE>
<CAPTION>
YEAR PERCENT
<S> <C>
1982................................................................................ 1.3%
1983................................................................................ 0.5
1984................................................................................ 0.6
1985................................................................................ 0.7
1986................................................................................ 0.8
1987................................................................................ 0.9
1988................................................................................ 1.0
1989................................................................................ 1.0
1990................................................................................ 1.5
1991................................................................................ 1.4
1992................................................................................ 1.1
</TABLE>
Environmental Matters
Petro has not incurred any significant environmental compliance costs. This
is primarily due to the Company's general policy of not owning or operating fuel
oil terminals and of closely monitoring its compliance with all environmental
laws. While Petro has received notifications for three sites under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
two claims against the Company were voluntarily dismissed and the third was
closed for $20,000.
INDUSTRY OVERVIEW
Since the 1930s, oil has been a primary source of home heat in the
Northeast. The Northeast accounts for approximately two-thirds of the demand for
home heating oil in the United States and, during 1991, approximately 7.7
million homes, or approximately 40% of all homes in the Northeast, were heated
by oil. In recent years, demand has been affected by conservation efforts and
conversions to natural gas. In addition, as the number of new homes that use oil
heat has not been significant, there has been virtually no increase in the
customer base due to housing starts. As a result, home heating oil consumption
in the Northeast has declined from approximately 5.9 billion gallons in 1981 to
approximately 4.4 billion gallons in 1991. The Company does not expect
consumption to decline materially as a result of further conservation efforts
and conversions to natural gas because, unless worldwide oil shortages develop,
consumers have little incentive to take additional conservation measures beyond
what they have already implemented. In addition, losses of customers to gas heat
as an alternate energy source are presently insignificant due to the recent
stabilization of retail oil prices relative to retail natural gas prices and the
cost of conversion. See "Business--Fundamental Characteristics--Conversions to
Natural Gas."
The home heating oil distribution business is highly fragmented and
characterized by numerous local fuel oil distributors, most of which have fewer
than 20 employees and operate within a 25 mile radius from their distribution
facility. According to the United States Bureau of Census, there were
approximately 3,800 independently-owned and operated home heating oil
distributors in the Northeast at the end of 1990. Generally, these companies
were established in the late 1940s and early 1950s in
29
<PAGE>
response to the post-World War II suburban housing boom. Now, 45 years later,
many of the proprietors of these businesses are considering retirement and
selling their operations.
BUSINESS STRATEGY
Current management assumed control of the Company in 1979 and restructured
the Company by consolidating operating branches and focusing primarily on the
retail sale of home heating oil. In addition, corporate overhead was
significantly reduced, primarily through a reduction in the number of employees
and related expenses. After this reorganization, management perceived an
opportunity to achieve substantial growth and increased profitability by
acquiring fuel oil distributors in new and existing markets.
Acquisition Strategy
The Company's strategy is to continue to grow through the acquisition and
integration of additional distributors in existing and new markets.
The Company acquires two types of distributors. The first type are
relatively small and easily integrated into the Company's branch system,
resulting in significant economies of scale through the centralization of the
purchasing, marketing, credit, data processing and other administrative
functions of the acquired distributor. The second type are larger, stand-alone
businesses that are not integratable but are usually in new markets.
Acquisitions of these businesses not only provide attractive investment returns,
but also provide hubs for future expansion.
From January 1, 1980 through September 30, 1993, the Company made 144
acquisitions of fuel oil distributors, of which 18 resulted in the Company's
expansion into new markets and the remaining were located in existing markets.
After an initial start-up period, the Company's acquisitions have been made at a
relatively steady pace, with the Company acquiring an average of 14 companies
annually from 1984 through 1989, which, excluding one large acquisition in 1987,
averaged 3.4 million gallons annually per acquisition, and cost an average of
$1.6 million per acquisition. While the Company continued to acquire
distributors in 1990 and 1991, it did so at a reduced pace, despite an increase
in opportunities, since the warm winter weather in those years limited the
Company's internally generated capital and access to attractively priced
external capital. The Company completed nine acquisitions in 1992 with an annual
volume of 65.6 million gallons and completed nine acquisitions during the nine
months ended September 30, 1993 with an annual volume of 25.6 million gallons.
On December 22, 1992 the Company acquired a fuel oil distribution business
from Agway Energy Products. This acquired business, which has distributors in
eight locations, sold, in the aggregate, approximately 15.5 million gallons of
home heating oil and 10.0 million gallons of other petroleum products in 1992.
Four of the distributors are also engaged in the distribution of propane,
primarily for home heating. These four distributors sold approximately 5.5
million gallons of propane during 1992. The Company believes that the propane
delivery business is a natural extension of its home heating oil delivery
business, and it has integrated these four propane distributors into its
existing operations. In December 1993, Petro acquired an approximate 29.5%
interest in another propane distributor, Star Gas, for $16 million. Star Gas has
a right of first refusal with respect to future acquisition opportunities in the
propane industry that are offered to the Company. There can be no assurance that
the investment will be profitable. The Company intends to explore the
acquisition of other distributors in the propane industry. See "Risk
Factors--Investment in Star Gas" and "--Investment in Star Gas."
30
<PAGE>
The following table sets forth the number of acquisitions made by the
Company during the 1979 to 1992 period, including the approximate number of
customers acquired and the gallons which such customers purchased from the
acquired distributors in the year preceding such acquisition:
<TABLE>
<CAPTION>
NUMBER OF
NUMBERS OF NUMBER OF GALLONS ACQUIRED
YEAR ACQUISITIONS CUSTOMERS ACQUIRED (IN THOUSANDS)
<S> <C> <C> <C>
1979.............................................. 1 800 900
1980.............................................. 3 6,950 8,910
1981.............................................. 6 50,800 49,050
1982.............................................. 4 19,900 23,600
1983.............................................. 5 40,000 65,151
1984.............................................. 13 51,300 62,420
1985.............................................. 10 49,900 61,934
1986.............................................. 16 46,800 53,375
1987.............................................. 12 76,300 114,527
1988.............................................. 20 47,300 53,287
1989.............................................. 16 34,400 51,569
1990.............................................. 12 35,600 42,859
1991.............................................. 9 15,300 18,220
1992.............................................. 9 65,200 65,618
</TABLE>
The Company's active acquisition program is designed to capitalize on the
highly fragmented nature of the home heating oil industry, Petro's acquisition
expertise, as well as what management believes to be an absence of competitors
with acquisition experience, reputation and access to capital equivalent to that
of Petro. In the Northeast, there are approximately 3,800 independently owned
and operated home heating oil distributors. Many of the proprietors of these
businesses are of retirement age and may be receptive to selling their
operations. Another source of acquisitions are companies that are owned by
individual entrepreneurs who find expansion within the heating oil industry
difficult, either operationally or financially, or who have other investment
opportunities. Recently, acquisition opportunities have increased due to the
effect of an increasingly difficult business environment on these independently
owned and operated businesses, especially as a result of the warm 1990 and 1991
heating seasons. In addition, the retail home heating oil divisions of major oil
companies, which strategically desire to concentrate their capital and
management in other segments of the petroleum industry, have also become
available.
The Company has an acquisition staff whose responsibility it is to develop
leads, analyze potential purchases, negotiate purchase prices and contracts and
oversee the integration process. This has resulted in acquisitions generally
requiring only three to four weeks from the time an understanding is reached to
the consummation of the transaction and the integration of the acquired
distributor into Petro's operations. In August 1993, the Company added two
senior managers to its acquisition staff in order to enhance the Company's
ability to actively identify new acquisition opportunities.
The two principal criteria the Company uses to evaluate a potential
acquisition are return on investment and operational fit. The Company determines
the earnings potential of a possible acquisition using its historical home
heating oil volume and gross profit margin and the Company's anticipated cost of
operating the acquired distributor. Based on the anticipated earnings, the
Company determines the price it will offer for the distributor to be acquired
which is calculated to provide the appropriate return on investment. The Company
seeks an annual EBITDA return of 25% to 30% on its capital investments. The
determination of operational fit is based on the Company's evaluation of such
distributor's customer profile, including annual home heating oil gallons sold,
the number of customers on automatic delivery, types of service plans, customer
payment patterns and other operating matters such as fleet and supply
requirements and compliance with environmental and other laws.
31
<PAGE>
Recognizing the service nature of the home heating oil business, Petro has
attempted to retain the local identity of companies it purchases. In addition,
while economies of scale are sought with each acquisition, the Company tries to
minimize changes that could adversely affect customer or employee relations. By
paying close attention to the operational, as well as financial, characteristics
of an acquisition, the Company has avoided significant problems relating to its
acquisitions over the past 13 years. This policy has not only reduced the
potential monetary risks associated with an acquisition but has also enabled
senior management to focus on new purchases rather than on post-acquisition
matters.
Petro is the largest retail distributor of home heating oil in the United
States and management believes there is no home heating oil distributor
comparable to Petro in its access to capital. Petro is the only distributor
operating in as many as 26 markets, and the Company believes that it sells
approximately 3.5 times as many gallons of retail home heating oil as the next
largest distributor. While in each of Petro's markets there are a limited number
of distributors that from time to time compete for acquisitions, these are
generally small enterprises that have limited capital resources and lack
structured acquisition programs. In addition, after 145 acquisitions, there is
an awareness throughout the home heating oil industry of Petro's interest in and
ability to consummate transactions. This high profile within the industry,
combined with the Company's reputation among potential sellers, results in Petro
having the opportunity to review many of the acquisition opportunities in the
Northeast. Several acquisition opportunities are currently being evaluated.
Operating Strategy
The Company currently operates from 30 branch locations and a corporate
office in Stamford, Connecticut. The accounting, data processing, purchasing and
credit functions are centralized, while branch offices maintain autonomy over
oil delivery, heating equipment service and customer relations. The Company
obtains its fuel oil in either barge or truckload quantities. When purchasing in
barge quantities, the Company hires independent barging companies on an as
needed basis to transport the Company's oil from refineries and other bulk
storage facilities to third-party storage terminals. The Company has contracted
with approximately 71 third party storage terminals for the right to temporarily
store its fuel oil at their facilities. The fuel oil is then transported by the
Company's fleet of approximately 725 delivery trucks to its customers.
Approximately 85% of the Company's customers receive their fuel oil
pursuant to an automatic delivery system in which individual deliveries are
scheduled by computer based upon each customer's historical consumption patterns
and prevailing weather conditions. The Company delivers home heating oil
approximately six times during the year to the average customer. The Company's
practice is to bill customers promptly after delivery. In addition,
approximately 30% of the Company's customers are on the Company's budget payment
plan whereby their estimated annual oil purchases and service contract is paid
for in a series of equal monthly payments over an 11 or 12 month period.
SUPPLIERS
The Company obtains home heating oil from numerous sources, including
integrated international oil companies, independent refiners and independent
wholesalers, many of which have been suppliers to the Company for over 10 years.
The Company's purchases are made pursuant to supply contracts or on the spot
market. The Company has market price based contracts for substantially all its
petroleum requirements with 14 different suppliers, all of which have
significant domestic sources for their product. The Company's current suppliers
are (in alphabetical order): Amerada Hess Corporation; Bayway Refining Co.;
Citgo Petroleum Corp.; Coastal New England and New York; Crown Central
Petroleum; Exxon Company USA; Global Petroleum Corp.; Kerr McGee Refining Corp.;
MG Refining and Marketing Co.; Mobil Oil Corporation; Northeast Petroleum, a
division of Cargill, Inc.; S&S Hartwell and Co., Inc., a division of Sprague
Energy Group; Stuart Petroleum Company; and Sun Oil Company. The Company's
supply contracts each have terms of 12 months and typically expire in May or
June of each year. All of the supply contracts provide for maximum quantities,
but do not establish in
32
<PAGE>
advance the price at which fuel oil is sold, which, like the Company's price to
its customers, is established from time to time. The Company believes that its
policy of contracting for substantially all its supply needs with diverse and
reliable sources will enable it to obtain sufficient product should unforeseen
shortages develop in the worldwide supply of crude oil. The Company further
believes that relations with its current suppliers are satisfactory.
CUSTOMERS AND SALES
As of September 30, 1993, the Company served approximately 421,000
customers in the following 26 markets through a sales force of 193 individuals
based primarily in the Company's branch offices:
NEW YORK
Bronx, Queens and Kings Counties
Eastern Long Island
Staten Island
Western Long Island
CONNECTICUT
Bridgeport--New Haven
Hartford (Metropolitan)
Litchfield County
Southern Fairfield County
PENNSYLVANIA
Allentown
Berks County (Centered in Reading)
Lebanon County (Centered in Palmyra)
MASSACHUSETTS
Boston (Metropolitan)
Northeastern Massachusetts
(Centered in Lawrence)
Springfield
Worcester
MARYLAND/VIRGINIA/D.C.
Baltimore (Metropolitan)
Washington, D.C. (Metropolitan)
NEW JERSEY
Camden
Neptune
Newark (Metropolitan)
North Brunswick
Rockaway
Trenton
NEW HAMPSHIRE
Milford
Portsmouth
RHODE ISLAND
Providence
Approximately 85% of the Company's sales of home heating oil are made to
homeowners with the balance to industrial, commercial and institutional
customers. Historically, the Company has lost a portion of its customer base
each year for various reasons, including customer relocation, price competition
and conversions to natural gas.
To generate leads for new customers, the Company utilizes a variety of
techniques such as telemarketing and monitoring real estate turnover. The
Company has implemented various sales incentives designed to attract new
customers and reduce account losses. The Company has instituted an ongoing
customer service training and sensitivity program in an effort to provide
superior service to its existing customers.
COMPETITION
The Company's business is highly competitive. The Company competes with
fuel oil distributors offering a broad range of services and prices, from full
service distributors, like the Company, to those offering delivery only.
Competition with other companies in the fuel oil industry is based primarily on
customer service and price. Long-standing customer relationships are typical in
the retail home heating oil industry. Many companies in the industry, including
Petro, deliver home heating oil to their customers based upon weather conditions
and historical consumption patterns without the customer having to make an
affirmative purchase decision each time oil is needed. In addition, most
companies, including Petro, provide home heating equipment repair service on a
24-hour a day basis, which tends to build customer loyalty.
33
<PAGE>
EMPLOYEES
As of September 30, 1993, the Company had 2,071 employees, of whom 634 were
office, clerical and customer service personnel, 723 were heating equipment
repairmen, 324 were oil truck drivers and mechanics, 197 were management and
staff and 193 were employed in sales. Approximately 62 of those employees are
seasonal, and management expects to rehire the majority of them for the next
heating season. Approximately 726 full time employees and 32 seasonal employees
are represented by 18 different local chapters of labor unions. Management
believes that its relations with both its union and non-union employees are
satisfactory.
LITIGATION
The Company is not party to any litigation which individually or in the
aggregate could reasonably be expected to have a material adverse effect on the
results of operations or the financial condition of the Company.
INVESTMENT IN STAR GAS
In December 1993, the Company acquired an approximate 29.5% equity interest
(42.8% voting interest) in Star Gas for $16.0 million in cash. Of such $16.0
million investment, $14.0 million was invested directly in Star Gas through the
purchase of Series A 8% pay-in-kind Cumulative Convertible Preferred Stock of
Star Gas, which is convertible into common stock of Star Gas, and $2.0 million
was invested through Star Gas Holdings, Inc. ("Holdings"), a corporation formed
in connection with the Star Gas Recapitalization. Certain other investors
(including Holdings) invested a total of $49.0 million of additional equity in
Star Gas, of which $11.0 million was in the form of cash and $38.0 million
resulted from the conversion of long-term debt and preferred stock into equity.
As a result of redemptions of a portion of the equity in Star Gas held by
certain of the other investors that the Company expects will occur in connection
with the Star Gas Recapitalization, the Company expects that its direct and
indirect equity interest in Star Gas will increase to 36.7% without any
additional investment by the Company.
Star Gas has granted to the Company an option, exercisable through December
20, 1998, to purchase 500,000 shares of common stock of Star Gas (representing
10% of Star Gas' equity) for an aggregate purchase price of approximately $5.0
million. In addition, each of the other investors in Star Gas (including each
such investor whose investment is held through Holdings) has granted to the
Company an option, exercisable for the period beginning on the date that Star
Gas' audited financial statements for the year ended September 30, 1994 are
first delivered to such investors and ending on December 31, 1998, to purchase
such investor's interest in Star Gas (or, in the case of Holdings, to purchase
such investor's interest in Holdings). In addition, each such investor has an
option, exercisable beginning January 1, 1999 and ending on December 31, 1999,
to require the Company to purchase such investor's interest in Star Gas (or
Holdings). In any such case, the purchase price for such interests would be
calculated based upon a multiple of Star Gas' EBITDA, subject to certain minimum
prices, and would be payable in cash or common stock of the Company or, in the
case of the Holdings options, in cash, subordinated debt of the Company or, if
the Company is not then permitted to issue such debt, preferred stock of the
Company. For additional information regarding the Star Gas Recapitalization, see
Note 2 of Notes to Consolidated Financial Statements of Star Gas.
The Company's decision whether or not to exercise any of its options will
be based, among other things, upon Star Gas' results of operations and the
availability of financing to the Company. As a result, the exercise of any such
option cannot be considered probable at this time.
The investors in Star Gas have entered into a shareholders' agreement,
which provides that the Company is entitled to nominate for election up to three
persons to serve as directors of Star Gas, Holdings is entitled to nominate up
to two persons, and the other investors (as a group) are entitled to nominate up
to three persons.
34
<PAGE>
The Company will manage Star Gas' business under a Management Services
Agreement which provides for an annual cash fee of $500,000 and an annual bonus
equal to 5% of the increase in Star Gas' EBITDA over the year ended September
30, 1993, payable in common stock of Star Gas pursuant to a formula set forth in
the Management Services Agreement. Star Gas also will reimburse the Company for
its expenses and the cost of certain Company personnel.
After giving effect to the Star Gas Recapitalization on a pro forma basis
as of September 30, 1993, Star Gas would have had total long-term debt of $70.0
million and stockholders' equity of $51.1 million. The Company is not
contingently liable for any indebtedness of Star Gas.
Star Gas is the tenth largest distributor of propane in the United States,
with sales of $154.2 million, representing over 169 million gallons of propane,
for the year ended September 30, 1993. Star Gas served approximately 200,000
customers in the midwestern, northeastern and southeastern regions of the United
States as of September 30, 1993.
Star Gas distributes propane primarily for home heating as well as for
commercial uses from 89 locations employing a fleet of over 300 delivery trucks.
Star Gas acquires propane from approximately 30 sources, including Ashland
Petroleum Company, Amoco Canada Marathon Corp., Enron Gas Liquids, Inc. and
Texaco Exploration and Production, Inc. Star Gas owns a storage facility in the
Midwest in which it is able to store approximately 22 million gallons of propane
in an underground cavern located approximately 400 feet below the surface. The
Company believes that there is little risk associated with the storage facility
due to its depth and location and that there is no significant environmental
risk due to the nature of the product stored.
The propane industry is highly competitive. For the fiscal years ended
September 30, 1991, 1992 and 1993, Star Gas had net losses of $5.3 million, $7.3
million and $47.1 million and EBITDA of $24.7 million, $22.2 million and $18.6
million, respectively. See the Consolidated Financial Statements of Star Gas
which appear elsewhere in this Prospectus. For the fiscal years ended September
30, 1991, 1992 and 1993, Star Gas had a ratio of EBITDA to interest expense of
1.3 to 1.0, 1.3 to 1.0, and 1.1 to 1.0, respectively. After giving effect to the
Star Gas Recapitalization, the ratio of EBITDA to interest expense on a pro
forma basis would have been 2.3 to 1.0 for the fiscal year ended September 30,
1993.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
Irik P. Sevin...................... 46 Chief Executive Officer, Chairman of the Board, President and Director
C. Justin McCarthy................. 49 Senior Vice President--Operations
Joseph P. Cavanaugh................ 56 Senior Vice President--Administration--Controller
Audrey L. Sevin.................... 67 Secretary and Director
George Leibowitz................... 56 Senior Vice President--Finance and Corporate Development
George P. Russell.................. 38 Senior Vice President--Marketing and Sales
Richard F. Ambury.................. 36 Vice President and Assistant Controller
James J. Bottiglieri............... 37 Vice President and Assistant Controller
Matthew J. Ryan.................... 36 Vice President--Supply
Phillip Ean Cohen(1)............... 46 Director
Thomas J. Edelman.................. 42 Director
Richard O'Connell(1)(2)............ 47 Director
Wolfgang Traber(1)(2).............. 49 Director
Max M. Warburg..................... 45 Director
</TABLE>
- -----------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Irik P. Sevin has been a director of Petro, Inc. since January 1979 and of
the Company since its organization in October 1983. Mr. Sevin has been President
of Petro, Inc. since November 1979 and of the Company since 1983 and Chairman of
the Board of the Company since January 1993. Between January 1979 and November
1979, he was Executive Vice President of Petro, Inc. Mr. Sevin was an associate
in the investment banking division of Kuhn Loeb & Co. and then Lehman Brothers
Kuhn Loeb Incorporated from February 1975 to December 1978. Mr. Sevin is a
graduate of the Cornell University School of Industrial and Labor Relations
(B.S.), New York University School of Law (J.D.) and the Columbia University
School of Business Administration (M.B.A.).
C. Justin McCarthy has been Senior Vice President--Operations of Petro,
Inc. since January 1979 and of the Company since its organization in October
1983. Prior to his joining the Company, Mr. McCarthy was General Manager of the
New York City operations for Whaleco Fuel Oil Company from 1976 to 1979 and was
General Manager of the Long Island Division of Meenan Oil Co., Inc. from 1973 to
1976. Mr. McCarthy is a graduate of Boston College (B.B.A.) and the New York
University Graduate School of Business Administration (M.B.A.).
Joseph P. Cavanaugh has been Controller of Petro, Inc. since 1973 and of
the Company since its organization in 1983. He was elected a Vice President of
the Company in October 1983 and a Senior Vice President since January 1993. Mr.
Cavanaugh is a graduate of Iona College (B.B.A.) and Pace University (M.S. in
Taxation).
Audrey L. Sevin has been a director and Secretary of Petro, Inc. since
January 1979 and of the Company since its organization in October 1983. Mrs.
Sevin was a director, executive officer and principal shareholder of A.W. Fuel
Co., Inc. from 1952 until its purchase by the Company in May 1981. Mrs. Sevin is
a graduate of New York University (B.S.).
36
<PAGE>
George Leibowitz has been Senior Vice President of the Company since
November 1, 1992. From 1985 to 1992, prior to joining the Company, Mr. Leibowitz
was the Chief Financial Officer of Slomin's Inc., a retail heating oil dealer.
From 1984 to 1985, Mr. Leibowitz was the President of Lawrence Energy Corp., a
consulting and oil trading company. From 1971 to 1984, Mr. Leibowitz was Vice
President--Finance and Treasurer of Meenan Oil Co., Inc. Mr. Leibowitz is a
Certified Public Accountant and a graduate of Columbia University (B.A. 1957)
and the Wharton Graduate Division, University of Pennsylvania (M.B.A. 1958).
George P. Russell has been Senior Vice President--Marketing and Sales since
May 1993. From 1986 to 1993, prior to joining the Company, Mr. Russell was the
Vice President of Marketing and Sales for Harvard Community Health Plan. From
1981 to 1986, Mr. Russell was a Marketing Manager with The Gillette Company. Mr.
Russell is a graduate of Western New England College (B.S. 1977), St. John's
University (M.B.A. 1979) and Harvard Graduate School of Business (Advanced
Management Program--Marketing 1988).
Richard F. Ambury has been Assistant Controller of the Company since June
1983 and was elected Vice President--Assistant Controller in December 1992. From
1979 to 1983, Mr. Ambury was employed by a predecessor firm of KPMG Peat
Marwick, a public accounting firm. Mr. Ambury graduated from Marist College with
a degree in Business Administration in 1979 and has been a Certified Public
Accountant since 1981.
James J. Bottiglieri has been Assistant Controller of the Company since
1985 and was elected Vice President--Assistant Controller in December 1992. From
1978 to 1984, Mr. Bottiglieri was employed by a predecessor firm of KPMG Peat
Marwick, a public accounting firm. Mr. Bottiglieri graduated from Pace
University with a degree in Business Administration in 1978 and has been a
Certified Public Accountant since 1980.
Matthew J. Ryan, who has been employed by the Company since 1987, has been
Manager of Supply and Distribution of the Company since 1990 and was elected
Vice President--Supply in December 1992. From 1974 to 1987, Mr. Ryan was
employed by Whaleco Fuel Corp., a subsidiary of the Company which was acquired
in 1987. Mr. Ryan graduated from St. Francis College with a degree in Accounting
in 1983 (B.S.).
Phillip Ean Cohen has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October 1983. Since 1985, Mr. Cohen has
been Chairman of Morgan Schiff & Co., Inc., an investment banking firm. Mr.
Cohen is presently a director of AmeriHealth, Inc.
Thomas J. Edelman has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October 1983. Mr. Edelman is the
President and a director of Snyder Oil Corporation, a Fort Worth, Texas based
independent oil company. Prior to 1981, he was a Vice President of The First
Boston Corporation. From 1975 through 1980, Mr. Edelman was with Lehman Brothers
Kuhn Loeb Incorporated. Mr. Edelman is a graduate of Princeton University (B.A.)
and the Harvard Graduate School of Business Administration (M.B.A.). Mr. Edelman
is also the Chairman of the Board of Lomak Petroleum, Inc., an Ohio based
independent oil company and a director of Total Energy Services Corporation, a
Houston based oil service company.
Richard O'Connell has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October 1983. Mr. O'Connell is a
private investor.
Wolfgang Traber has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October of 1983. Mr. Traber is Managing
Director of Hanseatic Corporation, in
37
<PAGE>
Hamburg, Germany, a private investment corporation. Mr. Traber is a director of
Deltec Securities Corporation, Blue Ridge Real Estate Company, Hellespont
Tankers Ltd. and M.M. Warburg & Co.
Max M. Warburg has been a director of the Company since May 1984. Since
January 1, 1982, Mr. Warburg has been a partner of M.M. Warburg & Co., a private
bank. For the prior four years he was a Managing Director of the same
organization. Since March 1988, he has been a member of the board of Holsten
Brauerei AG, Hamburg. Since May 1, 1987, he has been a member of the board of
Eurokai-Eckelmann Gruppe, Hamburg. Mr. Warburg is a member of the Board of DWS
Deutsche Gesellschaft fur Wertpapiersparen GmbH, Frankfurt; DEG Deutsche
Finanzierungsgesellschaft fur Beteilingungen in Entwicklungslandern GmbH, Koln;
the Hamburg Stock Exchange; and the Hamburg Banking Association.
Audrey L. Sevin is the mother of Irik P. Sevin. There are no other familial
relationships between any of the directors and executive officers.
The Company pays each of its directors other than Irik P. Sevin an annual
fee of $12,000. Directors are elected annually and serve until the next annual
meeting of shareholders and until their successors are elected and qualified.
Officers serve at the discretion of the Board.
Certain holders of the Class A Common Stock have entered into a
shareholders' agreement (the "Shareholders' Agreement") which provides that they
will vote their shares of Class A Common Stock and Class C Common Stock to elect
as directors of the Company five persons designated by a group consisting of the
Estate of Malvin P. Sevin, Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman,
Phillip Ean Cohen and Margot Gordon (the "Sevin Group") and three persons
designated by certain other shareholders of the Company (the "Traber Group").
Each group may designate its nominees by action of the holders of a majority of
the Class C Common Stock held by the group.
At present, there are seven directors serving and one vacancy on the Board.
Of the present directors, Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman and
Phillip Ean Cohen have been designated by the Sevin Group and Wolfgang Traber,
Richard O'Connell and Max A. Warburg have been designated by the Traber Group.
All such obligations to vote for directors shall lapse if the Estate of Malvin
P. Sevin, Irik P. Sevin or Audrey L. Sevin, no longer owns, directly or
indirectly, or has sole voting power over shares having at least 51% of the
voting power of all shares of Class C Common Stock held by the Sevin Group.
The Shareholders' Agreement (as well as the Company's Restated Articles of
Incorporation) provides that certain actions may not be taken without the
affirmative vote of 80% of the entire Board of Directors (irrespective of
vacancies) including at least one director who has been designated by the Traber
Group. The Shareholders' Agreement also provides for first refusal rights to the
Company if a holder of Class C Common Stock receives a bona fide written offer
from a third party to buy such holder's Class C Common Stock.
38
<PAGE>
DESCRIPTION OF DEBENTURES
The Debentures will be issued pursuant to an Indenture, to be dated as of
, 1994, between the Company and Chemical Bank, as trustee (the
"Trustee"). The terms of the Debentures include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act"). The Debentures are subject to all such terms,
and holders of the Debentures are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete. A copy of the
proposed form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. Definitions of certain terms used
in this section appear at the end of this section under "Certain Definitions."
GENERAL
The Indenture authorizes the issuance of an aggregate principal amount of
$75 million of Debentures. The Debentures will mature on , 2006.
The Debentures will be general unsecured obligations of the Company and will
bear interest at the rate per annum shown on the cover page of this Prospectus,
payable semi-annually in arrears on and in each year
to the holders of record at the close of business on the and
next preceding such interest payment date. Interest will initially
accrue from the date of issuance, and the first interest payment date will be
, 1994. Interest will be computed on the basis of a 360-day year
of twelve 30-day months. The Debentures will be issued in fully registered form
only in denominations of $1,000 and integral multiples thereof.
As indicated under "Ranking" below, the Debentures will be subordinated in
right of payment to all Senior Debt of the Company.
Principal, premium, if any, and interest will be payable, and the
Debentures may be presented for redemption, repurchase, exchange or transfer, at
the office of the Trustee in the Borough of Manhattan, City of New York and at
any other office or agency maintained by the Company for such purpose. The
registrar and paying agent will be Chemical Bank. The Company may change the
registrar or paying agent without prior notice to holders and the Company or any
Subsidiary may act in such capacity.
OPTIONAL REDEMPTION
The Debentures will be redeemable for cash on or after , 1999
at the option of the Company, in whole or from time to time in part, at the
redemption prices set forth herein, together with interest accrued to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date). The
redemption prices (expressed as percentages of principal amount) are as follows
for Debentures redeemed during the twelve-month period beginning
of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1999............................................................................. %
2000.............................................................................
2001.............................................................................
2002.............................................................................
2003 and thereafter.............................................................. 100.000
</TABLE>
In addition, at any time prior to , 1997, the Company may redeem
up to $25 million in principal amount of the Debentures with the net proceeds of
a public offering of Capital Stock (other than Redeemable Stock) at a redemption
price of % of the principal amount thereof, plus accrued and unpaid interest
thereon, provided that at least $50 million in aggregate principal amount of the
Debentures remain outstanding immediately following any such redemption.
39
<PAGE>
SINKING FUND
There will be no mandatory sinking fund payments for the Debentures.
SELECTION OF DEBENTURES TO BE REDEEMED AND NOTICE OF REDEMPTION
In the event of optional redemption, as described above, of less than all
of the Debentures, the Trustee will select the Debentures for redemption pro
rata or by lot or by a method that complies with applicable legal and securities
exchange requirements, if any, and that the Trustee considers fair and
appropriate and in accordance with methods generally used at the time of
selection by fiduciaries in similar circumstances.
Notice of redemption will be mailed at least 30 but not more than 60 days
before the redemption date to each holder of Debentures to be redeemed at such
holder's registered address. The notice of redemption will identify the
Debentures to be redeemed and will state the redemption date; the redemption
price; the name and address of the paying agent; that Debentures called for
redemption must be surrendered to the paying agent to collect the redemption
price plus accrued interest; that, unless the Company defaults in making such
redemption payment or the paying agent is prohibited from making such payment
pursuant to the terms of the Indenture, interest on Debentures called for
redemption ceases to accrue on and after the redemption date; the paragraph of
the Debentures pursuant to which the Debentures called for redemption are being
redeemed; and that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the Debentures.
Prior to the redemption date, the Company will deposit with the paying
agent (or, if the Company or a Subsidiary is the paying agent, will segregate
and hold in trust) money sufficient to pay the redemption price of and accrued
interest on all Debentures to be redeemed on that date other than Debentures or
portions of Debentures called for redemption which have been delivered by the
Company to the Trustee for cancellation.
RANKING
The payment of the principal of, premium (if any) and interest on the
Debentures is subordinated in right of payment, as set forth in the Indenture,
to the payment when due of all Senior Debt of the Company. However, payment from
the money or the proceeds of U.S. Government Obligations held in any defeasance
trust described under "Defeasance" below is not subordinate to any Senior Debt
or subject to the restrictions described herein. At September 30, 1993, after
giving pro forma effect to the Offering, application of the net proceeds
therefrom as described under "Use of Proceeds" and the Subordinated Debt
Amendments, the outstanding Senior Debt of the Company would have been
approximately $42.7 million. The Indenture contains limitations on the amount of
additional Funded Debt that the Company may incur; however, under certain
circumstances the amount of such Funded Debt could be substantial. The Indenture
does not contain limitations on the amount of Indebtedness that is not Funded
Debt that the Company may incur. In addition, any Indebtedness that the Company
may incur may be Senior Debt. See "--Certain Covenants--Limitation on Funded
Debt." A portion of the operations of the Company is conducted through its
Subsidiaries. Claims of creditors of such Subsidiaries, including trade
creditors, secured creditors and creditors holding guarantees issued by such
Subsidiaries, and claims of preferred stockholders (if any) of such
Subsidiaries, generally will have priority with respect to the assets and
earnings of such Subsidiaries over the claims of creditors of the Company,
including holders of the Debentures, even though such obligations do not
constitute Senior Debt. The Debentures, therefore, will be effectively
subordinated to creditors (including trade creditors) and preferred stockholders
(if any) of Subsidiaries of the Company. At September 30, 1993, such
Subsidiaries had outstanding Indebtedness (other than guarantees of the
Company's Indebtedness under the Credit Agreement) and trade credit of
approximately $9.2 million, consisting primarily of trade credit. The Debentures
will rank pari passu with other subordinated indebtedness of the
40
<PAGE>
Company, which, after giving pro forma effect to the Subordinated Debt
Amendments would have aggregated approximately $92.6 million as of September 30,
1993.
Although the Indenture limits the incurrence of Indebtedness and the
issuance of preferred stock by the Company's Subsidiaries, such limitation is
subject to a number of significant qualifications. See "Limitation on Subsidiary
Indebtedness and Preferred Stock."
"Senior Debt" means the following obligations, whether outstanding on the
date of the Indenture or thereafter issued:
(i) all obligations consisting of the Bank Debt;
(ii) all obligations consisting of the principal of and premium, if
any, and accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to the Company to the extent post-filing interest is allowed in
such proceeding) in respect of (A) indebtedness of the Company for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which the Company is
responsible or liable;
(iii) all Capital Lease Obligations of the Company;
(iv) all obligations of the Company (A) for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (B) under interest rate swaps, caps, collars, options and
similar arrangements and foreign currency hedges entered into in respect of
any obligations described in clauses (i), (ii) and (iii) or (C) issued or
assumed as the deferred purchase price of property and all conditional sale
obligations of the Company and all obligations of the Company under any
title retention agreement;
(v) all obligations of other persons of the type referred to in
clauses (ii), (iii) and (iv) and all dividends of other persons for the
payment of which, in any case, the Company is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
guarantees of such obligations and dividends; and
(vi) all obligations of the Company consisting of modifications,
renewals, extensions, replacements and refundings of any obligations
described in clauses (i), (ii), (iii), (iv) or (v);
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations are not superior
in right of payment to the Debentures; provided, however, that Senior Debt will
not include (1) any obligation of the Company to any Subsidiary or other
Affiliate of the Company, (2) any liability for federal, state, local or other
taxes owed or owing by the Company, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities) or (4) that
portion of any Indebtedness that was incurred in violation of the Indenture.
The Company may not pay principal of, premium (if any) or interest on, the
Debentures or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Debentures if (i) any Designated Senior Debt is not paid when due or (ii) any
other default on Designated Senior Debt occurs and the maturity of such
Designated Senior Debt is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived, any such acceleration has
been rescinded or such Designated Senior Debt has been paid in full. However,
the Company may pay the Debentures without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of each issue of Designated Senior Debt with respect to which any
such default relates. During the continuance of any default (other than a
default described in clause (i) or (ii) of the second preceding sentence) with
respect to any Designated Senior Debt pursuant to which the maturity thereof may
be accelerated immediately without further notice (except such notice as may be
required to effect such acceleration)
41
<PAGE>
or the expiration of any applicable grace periods, the Company may not pay the
Debentures for a period (a "Payment Blockage Period") commencing upon the
receipt by the Company and the Trustee of written notice of such default from
the Representative of the holders of any such Designated Senior Debt specifying
an election to effect such prohibition (a "Payment Blockage Notice") and ending
179 days thereafter (or earlier if such Payment Blockage Period is terminated
(i) by written notice to the Trustee and the Company from the Representative
that gave such Payment Blockage Notice, (ii) by repayment in full of such
Designated Senior Debt or (iii) because such default is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first two sentences of this
paragraph), unless the holders of such Designated Senior Debt or the
Representative of such holders have accelerated the maturity of such Designated
Senior Debt, the Company may resume payments on the Debentures after the end of
such Payment Blockage Period. Not more than one Payment Blockage Notice may be
given in any consecutive 360-day period, irrespective of the number of defaults
with respect to Designated Senior Debt during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Debt will be
entitled to receive payment in full before the holders of the Debentures are
entitled to receive any payment.
If payment of the Debentures is accelerated because of an Event of Default,
the Company or the Trustee will promptly notify the holders of the Designated
Senior Debt or their Representatives of the acceleration.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior Debt
may recover more, ratably, than the holders of the Debentures, and creditors of
the Company who are not holders of Senior Debt (including the Debentures) may
recover less, ratably, than holders of Senior Debt.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Debentures will
have the right to require the Company to repurchase all or any part of such
holder's Debentures at a repurchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date). A "Change of
Control" will be deemed to occur if (i) any "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than the
members of the Sevin Group and the Traber Group, becomes the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person shall be deemed to be the beneficial owner of all shares that such person
has the right to acquire, regardless of whether such right is exercisable
immediately or after the passage of time), directly or indirectly, of 50% or
more of the total voting power of all classes of the Voting Stock of the Company
and the members of the Sevin Group and the Traber Group cease to have the right
to appoint at least a majority of the members of the Board of Directors of the
Company, (ii) the holders of the 10 1/8% Notes have the right to require the
Company to purchase any such 10 1/8% Notes pursuant to Section 4.08 of the
Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as
trustee, relating thereto, (iii) any holder of the 11.85% Notes, the 12.17%
Notes or the 12.18% Notes exercises its right to declare any such notes to be
due and payable pursuant to Section 2.1 of the Note Agreement, dated as of
September 1, 1988, relating thereto (the "1988 Note Agreement"), (iv) any holder
of the 14.10% Notes exercises its right to declare any such notes to be due and
payable pursuant to Section 5.2(A) of the Note Agreement, dated as of January
15, 1991, relating thereto (the "1991 Note Agreement") and any holder of the
2000 Notes exercises its right to declare any such notes to be due and payable
pursuant to Section 5.2(A) of the Purchase Agreement, dated as of September 1,
1991, relating thereto (the "1991 Purchase
42
<PAGE>
Agreement") or (v) any holder of 11.85% Notes, 12.17% Notes, 12.18% Notes,
14.10% Notes or 2000 Notes shall have received any consideration (whether in the
form of cash, a change in the rate of interest relating to such notes, a change
in any other provision of the terms of such notes, or otherwise) to amend,
modify, waive or otherwise give up its right to declare any such notes to be due
and payable upon a "Change of Ownership," as defined in the 1988 Note Agreement,
the 1991 Note Agreement or the 1991 Purchase Agreement, as the case may be;
provided, however, that an amendment to or waiver or other modification of
Section 2.1 of the 1988 Note Agreement, Section 5.2(A) of the 1991 Note
Agreement or 5.2(A) of the 1991 Purchase Agreement shall not, in the absence of
any consideration, constitute a Change of Control under the Indenture.
Within 30 days following any Change of Control, the Company will mail a
notice to each holder stating (i) that a Change of Control has occurred and that
such holder has the right to require the Company to purchase such holder's
Debentures at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); (ii) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (iii) the
purchase date (which will be no earlier than 30 days nor later than 60 days from
the date such notice is mailed); and (iv) the instructions, determined by the
Company consistent with the Indenture, that a holder must follow in order to
have its Debentures repurchased.
If, at the time of a Change of Control, the Company is prohibited by the
terms of Bank Debt from purchasing Debentures that may be tendered by holders at
the purchase price described above as a result of such Change of Control, then
prior to the mailing of the notice to holders described in the preceding
paragraph but in any event within 30 days following any Change of Control, the
Company must (i) repay in full all Bank Debt or offer to repay in full all Bank
Debt and repay the Bank Debt of each lender who has accepted such offer or (ii)
obtain the requisite consent under the Bank Debt to permit the purchase of the
Debentures as described above. The Company must first comply with the covenant
described in the preceding sentence before it will be required to purchase
Debentures in the event of a Change of Control, provided that the Company's
failure to comply with the covenant described in the preceding sentence will
constitute a Default described in clause (iii) under "Defaults" below. As a
result of the foregoing, a holder of the Debentures may not be able to compel
the Company to purchase the Debentures unless the Company is able at the time to
refinance the Bank Debt.
The Change of Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. Management has no present intention
to engage in a transaction involving a Change of Control, although it is
possible that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
The Company's existing subordinated indebtedness contains provisions that
require the Company to repurchase such Indebtedness upon the occurrence of
certain events which are substantially similar to the event constituting a
Change of Control. The Credit Agreement limits the amount of the Company's cash
that may be used to repurchase indebtedness of the Company. In addition, the
Company's ability to pay cash to the holders of Debentures upon a repurchase may
be limited by the Company's then existing financial resources.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with any offer
required to be made by the Company to purchase the Debentures as a result of a
Change of Control.
43
<PAGE>
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
SEC Reports. Whether or not required by the rules and regulations of the
Commission, so long as any Debentures are outstanding, the Company will furnish
to the holders of Debentures all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information with the Commission for public availability and
make such information available to investors who request it in writing. The
Company also will comply with the provisions of Sec. 314(a) of the Trust
Indenture Act.
Limitation on Funded Debt. The Company will not, directly or indirectly,
create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable with respect to (collectively, "incur") any Funded Debt
unless, after giving effect thereto, the Company's Consolidated EBITDA Coverage
Ratio exceeds 2.0 to 1.
Notwithstanding the foregoing paragraph, the Company may incur the
following Funded Debt: (i) Funded Debt owed to and held by a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Funded Debt (other
than to a Wholly Owned Subsidiary) will be deemed, in each case, to constitute
the incurrence of such Funded Debt by the Company; (ii) the Debentures and
Funded Debt issued in exchange for, or the proceeds of which are used to refund
or refinance, any Funded Debt permitted by this clause (ii); provided, however,
that (1) the principal amount of the Funded Debt so incurred will not exceed the
principal amount of the Funded Debt so exchanged, refunded or refinanced and (2)
the Funded Debt so incurred (A) will not mature prior to the Stated Maturity of
the Funded Debt so exchanged, refunded or refinanced and (B) will have an
Average Life equal to or greater than the remaining Average Life of the Funded
Debt so exchanged, refunded or refinanced; (iii) Funded Debt (other than Funded
Debt described in clause (i) or (ii) of this paragraph) outstanding on the date
of the Indenture and Funded Debt issued in exchange for, or the proceeds of
which are used to refund or refinance, any Funded Debt permitted by this clause
(iii) or by the first paragraph of this covenant; provided, however, that (1)
the principal amount of the Funded Debt so incurred will not exceed the
principal amount of the Funded Debt so exchanged, refunded or refinanced, (2)
the Funded Debt so incurred (A) will not mature prior to the Stated Maturity of
the Funded Debt so exchanged, refunded or refinanced and (B) will have an
Average Life equal to or greater than the remaining Average Life of the Funded
Debt so exchanged, refunded or refinanced and (3) if the Funded Debt so
exchanged, refunded or refinanced is a Subordinated Obligation, the Funded Debt
so incurred will be subordinated to the Debentures and; (iv) additional Funded
Debt in an aggregate amount not to exceed $50 million at any one time
outstanding.
In addition, the Company will not create, incur, assume or permit to exist
any Lien (other than Permitted Liens) upon or with respect to any of the
property of the Company or any Subsidiary to secure Funded Debt that is not
Senior Debt unless contemporaneously therewith effective provision is made to
secure the Debentures equally and ratably with such Funded Debt for so long as
such Funded Debt is secured by a Lien.
Limitation on Indebtedness and Preferred Stock of Subsidiaries. The Company
will not permit any Subsidiary to incur any Indebtedness or issue any Preferred
Stock except: (i) Indebtedness or Preferred Stock issued to and held by the
Company or a Wholly Owned Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of
such Indebtedness
44
<PAGE>
or Preferred Stock (other than to the Company or a Wholly Owned Subsidiary) will
be deemed, in each case, to constitute the incurrence of such Indebtedness or
the issuance of such Preferred Stock, as the case may be, by the issuer thereof;
(ii) Indebtedness incurred or Preferred Stock of a Subsidiary issued and
outstanding on or prior to the date on which such Subsidiary was acquired by the
Company (other than Indebtedness incurred or Preferred Stock issued in
contemplation of, as consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Subsidiary became a Subsidiary or
was acquired by the Company), provided that at the time such Subsidiary is
acquired by the Company, after giving effect to such Indebtedness or Preferred
Stock of such Subsidiary, the Company's Consolidated EBITDA Coverage Ratio
exceeds 2.0 to 1; (iii) Indebtedness or Preferred Stock (other than Indebtedness
or Preferred Stock described in clause (i), (ii), (iv) or (vi) of this covenant)
incurred or issued and outstanding on or prior to the date of the Indenture;
(iv) Indebtedness of a Subsidiary consisting of guarantees issued by such
Subsidiary and outstanding on the date of the Indenture and Indebtedness of a
Subsidiary consisting of guarantees issued subsequent to the date of the
Indenture, in each case, to the extent such guarantee guarantees Bank Debt; (v)
Indebtedness of a Subsidiary (other than Indebtedness described in clause (iv)
above) consisting of guarantees of Funded Debt of the Company permitted by the
first paragraph of "Limitation on Funded Debt," provided that contemporaneously
with the incurrence of such Indebtedness by such Subsidiary, such Subsidiary
issues a guarantee for the pro rata benefit of the holders of the Debentures
that is subordinated to such Indebtedness of such Subsidiary to the same extent
as the Debentures are subordinated to such Funded Debt of the Company; and (vi)
Indebtedness or Preferred Stock issued in exchange for, or the proceeds of which
are used to refund or refinance, Indebtedness or Preferred Stock referred to in
the foregoing clause (ii) or (iii); provided, however, that (1) the principal
amount of such Indebtedness or Preferred Stock so incurred or issued will not
exceed the principal amount of the Indebtedness or Preferred Stock so exchanged
or refinanced and (2) the Indebtedness or Preferred Stock so incurred or issued
will (A) have a Stated Maturity later than the Stated Maturity of the
Indebtedness or Preferred Stock being exchanged or refinanced and (B) will have
an Average Life equal to or greater than the remaining Average Life of the
Indebtedness or Preferred Stock so exchanged, refunded or refinanced.
Limitation on Restricted Payments. The Company will not, and will not
permit any Subsidiary, directly or indirectly, to (i) declare or pay any
dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) or to the direct or indirect holders of its Capital Stock (except
(x) dividends or distributions payable solely in its Non-Convertible Capital
Stock or in options, warrants or other rights to purchase its Non-Convertible
Capital Stock and (y) dividends or distributions payable to the Company or a
Subsidiary, and, if a Subsidiary is not wholly owned, to the other shareholders
of such Subsidiary on a pro rata basis in accordance with their ownership
interest in such Subsidiary), (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company or of any direct or indirect
parent of the Company, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition)
or (iv) make any Restricted Investment (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition or retirement,
or any such Restricted Investment, being herein referred to as a "Restricted
Payment") if at the time the Company or such Subsidiary makes such Restricted
Payment: (1) a Default will have occurred and be continuing (or would result
therefrom); or (2) the aggregate amount of such Restricted Payment and all other
Restricted Payments subsequent to December 31, 1993 would exceed the sum of: (A)
50% of the Cash Flow of the Company and its Subsidiaries accrued during the
period (treated as one accounting period) subsequent to December 31, 1993, to
the end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or, in case such Cash Flow will be a deficit,
minus 100% of such deficit); (B) the aggregate Net Cash Proceeds
45
<PAGE>
received by the Company from the issue or sale of its Capital Stock subsequent
to December 31, 1993 (other than an issuance or sale to a Subsidiary or
Unrestricted Subsidiary of the Company or an employee stock ownership plan or
other trust established by the Company or any Subsidiary or Unrestricted
Subsidiary of the Company); (C) the amount by which indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary) subsequent to December 31, 1993, of any Indebtedness of
the Company convertible or exchangeable for Capital Stock of the Company (less
the amount of any cash, or other property, distributed by the Company upon such
conversion or exchange); and (D) $20 million.
The provisions of the foregoing paragraph will not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Capital Stock
issued or sold to a Subsidiary or an employee stock ownership plan or other
trust established by the Company or any Subsidiary); provided, however, that (A)
such purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale will be
excluded from clause (2)(B) of the foregoing paragraph; (ii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; provided,
however, that at the time of payment of such dividend, no other Default will
have occurred and be continuing (or result therefrom); provided further,
however, that such dividend will be included in the calculation of the amount of
Restricted Payments; (iii) dividends declared and paid in respect of the
Company's Class B Common Stock outstanding on the date of the Indenture in an
amount in respect of any fiscal year not to exceed 1.5% of the Company's Class B
Cash Flow for the immediately preceding fiscal year (provided that no dividend
will theretofore have been declared on the Class A Common Stock or Class C
Common Stock in the same fiscal year); provided, however, that at the time of
such dividend, redemption or exchange, no Default will have occurred or be
continuing; provided further, however, that any such dividends, redemptions and
exchanges will be included in the calculation of Restricted Payments; (iv)
dividends on, and mandatory redemptions and exchanges of, the 1989 Preferred
Stock outstanding on the date of the Indenture; provided, however, that at the
time of such dividend, redemption or exchange, no Default will have occurred or
be continuing; provided further, however, that any such dividends, redemptions
and exchanges will be excluded in the calculation of Restricted Payments; or (v)
Restricted Investments in an aggregate amount not to exceed the sum of (A) $25
million, plus (B) $5 million on each anniversary of the date of the Indenture,
plus (C) the amount of all dividends or other distributions received in cash by
the Company or any of its Wholly Owned Subsidiaries from, and the amount of any
Net Cash Proceeds to the Company or any of its Wholly Owned Subsidiaries from
the sale of Capital Stock (other than a sale of Capital Stock to the Company, a
Subsidiary or Unrestricted Subsidiary of the Company or an employee stock
ownership plan or other trust established by the Company or any Subsidiary or
Unrestricted Subsidiary of the Company) of, an Unrestricted Subsidiary of the
Company, to the extent that the aggregate amount of such dividends or other
distributions, together with the aggregate amount of any such Net Cash Proceeds,
do not exceed the aggregate amount of Restricted Investments made by the Company
in such Unrestricted Subsidiary since the date of the Indenture; provided,
however,that Restricted Investments permitted by this clause (v) will be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Subsidiaries. The Company
will not, and will not permit any Subsidiary to, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary to: (i) pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness owed to the Company,
(ii) make any loans or advances to the Company or (iii) transfer any of its
property or assets to the Company, except: (1) any encumbrance or restriction
pursuant to an agreement in effect on the date of the Indenture; (2) any
encumbrance or restriction with respect to a Subsidiary pursuant to an agreement
relating to any Indebtedness issued by such Subsidiary on or prior to the date
on which such Subsidiary was acquired by the Company (other than Indebtedness
issued in contemplation of, as consideration in, or to
46
<PAGE>
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Subsidiary became a Subsidiary or was acquired by the Company) and
outstanding on such date; (3) any encumbrance or restriction pursuant to an
agreement effecting a refinancing of Indebtedness issued pursuant to an
agreement referred to in the foregoing clause (1) or (2) or contained in any
amendment to an agreement referred to in the foregoing clause (1) or (2);
provided, however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are no less favorable to holders of the
Debentures than the encumbrances and restrictions contained in such agreements;
(4) any such encumbrance or restriction consisting of customary nonassignment
provisions in leases governing leasehold interests to the extent such provisions
restrict the transfer of the lease; (5) in the case of clause (iii) above,
restrictions contained in security agreements securing Indebtedness of a
Subsidiary to the extent such restrictions restrict the transfer of the property
subject to such security agreements; and (6) any restriction with respect to a
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary pending the closing of such sale or disposition.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Subsidiary to, conduct any business or enter into any transaction
or series of similar transactions in an aggregate amount in excess of $100,000
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company or any legal or
beneficial owner of 5% or more of any class of Capital Stock of the Company or
with an Affiliate of any such owner (any such business, transaction or series of
similar transactions, an "Affiliate Transaction") unless the terms of such
Affiliate Transaction are: (i) set forth in writing, (ii) fair to the Company
and its Subsidiaries from a financial point of view, (iii) in the case of any
Affiliate Transaction (other than an Affiliate Transaction with an Unrestricted
Subsidiary of the Company) in an aggregate amount in excess of $500,000, the
disinterested members of the Board of Directors have determined in good faith
that the criteria set forth in clause (ii) are satisfied and (iv) in the case of
any Affiliate Transaction involving an Unrestricted Subsidiary of the Company in
an aggregate amount in excess of $2.0 million, the members of the Board of
Directors have determined in good faith that the criteria set forth in clause
(ii) are satisfied. This covenant will not prohibit: (i) any Restricted Payment
permitted under "Limitation on Restricted Payments," (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) loans or advances to
employees in the ordinary course of business; (iv) the payment of reasonable
fees to directors of the Company and its subsidiaries who are not employees of
the Company or its subsidiaries, (v) any transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries or (vi) the
Investment represented by the Sevin Note.
Limitation on Liens on Subsidiary Stock. The Company will not directly or
indirectly create, assume or suffer to exist, any Lien on any Capital Stock of
any of its Subsidiaries.
Except for the limitations on dividends and redemptions of capital stock
and the limitations on the incurrence of Indebtedness, the Indenture will not
contain any covenants or provisions that may afford holders of the Debentures
protection in the event of a highly leveraged transaction.
SUCCESSOR COMPANY
The Company may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any person unless: (i)
the resulting, surviving or transferee person (if not the Company) is organized
and existing under the laws of the United States of America or any State thereof
or the District of Columbia and such entity expressly assumes by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Indenture and the
Debentures; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee person or any Subsidiary as a result of such transaction
as having been issued by such person
47
<PAGE>
or such Subsidiary at the time of such transaction), no Default has happened and
is continuing; (iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee person would be able to issue an additional
$1.00 of Funded Debt pursuant to the first paragraph of "Limitation on Funded
Debt"; and (iv) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture. The
resulting, surviving or transferee person will be the successor company.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Debentures when due, continued for 30 days, whether
or not such payment is prohibited by the provisions described under "Ranking"
above, (ii)(A) a default in the payment of principal of any Debenture when due
at its Stated Maturity, upon redemption, upon declaration or otherwise, whether
or not such payment is prohibited by the provisions described under "Ranking"
above or (B) the failure by the Company to redeem or purchase Debentures when
required pursuant to the Indenture or the Debentures, whether or not such
redemption or purchase will be prohibited by the provisions described under
"Ranking" above, (iii) the failure by the Company to comply for 30 days after
notice with its agreements contained in the Debentures or the Indenture (other
than those referred to in clauses (i) and (ii) above) (the "covenant default
provision"), (iv) Indebtedness of the Company or any Significant Subsidiary is
not paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total amount of
such Indebtedness unpaid or accelerated exceeds $1 million or its foreign
currency equivalent (the "cross acceleration provision"), (v) certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy provisions") or (vi) any judgment or decree for the
payment of money in excess of $1 million is rendered against the Company or a
Significant Subsidiary and is not discharged and either (A) an enforcement
proceeding has been commenced by any creditor upon such judgment or decree or
(B) there is a period of 60 days following such judgment or decree during which
such judgment or decree is not discharged, waived or the execution thereof
stayed, and, in the case of (B), such default continues for 10 days after notice
(the "judgment default provision").
If an Event of Default (other than an Event of Default specified in clause
(v) above with respect to the Company) occurs and is continuing, the Trustee or
the holders of at least 25% in principal amount of the Debentures may declare
the principal of and accrued but unpaid interest on all the Debentures to be due
and payable. Upon such a declaration, such principal and interest will be due
and payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization with respect to the Company occurs and
is continuing, the principal of and interest on all the Debentures will ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holders of the Debentures. Under certain
circumstances, the holders of a majority in principal amount of the Debentures
may rescind any such acceleration with respect to the Debentures and its
consequences. If payment of the Debentures is accelerated because of an Event of
Default, the Company or the Trustee must promptly notify the holders of
Designated Senior Debt of the acceleration.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Debentures
unless such holders have offered to the Trustee indemnification satisfactory to
it in its sole discretion against all such losses and expenses caused by taking
or not taking any such action. No holder of a Debenture may pursue any remedy
with respect to the Indenture or the Debentures unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the Debentures have requested the
Trustee to pursue the remedy, (iii) such holders have offered the Trustee
reasonable security or indemnity against any loss, liability or expense, (iv)
the
48
<PAGE>
Trustee has not complied with such request within 60 days after the receipt
thereof and the offer of security or indemnity and (v) the holders of a majority
in principal amount of the Debentures have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the Debentures
are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or, subject to the provisions
of the Indenture relating to the duties of the Trustee, that the Trustee
determines is unduly prejudicial to the rights of any other holder of a
Debenture or that would involve the Trustee in personal liability; provided,
however, that the Trustee may take any other action deemed proper by the Trustee
that is not inconsistent with such direction.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Debentures
notice of the Default within 90 days after it occurs; provided, however, that,
except in the case of a Default in the payment of principal of or interest on
any Debenture, the Trustee may withhold notice if and so long as a committee of
its Trust Officers determines that withholding notice is in the interest of the
holders of the Debentures. The Company also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Except as described below and except for amendments or waivers of the
Change of Control provisions (including the related definitions) of the
Indenture (which require the consent of the holders at least 66 2/3% in
principal amount of the Debentures), the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Debentures then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of a majority in principal amount of the
Debentures then outstanding. However, without the consent of each holder of
Debentures affected, no amendment may, among other things, (i) reduce the amount
of Debentures whose holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest on any Debenture, (iii) reduce the
principal of or extend the Stated Maturity of any Debenture, (iv) reduce the
premium payable upon the redemption of any Debenture or change the time at which
any Debenture may or will be redeemed as described under "Optional Redemption"
above, (v) make any Debenture payable in money other than that stated in the
Debenture, (vi) impair the right of any holder of the Debentures to receive
payment of principal of and interest on such holder's Debentures on or after the
due dates therefor or to institute suit for the enforcement of any payment on or
with respect to such holder's Debentures, (vii) make any change to the
subordination provisions of the Indenture that adversely affects the rights of
any holder or (viii) make any change in the amendment provisions which require
each holder's consent or in the waiver provisions.
Without the consent of any holder of the Debentures, the Company and the
Trustee may amend or supplement the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of the Company under the Indenture, to provide
for uncertificated Debentures in addition to or in place of certificated
Debentures (provided that the uncertificated Debentures are issued in registered
form for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Debentures are described in Section 163(f)(2)(B) of the Code), to
make any change to the subordination provisions of the Indenture that adversely
affects the rights of any holder of Senior Debt (or Representatives therefor),
to add guarantees with respect to the Debentures, to secure the Debentures, to
add to the covenants of the Company for the benefit of the holders of the
Debentures or to surrender any right or power conferred upon the Company, to
make any change that does not adversely affect the rights of any holder of the
Debentures or to comply with any requirement of the Commission in connection
with the qualification of the Indenture under the Trust
49
<PAGE>
Indenture Act. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the holders of the Debentures is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Debentures a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Debentures, or any defect therein, will not impair or affect the validity of the
amendment.
TRANSFER
The Debentures will be issued in registered form and will be transferable
only upon the surrender of the Debentures being transferred for registration of
transfer. The Company may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the
Debentures and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Debentures, to replace mutilated,
destroyed, lost or stolen Debentures and to maintain a registrar and paying
agent in respect of the Debentures. The Company at any time may terminate its
obligations under the covenants described under "Certain Covenants" (other than
under "SEC Reports") and "Change of Control," the operation of the covenant
default provision, the cross acceleration provision, the bankruptcy provisions
which respect to Significant Subsidiaries and the judgment default provision
described under "Defaults" above and the limitations contained in clause (iii)
described under "Successor Company" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Debentures may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Debentures may not be accelerated
because of an Event of Default specified in clause (iii), (iv), (v) (with
respect only to Significant Subsidiaries) or (vi) under "Defaults" above or
because of the failure of the Company to comply with the covenants described
under "Certain Covenants" (other than the covenant described under "SEC Reports"
and certain other covenants not described above) above or "Change of Control"
above or with clause (iii) under "Successor Company" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the
Debentures to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an Opinion of
Counsel to the effect that holders of the Debentures will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been in the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).
50
<PAGE>
CONCERNING THE TRUSTEE
Chemical Bank is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Debentures.
GOVERNING LAW
The Indenture provides that it and the Debentures will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Affiliate" of any person specified means (i) any person directly or
indirectly controlling or under direct or indirect common control with such
specified person, (ii) any spouse, immediate family member or other relative who
has the same principal residence as any person described in clause (i) above,
(iii) any trust in which any persons described in clause (i) or (ii) above has a
beneficial interest and (iv) in the case of the Company, any Unrestricted
Subsidiary of the Company. For the purposes of this definition, "control," when
used with respect to any person, means the power to direct the management and
policies of such person, directly or indirectly, whether through the ownership
of voting securities, a contract or otherwise, and the terms "controlling" and
"controlled" have meaning correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Subsidiary (other than directors' qualifying shares),
property or other assets (each referred to for the purposes of this definition
as a "disposition") by the Company or any of its Subsidiaries (including any
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Subsidiary to the Company or by the Company or a
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property or
assets at fair market value in the ordinary course of business or (iii) a
disposition of obsolete assets in the ordinary course of business.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as of the time of determination, the present value (discounted at the
interest rate borne by the Debentures, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Debt" means any and all amounts payable under or in respect of the
Credit Agreement, as amended from time to time, any Refinancing Agreement, any
Working Capital Financing Agreement, or any other loan agreement with a bank,
including principal, premium (if any), interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to the Company to the extent a claim for post-filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
51
<PAGE>
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" of a person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such person prepared in accordance with generally accepted
accounting principles; the amount of such obligation will be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; and the Stated Maturity thereof will be the date of the last payment
of rent or any other amount due under such lease prior to the first date upon
which such lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.
"Cash Flow" of a person for any fiscal year, means the sum of (i) the
Consolidated Net Income of such person for such fiscal year, plus (ii) to the
extent deducted in the calculation of such Consolidated Net Income, the
amortization of customer lists and other deferred charges and the amortization
and depreciation of capital assets, plus (iii) to the extent not included in
Consolidated Net Income, the amount of all dividends or other distributions
received in cash by the Company or any of its Wholly Owned Subsidiaries from,
and the amount of any Net Cash Proceeds to the Company or any of its Wholly
Owned Subsidiaries from the sale of Capital Stock of, an Unrestricted Subsidiary
of the Company; provided, however, that any amounts included in clause (v)(C) of
the second paragraph under "Limitations on Restricted Payments" shall be
excluded from Cash Flow of the Company.
"Class B Cash Flow" for any fiscal year means the sum of (i) net income of
the Company and its consolidated subsidiaries for such fiscal year determined in
accordance with generally accepted accounting principles, plus (ii) depreciation
and amortization of plant and equipment and amortization of customer lists and
restrictive covenants of the Company and its consolidated subsidiaries for such
fiscal year determined in accordance with generally accepted accounting
principles; provided, however, that (a) the net income of any person other than
a consolidated subsidiary in which the Company or any subsidiary has an interest
shall be included only to the extent of the amount of dividends or other
distributions paid to the Company or a consolidated subsidiary, (b) the net
income of any person acquired in a pooling transaction shall be excluded for any
period prior to the date of acquisition and (c) Class B Cash Flow with respect
to a fiscal year shall never be less than zero.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor and, for purposes of any
provision contained herein and required by the TIA, each other obligor on the
indenture securities.
"Consolidated EBITDA Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that (1) if the Company or any Subsidiary
has incurred any Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated EBITDA Coverage Ratio is an incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period will be calculated
after giving effect on a pro forma basis to (A) such Indebtedness as if such
Indebtedness had been incurred on the first day of such period, (B) the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, and (C) the interest income realized
by the Company and its Subsidiaries on the proceeds of such Indebtedness, to the
extent not yet applied at the date of determination, assuming such proceeds
earned interest at the Treasury Rate from the date such proceeds were received
through such date of determination, (2) if since the beginning of such period
the Company or any Subsidiary
52
<PAGE>
will have made any Asset Disposition, EBITDA for such period will be reduced by
an amount equal to EBITDA (if positive) directly attributable to the assets
which are the subject of such Asset Disposition for such period, or increased by
an amount equal to EBITDA (if negative), directly attributable thereto for such
period and Consolidated Interest Expense for such period will be reduced by an
amount equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Dispositions for such period (or, if the Capital
Stock of any Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable for the Indebtedness of such Subsidiary to the
extent the Company and its continuing Subsidiaries are no longer liable for such
Indebtedness after such sale) and (3) if since the beginning of such period the
Company or any Subsidiary (by merger or otherwise) will have made an Investment
in any Subsidiary (or any person which becomes a Subsidiary) or an acquisition
of assets, including any acquisition of assets occurring in connection with a
transaction causing a calculation to be made hereunder, which constitutes all or
substantially all an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period will be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period. For purposes
of this definition, whenever pro forma effect is to be given to an acquisition
of assets, the amount of income or earnings relating thereto, and the amount of
Consolidated Interest Expense associated with any Indebtedness incurred in
connection therewith, the pro forma calculations will be determined in good
faith by a responsible financial or accounting Officer of the Company; provided,
however, that such Officer shall assume (i) the historical sales and gross
profit margins associated with such assets for any consecutive 12-month period
ended prior to the date of purchase (provided that the first month of such
period will be no more than 18 months prior to such date of purchase), less
estimated post-acquisition loss of customers (not to be less than 3%) and (ii)
other expenses as if such assets had been owned by the Company since the first
day of such period. If any Indebtedness bears a floating rate of interest and is
being given pro forma effect, the interest on such Indebtedness will be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Subsidiaries, determined on a consolidated basis,
including (i) interest expense attributable to capital leases, (ii) amortization
of debt discount, (iii) capitalized interest, (iv) non-cash interest expense,
(v) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing, (vi) interest actually paid
by the Company or any such Subsidiary under any guarantee of Indebtedness or
other obligation of any other Person, (vii) net costs associated with Hedging
Obligations (including amortization of fees), (viii) Preferred Stock dividends
in respect of all Preferred Stock of Subsidiaries held by persons other than the
Company or a Wholly Owned Subsidiary, (ix) the cash contributions to any
employee stock ownership plan or similar trust to the extent such contributions
are used by such plan to pay interest or fees to any person (other than the
Company) in connection with loans incurred by such plan or trust to purchase
newly issued or treasury shares of the Company (but excluding interest expense
associated with the accretion of principal on a non-interest bearing or other
discount security) and (x) to the extent not already included in Consolidated
Interest Expense, the interest expense attributable to Indebtedness of another
person that is guaranteed by the Company or any of its Subsidiaries, less
interest income (exclusive of deferred financing fees) of the Company and its
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Net Income" of a person, for any period, means the aggregate
of the Net Income of such person and its Subsidiaries for such period,
determined on a consolidated basis in accordance with generally accepted
accounting principles, provided that (i) the Net Income of any other person
(other than a Subsidiary) in which such person has an interest will be included
only to the extent of the amount of dividends or distributions paid to such
person, (ii) the Net Income of any person acquired by such person in a pooling
of interests transaction for any period prior to the date of such acquisition
will be
53
<PAGE>
excluded, (iii) any Net Income of any Subsidiary will be excluded if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Subsidiary, directly or
indirectly, to such person, except that (A) such person's equity in the Net
Income of any such Subsidiary for such period will be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Subsidiary during such period to such person as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
another subsidiary, to the limitation contained in this clause) and (B) such
person's equity in a net loss of any such Subsidiary for such period will be
included in determining such Consolidated Net Income, and (iv) the cumulative
effect of a change in accounting principles will be excluded.
"Credit Agreement" means the Second Amended and Restated Credit Agreement
dated as of December 31, 1992, between the Company and Chemical Bank, as agent,
as amended from time to time.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means (i) the Bank Debt and (ii) any other Senior
Debt which, at the date of determination, has an aggregate principal amount
outstanding of, or commitments to lend up to, at least $10 million and is
specifically designated by the Company in the instrument evidencing or governing
such Senior Debt as "Designated Senior Debt" for purposes of the Indenture.
"EBITDA" for any period means the Consolidated Net Income for such period
(but without giving effect to adjustments, accruals, deductions or entries
resulting from purchase accounting, extraordinary losses or gains and any gains
or losses from any Asset Dispositions), plus the following to the extent
deducted in calculating such Consolidated Net Income: (i) income tax expense,
(ii) Consolidated Interest Expense, (iii) depreciation expense, (iv)
amortization expense and (v) all other non-cash expenses.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock which is exchangeable or
convertible into another security (other than Capital Stock of the Company which
is neither Exchangeable Stock nor Redeemable Stock).
"Funded Debt" as applied to any person means, without duplication, (a) any
Indebtedness with a Stated Maturity of more than one year from the date of
incurrence, (b) any Indebtedness, regardless of its term, if such Indebtedness
is renewable or extendable at the option of the obligor of such Indebtedness
pursuant to the terms thereof to a date more than one year from the date of
incurrence; and (c) any Indebtedness, regardless of its term, that by its terms
or by the terms of the agreement pursuant to which it is issued, may be paid
with the proceeds of other Indebtedness that may be incurred pursuant to the
terms of such first-mentioned Indebtedness or by the terms of such agreement,
which other Indebtedness has a Stated Maturity of more than one year from the
date of incurrence of such first-mentioned Indebtedness; provided, however, that
Working Capital Borrowings shall be excluded from Funded Debt except to the
extent that Working Capital Borrowings exceed an amount equal to (i) 100% of the
current assets (excluding cash) of such person and its Subsidiaries, less (ii)
the excess, if any, of current liabilities over current assets of such person
and its Subsidiaries, in each case determined on a consolidated basis in
accordance with generally accepted accounting principles.
"guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other person and any obligation, direct or indirect, contingent or otherwise, of
such person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other
54
<PAGE>
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"guarantee" will not include endorsements for collection or deposit in the
ordinary course of business. The term "guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any person means the obligations of such person
pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such person against changes
in interest rates or foreign exchange rates.
"Indebtedness" of any person means, without duplication,
(i) the principal of (A) indebtedness of such person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such person is
responsible or liable;
(ii) all Capital Lease Obligations of such person and all Attributable
Indebtedness in respect of Sale/Leaseback Transactions entered into by such
person;
(iii) all obligations of such person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such person
and all obligations of such person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(iv) all obligations of such person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through (iii)
above) entered into in the ordinary course of business of such person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the third
Business Day following receipt by such person of a demand for reimbursement
following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i) through
(iv) of other persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including any guarantees of
such obligations and dividends, including by means of any agreement which
has the economic effect of a guarantee; and
(vi) all obligations of the type referred to in clauses (i) through
(v) of other persons secured by any Lien on any property or asset of such
person (whether or not such obligation is assumed by such person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
"Investment" in any person means any loan or advance to, any guarantee of,
any acquisition of any Capital Stock, equity interest, obligation or other
security of, or capital contribution or other investment in, such person.
Investments will exclude advances to customers and suppliers in the ordinary
course of business.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement
55
<PAGE>
agents' fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result thereof.
"Net Income" of any person means the net income (loss) of such person,
determined in accordance with generally accepted accounting principles;
excluding, however, from the determination of Net Income any gain (but not loss)
realized upon the sale or other disposition (including, without limitation,
dispositions pursuant to leaseback transactions) of any real property or
equipment of such person, which is not sold or otherwise disposed of in the
ordinary course of business, or of any capital stock of the Company or a
Subsidiary owned by such person.
"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into non-convertible common stock of such
corporation; provided, however, that Non-Convertible Capital Stock will not
include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Liens" means (i) Liens existing on the date of the Indenture and
renewals, extensions and refinancings thereof; (ii) rights of banks to set off
deposits against debts owed to said banks; (iii) Purchase Money Indebtedness;
(iv) Liens on the property of any entity existing at the time such property is
acquired by the Company or any of its Subsidiaries and renewals, extensions and
refinancings thereof, whether by merger, consolidation, purchase of assets or
otherwise; provided, however,that in the case of this clause (iv) that such
Liens (x) are not created, incurred or assumed in contemplation of such assets
being acquired by the Company and (y) do not extend to any other assets of the
Company or any of its Subsidiaries; and (v) Liens for taxes not yet due.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation; provided, however, that Preferred Stock will not include the
Company's Class B Common Stock.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligation
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Subsidiary of such asset, including
additions and improvements; provided, however, that any Lien arising in
connection with any such Indebtedness will be limited to the specified asset
being financed or, in the case of real property or fixtures, including additions
and improvements, the real property on which such asset is attached.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise
is required to be redeemed on or prior to the first anniversary of the Stated
Maturity of the Debentures or is redeemable at the option of the holder thereof
at any time on or prior to the first anniversary of the Stated Maturity of the
Debentures.
56
<PAGE>
"Refinancing Agreement" means any credit agreement or other agreement
between the Company and bank lenders pursuant to which the Company refinances
borrowings under the Credit Agreement or another Refinancing Agreement.
"Representative" means the holder, trustee, agent or representative (if
any) for an issue of Senior Debt.
"Restricted Investment" means any Investment in an Unrestricted Subsidiary.
At the time any Subsidiary of the Company is designated by the Board of
Directors of the Company as an Unrestricted Subsidiary, the Company shall be
deemed to have made a Restricted Investment in an amount equal to the fair
market value as of such time of the Company's interest in such Unrestricted
Subsidiary, as determined in good faith by the Board of Directors and set forth
in a Board Resolution.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a person and the Company or a Subsidiary leases it from such person.
"Sevin Group" means the Estate of Malvin P. Sevin and trusts created
thereunder, Audrey L. Sevin, Irik P. Sevin, Thomas J. Edelman, Margot Gordon and
Phillip Ean Cohen and any trust over which such persons have sole voting power.
"Sevin Note" means the promissory note, dated December 31, 1992, of Irik P.
Sevin to the Company in a principal amount of $1,499,378 and due on December 31,
1993, as the same may be extended (but not otherwise amended) on a year-by-year
basis in accordance with the Company's past practices and the principal amount
of which may not be increased in any one year by more than the amount of accrued
and unpaid interest during the immediately preceding year.
"Significant Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination either (A) had assets which, as of the date of the
Company's most recent quarterly consolidated balance sheet, constituted at least
3% of the Company's total assets on a consolidated basis as of such date, or (B)
had revenues for the 12-month period ending on the date of the Company's most
recent quarterly consolidated statement of income which constituted at least 3%
of the Company's total revenues on a consolidated basis for such period, or (ii)
any Subsidiary of the Company which, if merged with all Defaulting Subsidiaries
of the Company, would at the time of determination either (A) have had assets
which, as of the date of the Company's most recent quarterly consolidated
balance sheet, would have constituted at least 10% of the Company's total assets
on a consolidated basis as of such date or (B) have had revenues for the
12-month period ending on the date of the Company's most recent quarterly
consolidated statement of income which would have constituted at least 10% of
the Company's total revenues on a consolidated basis for such period (each such
determination being made in accordance with generally accepted accounting
principles). "Defaulting Subsidiary" means any Subsidiary of the Company with
respect to which an event described under clause (iv), (v) or (vi) under
"Defaults" above has occurred and is continuing unless such contingency has
occurred.
"Stated Maturity" means, with respect to any Indebtedness, the date
specified in such Indebtedness, or in any agreement pursuant to which such
Indebtedness was incurred, as the fixed date on which the principal of such
Indebtedness is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
Indebtedness at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligations" means any Indebtedness of the Company (whether
outstanding on the date hereof or hereafter incurred) which is subordinate or
junior in right of payment to the Debentures.
"Subsidiary" means a corporation of which a majority of the Capital Stock
having voting power under ordinary circumstances to elect a majority of the
board of directors is owned by (i) the Company, (ii) the Company and one or more
Subsidiaries or (iii) one or more Subsidiaries; provided, however,that an
Unrestricted Subsidiary shall be deemed not to be a Subsidiary (except as used
in the definition thereof).
57
<PAGE>
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec.Sec.
77aaa-77bbbb) as in effect on the date of the Indenture.
"Traber Group" means (i) all the holders of Class C Common Stock as of the
date of the Indenture who are not members of the Sevin Group, (ii) any person
who receives shares from persons described in clause (i) without such transfer
of shares being subject to the first refusal right referred to in the
shareholders agreement among the holders of Class C Common Stock dated November
25, 1986, as amended through the date of the Indenture, and (iii) any trust over
which persons described in clause (i) or (ii) have sole voting power.
"Treasury Rate" as of any date of determination means the yield to maturity
at the time of computation of United States Treasury securities with a constant
maturity (as compiled and published in the most recent federal Reserve
Statistical Release H.15(519) which has become publicly available at least two
business days prior to such date of determination (or, if such Statistical
Release is no longer published, any publicly available source of similar market
data)) of five years.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means a Subsidiary of the Company, and each
Subsidiary of such Subsidiary, designated by the Board of Directors of the
Company as an Unrestricted Subsidiary pursuant to a Board Resolution set forth
in an Officers' Certificate and delivered to the Trustee, (a) no portion of the
Indebtedness or any other obligations (contingent or otherwise) of which (i) is
guaranteed by the Company or any other Subsidiary of the Company, (ii) is
recourse to or obligates the Company or any other Subsidiary of the Company in
any way or (iii) subjects any property or asset of the Company or any other
Subsidiary of the Company, directly or indirectly, contingently or otherwise, to
the satisfaction thereof and (b) with which neither the Company nor any other
Subsidiary of the Company has any obligation (i) to subscribe for additional
shares of Capital Stock or other equity interests therein or (ii) to maintain or
preserve such Subsidiary's financial condition or to cause such Subsidiary to
achieve certain levels of operating results. An Unrestricted Subsidiary may be
designated a Subsidiary, provided that (A) no Default or Event of Default shall
have occurred and be continuing and (B) immediately after giving effect to such
designation, the Company would be able to issue an additional $1.00 of Funded
Debt pursuant to the first paragraph of "Limitation on Funded Debt."
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than directors' qualifying shares) is owned by the Company or another
Wholly Owned Subsidiary.
"Working Capital Borrowings" means, on any date of determination, all
Indebtedness of the Company and its Subsidiaries on a consolidated basis
incurred to finance current assets.
"Working Capital Financing Agreement" means any agreement entered into
after the date of the Indenture by the Company and bank lenders pursuant to
which the Company issues Working Capital Borrowings.
"1989 Preferred Stock" means the preference stock of the Company designated
as "1989 Preferred Stock, Par Value $.10."
58
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS AND REDEEMABLE PREFERRED STOCK
CREDIT AGREEMENT
The Company has entered into the Credit Agreement with Chemical Bank as
agent. A copy of the Credit Agreement has been incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of certain provisions of the Credit Agreement does not purport
to be complete and is subject to, and is qualified by reference to, all of the
provisions of the Credit Agreement.
The Credit Agreement provides for maximum aggregate advances of $75 million
to finance working capital requirements of the Company ("Revolving Credit
Loans") with a sublimit under a borrowing base established each month. Amounts
borrowed under the Revolving Credit Loans are subject to a 45-day clean-up
requirement prior to September 30 of each year and the revolving credit portion
of the facility terminates on June 30, 1996. At September 30, 1993 no Revolving
Credit Loans were outstanding. The Credit Agreement includes a letter of credit
facility which expires on October 20, 1994 pursuant to which the Company may
open letters of credit in the aggregate amount of $20.0 million to support the
Company's obligation to redeem equity securities issued in acquisitions.
The Company has previously issued the Maxwhale Notes aggregating $50
million due June 1, 1994 in connection with the purchase of a fuel oil
distributor, which are secured by letters of credit issued by certain of the
banks which are parties to the Credit Agreement. The Credit Agreement requires
deposits by the Company into a cash collateral account to partially secure the
Company's obligation to the banks under such letters of credit. As of September
30, 1993, $20.0 million had been deposited and an additional $7.5 million is
required to be deposited on May 15, 1994. At the maturity of the Maxwhale Notes,
the banks are committed under the Credit Agreement to make term loans ("Term
Loans") to the Company to refund the balance due on the Maxwhale Notes in excess
of the cash collateral account. The Company will repay the Maxwhale Notes from
the proceeds of the Offering and the amount in the cash collateral account will
be released to the Company.
Interest on the Revolving Credit Loans and the Term Loans is payable
monthly and is based upon a floating rate selected by the Company of either the
Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined
below), plus 0 to 50 basis points on Alternate Base Rate Loans which are
Revolving Credit Loans or 25 to 75 basis points on Alternate Base Rate Loans
which are Term Loans and 125 to 175 basis points on Eurodollar Loans which are
Revolving Credit Loans or 225 to 275 basis points on Eurodollar Loans which are
Term Loans, based upon the ratio of Consolidated Operating Profit to Interest
Expense (as defined in the Credit Agreement). Eurodollar Rate means the
prevailing rate in the interbank Eurodollar market adjusted for reserve
requirements. Alternate Base Rate means the greater of (i) the prime or base
rate of Chemical Bank in effect or (ii) the Federal funds rate in effect rate
plus 1/2 of 1%. In addition, the Company is required to pay certain fees for
balance deficiencies, if any, and unused commitments.
The Company's obligations under the Credit Agreement are secured by all of
its and its subsidiaries' customer lists, tradenames and trademarks.
The Credit Agreement contains significant financial and other covenants.
Under the Credit Agreement, the Company and its subsidiaries may not:
(i) incur any indebtedness, whether recourse or non-recourse and
whether senior or junior, except subordinated debt and certain other
indebtedness as specifically authorized by the Credit Agreement;
(ii) create or permit any lien on any of its assets or properties,
except for identified permitted encumbrances; and
59
<PAGE>
(iii) sell, transfer or convey customer lists, except, among other
exceptions, a sale of from which a portion of the net cash proceeds, if not
reinvested in customer lists, are used to prepay the Revolving Credit Loans
and Term Loans.
The Credit Agreement also provides that the Company must meet the following
financial ratios and tests:
(i) for any fiscal year, the Company may not permit the ratio of
Adjusted Net Income to Consolidated Net Lease Obligations (as those terms
are defined in the Credit Agreement) to be less than 4.0 to 1.0;
(ii) the Company may not permit Consolidated Cash Flow (as defined in
the Credit Agreement) for any period of four consecutive fiscal quarters to
be less than $25.0 million (which may increase to $29.0 million under
certain circumstances);
(iii) for any fiscal year, Company may not permit the excess of 6
times Consolidated Operating Profit over Consolidated Funded Debt (other
than Subordinated Debt) (as those terms are defined in the Credit
Agreement) to be less than $125.0 million;
(iv) the Company may not incur Funded Debt if after giving effect
thereto to the ratio of Consolidated Funded Debt to Consolidated Cash Flow
(as those terms are defined in the Credit Agreement) exceeds 5.0 to 1.0;
and
(v) the Company may not permit at any time Consolidated Cash Uses (as
defined in the Credit Agreement), which include dividends and stock
redemptions, for the period from March 31, 1992 to such time to exceed
$57.4 million plus the sum of (a) net proceeds received from the issuance
of capital stock and Funded Debt after March 31, 1992 and (b) the positive
or negative amount of annual Cash Flow, in each annual period ending on
March 31 subsequent to March 31, 1992 (as those terms are defined in the
Credit Agreement).
The Company is currently seeking a modification of the Credit Agreement to
eliminate the limitation on Funded Debt contained therein and to substitute in
its place the limitation on Funded Debt which is contained in the Indenture. See
"Description of Debentures."
The Credit Agreement contains various events of default customary for such
types of agreements, including breaches of the covenants described above. If an
Event of Default occurs and is occurring, the lenders may, without notice,
terminate the Revolving Credit Loans and the Term Loans and/or declare all
obligations under the Credit Agreement immediately due and payable, except that
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, all such obligations shall become due and payable without
declaration, notice or demand.
SUBORDINATED DEBT
On September 1, 1988, the Company authorized the issuance of $60.0 million
of Subordinated Notes due October 1, 1998. The Company issued $40.0 million of
such notes on October 14, 1988 bearing interest at the rate of 11.85% per annum
(the "11.85% Notes"), $15.0 million of such notes on March 31, 1989 bearing
interest at the rate of 12.17% per annum (the "12.17% Notes") and $5.0 million
of such notes on May 1, 1990 bearing interest at the rate of 12.18% per annum
(the "12.18% Notes"). On January 15, 1991, the Company authorized the issuance
of $12.5 million of Subordinated Notes due January 15, 2001 bearing interest at
the rate of 14.10% per annum (the "14.10% Notes"). The Company issued $5.7
million of such notes in April 1991 and $6.8 million in March 1992. In March
1993, the Company issued $12.764 million of Subordinated Notes due March 1, 2000
(the "2000 Notes") in exchange for an equal amount of 1991 Redeemable Preferred
Stock. The Company issued the 1991 Redeemable Preferred Stock under an agreement
which required the Company to redeem the 1991 Redeemable Preferred Stock as soon
as, and to the extent that it was permitted to incur Funded Debt (as defined).
The 2000 Notes pay interest monthly based on the sum of LIBOR plus 9.28%. On
April 6, 1993, the Company issued $50.0 million of 10 1/8 Notes. The 11.85%
Notes, 12.17% Notes,
60
<PAGE>
12.18% Notes, 14.10% Notes, 2000 Notes and 10 1/8% Notes are collectively
referred to herein as the "Subordinated Debt."
The Debentures will rank pari passu with the Subordinated Debt which, after
giving pro forma effect to the Subordinated Debt Amendments, would have
aggregated approximately $92.6 million as of September 30, 1993. The agreements
pursuant to which the Company has issued the Subordinated Debt contain various
financial and other covenants relating to the maintenance of corporate
existence, timely payment of taxes, preservation of the Company's assets and
engaging in other businesses. Such agreements also contain covenants relating to
limitations on funded debt, restricted payments, mergers, consolidations and
sale of assets and transactions with affiliates which (except as described
below) are generally comparable to those contained in the Indenture.
In connection with the Offering, the Company is soliciting (the "Debt
Solicitations") consents of holders of at least a majority in aggregate
principal amount of each class of Subordinated Debt and the Redeemable Preferred
Stock described below to certain amendments (the "Subordinated Debt Amendments")
to the agreements under which the Subordinated Debt and the Redeemable Preferred
Stock was issued (the "Old Agreements"). The Company has received the requisite
consents from the holders of the 10 1/8% Notes and anticipates receiving the
requisites consents from the holders of the remaining Subordinated Debt and the
Redeemable Preferred Stock. The Old Agreements currently provide that the
Company shall not issue Funded Debt (as defined) unless, after giving effect
thereto, (x) the ratio of Consolidated Funded Debt (as defined) of the Company
and its subsidiaries to Consolidated Operating Cash Flow (as defined) for the
most recent four consecutive fiscal quarters ending at least 45 days prior to
the date such Funded Debt is issued, does not exceed 5.0 to 1.0, and (y) (in the
case of the 10 1/8% Notes) the Consolidated EBITDA Coverage Ratio (as defined)
exceeds 1.5 to 1.0. The Subordinated Debt Amendments would eliminate this
limitation and substitute in its place the Consolidated EBITDA Coverage Ratio of
2.0 to 1.0 which is contained in the Indenture for the Debentures and would also
make certain conforming changes in the language of the Old Agreements. See
"Capitalization" and "Description of Debentures."
In consideration for the consents to the Subordinated Debt Amendments, the
Company will pay to the holders of the Subordinated Debt (other than holders who
also own Redeemable Preferred Stock), a cash payment aggregating $0.4 million
and will cause approximately $42.6 million of the aggregate principal amount of
the Subordinated Debt to be ranked as Senior Debt. In addition, the Company will
increase dividends on the Redeemable Preferred Stock by $2.00 per share per
annum.
REDEEMABLE PREFERRED STOCK
The Company has outstanding 250,000 shares of Redeemable Preferred Stock,
of which 50,000 shares are classified as Series A, 50,000 shares are classified
as Series B and 150,000 shares are classified as Series C. The holders of the
Series A, Series B and Series C Redeemable Preferred Stock are entitled to
receive, as and when declared by the Board of Directors, annual dividends at the
rate of $12, $11.84 and $12.61 per share, respectively. The shares of Redeemable
Preferred Stock are exchangeable, in whole or in part, at the option of the
Company, for 1999 Notes, subject to meeting certain debt incurrence tests. On
August 1, 1994 and on August 1 of each year thereafter, so long as any of the
shares of Redeemable Preferred Stock remain outstanding, 1/6 of the number of
originally issued shares of each series of Redeemable Preferred Stock, less the
number of shares of such series previously exchanged for 1999 Notes, must be
redeemed in cash, with the final redemption of the remaining outstanding shares
on August 1, 1999. The redemption price of the Redeemable Preferred Stock is
$100 per share plus all accrued and unpaid dividends to the redemption date.
Except for dividends on the Company's Class B Common Stock, no dividends may be
declared or paid on any other capital stock of the Company during any fiscal
year until the Company has paid or declared and set apart all dividends and
satisfied the mandatory redemption requirements on all outstanding shares of
Redeemable Preferred Stock. The Redeemable Preferred Stock has no voting rights,
except as may be provided by law. The terms of the agreement pursuant to which
the Redeemable Preferred Stock was issued is being amended pursuant to the
Subordinated Debt Amendments. See "--Subordinated Debt."
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, Donaldson, Lufkin & Jenrette
Securities Corporation, Kidder, Peabody & Co. Incorporated, Chemical Securities
Inc. and Morgan Schiff & Co., Inc. (together, the "Underwriters"), the
Underwriters have agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriters, the respective amount of Debentures set
forth in the table below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF DEBENTURES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............................................ $
Kidder, Peabody & Co. Incorporated.............................................................
Chemical Securities Inc........................................................................
Morgan Schiff & Co., Inc.......................................................................
-----------------
Total................................................................................... $ 75,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriting
Agreement also provides that the Company will indemnify the Underwriters and
their controlling persons against certain liabilities and expenses, including
liabilities under the Securities Act or contribute to payments the Underwriters
may be required to make in respect thereof. The nature of the Underwriters'
obligations under the Underwriting Agreement is such that they are required to
purchase all of the Debentures if any of the Debentures are purchased.
The Underwriters propose to offer the Debentures directly 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 % of the
principal amount. The Underwriters may allow and such dealers may reallow, a
concession not in excess of % of the principal amount. After the initial
public offering of the Debentures, the offering price and other selling terms
may be changed by the Underwriters.
The Debentures are a new issue of securities, have no established trading
market and may not be widely distributed. The Company has been informed by
Donaldson, Lufkin & Jenrette Securities Corporation, Kidder, Peabody & Co.
Incorporated and Chemical Securities Inc. that they currently intend to make a
market in the Debentures; however, they are not obligated to do so and may
discontinue market making at any time without notice. Accordingly, no assurance
can be given as to the liquidity of, or trading market for, the Debentures.
Chemical Securities Inc. is an affiliate of Chemical Bank, which is the
agent bank and a lender under the Credit Agreement and certain standby and
support letters of credit. The Company plans to use a portion of the proceeds
from the Offering to pay the outstanding amount under the Credit Agreement and
will terminate the standby letter of credit supporting the Maxwhale Notes. In
addition, Chemical Bank, or its affiliates, participates on a regular basis in
various general financing and banking transactions for the Company and certain
of its affiliates.
Under the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. (the "NASD"), if more than 10% of the net proceeds of a public
offering of debt securities are to be paid to members of the NASD that are
participating in the offering, or affiliated or associated persons, the yield at
which the debt securities are distributed to the public must be no lower than
that recommended by a "qualified independent underwriter," as defined in
Schedule E to the Bylaws of the NASD. Because Chemical Bank, an affiliate of
Chemical Securities Inc., will receive more than 10% of the net proceeds of the
Offering as a result of the repayment of certain amounts under the Credit
Agreement, Donaldson, Lufkin & Jenrette Securities Corporation will act as a
qualified independent underwriter in connection with the Offering.
62
<PAGE>
Pursuant to an engagement letter dated December 16, 1993, the Underwriters
have been engaged by the Company to assist in the Debt Solicitations, for which
they will receive customary fees and reimbursement of expenses.
Mr. Phillip Ean Cohen, who is chairman and sole stockholder of Morgan
Schiff & Co., Inc., is a member of the Board of Directors of the Company.
LEGAL MATTERS
The validity of the Debentures offered hereby will be passed upon for the
Company by Phillips, Nizer, Benjamin, Krim & Ballon, New York, New York.
Phillips, Nizer, Benjamin, Krim & Ballon will rely upon Dorsey & Whitney,
Minneapolis, Minnesota with respect to certain matters concerning Minnesota law.
Certain legal matters with respect to the Debentures will be passed upon for the
Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The audited financial statements and schedules of the Company included in
this Prospectus or appearing in the Company's Annual Report on Form 10-K, have
been examined by KPMG Peat Marwick, independent certified public accountants, to
the extent and for the periods set forth in their reports appearing herein and
in the Company's Annual Report on Form 10-K and have been included and
incorporated by reference herein in reliance upon such reports given upon the
authority of said firm as experts in accounting and auditing.
The audited consolidated financial statement of Star Gas Corporation and
Subsidiaries, included in this Prospectus and Registration Statement, have
been audited by KPMG Peat Marwick, independent certified public accountants,
as of September 30, 1993 and for the year then ended and by Ernst & Young,
independent auditors, as of September 30, 1992 and for each of the two years
in the period ended September 30, 1992, as set forth in their respective
reports thereon appearing elsewhere herein, and has been so included in
reliance upon the reports of KPMG Peat Marwick and Ernst & Young given upon
the authority of such firms as experts in accounting and auditing.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992 and Amendment No. 1 thereto filed under cover of Form 8, its Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, June 30, and
September 30, 1993 and its Current Report on Form 8-K filed on January 4, 1994
are incorporated in this Prospectus by reference. All documents filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the effective date of the
Registration Statement shall be deemed incorporated by reference into this
Prospectus from the date of filing of such documents. Any statement contained
herein or in a document, all or a portion of which is incorporated or deemed to
be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contain herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon the request of such person, a
copy of the foregoing documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are incorporated by reference
in such document). Requests shall be directed to the attention of Richard
Ambury, Vice President and Assistant Controller, Petroleum Heat and Power Co.,
Inc., 2187 Atlantic Street, Stamford, CT 06902 (telephone (203) 325-5400).
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Financial Statements of Petroleum Heat and Power Co., Inc. and Subsidiaries:
Independent Auditors' Report.................................................................... F-2
Consolidated Balance Sheets..................................................................... F-3
Consolidated Statements of Operations........................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)......................... F-5
Consolidated Statements of Cash Flows........................................................... F-6
Notes to Consolidated Financial Statements...................................................... F-7
Consolidated Financial Statements of Star Gas Corporation and Subsidiaries:
Independent Auditors' Reports................................................................... F-25
Consolidated Balance Sheets..................................................................... F-27
Consolidated Statements of Operations........................................................... F-28
Consolidated Statements of Shareholders' Equity................................................. F-29
Consolidated Statements of Cash Flows........................................................... F-30
Notes to Consolidated Financial Statements...................................................... F-31
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
PETROLEUM HEAT AND POWER CO., INC.:
We have audited the accompanying consolidated balance sheets of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1991 and 1992, and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows for each of the years in the three-year
period ended December 31, 1992. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1991 and 1992, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1992 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
February 26, 1993
F-2
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
-------------------------- 30,
1991 1992 1993
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 2,907,460 $ 3,859,557 $ 7,436,907
Accounts receivable (net of allowance of $809,714, $1,270,754 and $2,459,983).... 73,808,576 78,358,514 43,186,509
Inventories...................................................................... 13,290,997 15,729,305 12,788,059
Prepaid expenses................................................................. 4,620,048 4,623,433 6,301,317
Notes receivable and other current assets........................................ 1,671,195 1,680,633 1,468,739
U.S. Treasury Notes held in a Cash Collateral Account............................ -- -- 20,000,000
------------ ------------ ------------
Total current assets....................................................... 96,298,276 104,251,442 91,181,531
------------ ------------ ------------
Property, plant and equipment...................................................... 51,620,915 61,092,297 63,966,168
Less accumulated depreciation and amortization................................... 27,325,673 28,342,302 31,432,958
------------ ------------ ------------
24,295,242 32,749,995 32,533,210
------------ ------------ ------------
Intangible assets (net of accumulated amortization of $159,599,408, $188,459,167
and $210,831,831)
Customer lists................................................................. 76,228,321 86,093,145 78,056,098
Deferred charges............................................................... 17,828,621 14,128,629 14,583,437
------------ ------------ ------------
94,056,942 100,221,774 92,639,535
------------ ------------ ------------
U.S. Treasury Notes held in a Cash Collateral Account.............................. 5,000,000 15,000,000 --
------------ ------------ ------------
Other assets....................................................................... 360,000 560,000 550,000
------------ ------------ ------------
$220,010,460 $252,783,211 $216,904,276
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Working capital borrowings....................................................... $ 39,750,000 $ 32,000,000 $ --
Current maturities of other long-term debt....................................... 33,345 33,345 33,345
Current installments of capital lease obligations................................ 596,833 103,595 --
Current maturities of Maxwhale Notes............................................. -- -- 27,500,000
Current maturities of cumulative redeemable preferred stock...................... -- -- 4,166,667
Subordinated notes payable....................................................... 5,704,000 12,400,373 --
Accounts payable................................................................. 12,929,206 15,289,518 9,173,905
Customer credit balances......................................................... 20,140,437 19,317,863 26,486,378
Unearned service contract revenue................................................ 12,356,529 13,180,431 12,334,492
Accrued expenses:
Wages and bonuses.............................................................. 5,622,354 5,030,100 5,335,366
Taxes other than income taxes.................................................. 2,127,655 1,856,074 686,493
Pension........................................................................ 2,664,637 2,373,188 663,983
Other.......................................................................... 6,411,741 9,410,757 12,289,552
------------ ------------ ------------
Total current liabilities.................................................. 108,336,737 110,995,244 98,670,181
------------ ------------ ------------
Maxwhale Notes Payable............................................................. 50,000,000 50,000,000 22,500,000
------------ ------------ ------------
Other long-term debt............................................................... 113,750 80,404 55,395
------------ ------------ ------------
Capital lease obligations.......................................................... 103,595 -- --
------------ ------------ ------------
Supplemental benefits payable...................................................... -- 1,688,728 1,656,850
------------ ------------ ------------
Pension plan obligation acquired................................................... 1,264,035 1,239,250 1,219,431
------------ ------------ ------------
Subordinated notes payable......................................................... 91,613,067 84,978,349 135,263,663
------------ ------------ ------------
Cumulative redeemable exchangeable preferred stock, par value $.10 per share,
409,722 shares authorized, 313,889, 408,884 and 250,000 shares outstanding of
which 41,667 at September 30, 1993 are reflected as current...................... 30,023,100 37,717,790 20,833,333
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock--par value $.10 per share; 1,590,278, 5,000,000 and 5,000,000
shares authorized, none outstanding............................................
Class A common stock--par value $.10 per share; 15,500,000, 40,000,000 and
40,000,000 shares authorized, 10,180,558, 18,992,579 and 18,992,579 shares
outstanding........................................................................ 1,018,056 1,899,258 1,899,258
Class B common stock--par value $.10 per share; 6,500,000 shares authorized,
3,034,060, 216,901and 216,901 shares outstanding (liquidation
preference--$12,826,630, $1,236,336 and $1,236,336)............................ 303,406 21,690 21,690
Class C common stock--par value $.10 per share; 5,000,000 shares authorized,
2,545,139 shares outstanding................................................... 254,514 254,514 254,514
Additional paid-in capital....................................................... 12,550,522 54,462,132 54,416,259
Deficit.......................................................................... (74,290,322) (89,274,148) (118,606,298)
------------ ------------ ------------
(60,163,824) (32,636,554) (62,014,577)
Note receivable from stockholder................................................. (1,280,000) (1,280,000) (1,280,000)
------------ ------------ ------------
Total stockholders' equity (deficiency).................................... (61,443,824) (33,916,554) (63,294,577)
------------ ------------ ------------
$220,010,460 $252,783,211 $216,904,276
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------- ------------------------------
1990 1991 1992 1992 1993
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 567,414,067 $ 523,243,243 $ 512,430,194 $ 340,892,396 $ 377,383,609
Cost of sales.......................... 435,030,967 378,771,961 350,941,386 232,333,611 262,367,466
-------------- -------------- -------------- -------------- --------------
Gross profit.................... 132,383,100 144,471,282 161,488,808 108,558,785 115,016,143
Selling, general and administrative
expenses............................... 80,596,935 79,427,873 83,407,680 59,768,363 68,270,664
Direct delivery expense................ 25,479,485 25,007,204 26,756,585 18,053,267 20,909,602
Amortization of customer lists......... 25,570,792 24,839,983 23,496,438 17,469,592 18,236,229
Depreciation and amortization of plant
and equipment.......................... 5,795,654 5,550,381 5,534,205 4,152,623 4,368,314
Amortization of deferred charges....... 4,946,043 5,185,113 5,363,321 4,054,427 4,136,435
Provision for supplemental benefit..... -- -- 1,973,728 -- 193,122
-------------- -------------- -------------- -------------- --------------
Operating income (loss)......... (10,005,809) 4,460,728 14,956,851 5,060,513 (1,098,223)
Other income (expense):
Interest expense..................... (21,925,775) (21,916,205) (20,204,808) (15,343,869) (16,501,218)
Interest income...................... 1,024,871 1,187,676 1,582,885 1,316,376 1,354,068
Gains (losses) on sales of fixed
assets................................. (154,824) (104,911) 8,297 (5,379) (28,817)
Other................................ (72,914) 60,147 (332,590) (332,590) --
-------------- -------------- -------------- -------------- --------------
Loss before income taxes........ (31,134,451) (16,312,565) (3,989,365) (9,304,949) (16,274,190)
Income taxes (benefit)................. (1,867,000) 250,000 400,000 218,000 218,000
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary
item................................... (29,267,451) (16,562,565) (4,389,365) (9,522,949) (16,492,190)
Extraordinary item--loss on early
extinguishment of debt................. -- -- -- -- (867,110)
-------------- -------------- -------------- -------------- --------------
Net loss............................. $ (29,267,451) $ (16,562,565) $ (4,389,365) $ (9,522,949) $ (17,359,300)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Net loss applicable to common stock.... $ (30,624,451) $ (19,854,648) $ (8,842,105) $ (13,579,607) $ (20,726,296)
Income (loss) before extraordinary item
per common share
Class A Common Stock................. $(2.81) $(1.64) $(.81) $(1.19) $(.94)
Class B Common Stock................. 1.70 .31 1.14 .86 1.41
Class C Common Stock................. (2.81) (1.64) (.81) (1.19) (.94)
Extraordinary loss per common share
Class A Common Stock................. $ -- $ -- $ -- $ -- $ (.04)
Class B Common Stock................. -- -- -- -- --
Class C Common Stock................. -- -- -- -- (.04)
Net income (loss) per common share:
Class A Common Stock................. $(2.81) $(1.64) $(.81) $(1.19) $(.98)
Class B Common Stock................. 1.70 .31 1.14 .86 1.41
Class C Common Stock................. (2.81) (1.64) (.81) (1.19) (.98)
Weighted average number of common
shares outstanding:
Class A Common Stock................. 10,180,558 10,180,558 12,854,266 11,050,778 18,992,579
Class B Common Stock................. 3,034,060 3,034,060 2,447,473 3,034,060 216,901
Class C Common Stock................. 2,545,139 2,545,139 2,545,139 2,545,139 2,545,139
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1990, 1991 AND 1992 AND NINE MONTHS ENDED SEPTEMBER 30,
1993 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------
CLASS A CLASS B CLASS C NOTE
------------------------ --------------------- --------------------- ADDITIONAL RECEIVABLE
NO. OF NO. OF NO. OF PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1989, as
previously
reported........... 12,725,697 $ 1,272,570 3,034,060 $ 303,406 -- $ -- $13,124,567 $(16,707,679) $(1,280,000)
Effect of exchange
of Class C Common
Stock for Class A
Common Stock....... (2,545,139) (254,514) 2,545,139 254,514
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
Balance at December
31, 1989, as
adjusted........... 10,180,558 1,018,056 3,034,060 303,406 2,545,139 254,514 13,124,567 (16,707,679) (1,280,000)
Net loss........... (29,267,451)
Cash dividends
declared and paid.. (6,243,096)
Cash dividends
payable............ (1,289,475)
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
Balance at December
31, 1990......... 10,180,558 1,018,056 3,034,060 303,406 2,545,139 254,514 13,124,567 (53,507,701) (1,280,000)
Net loss........... (16,562,565)
Cash dividends
declared and paid.. (3,927,446)
Cash dividends
payable............ (292,610)
Redeemable
preferred stock
issuance costs..... (550,962)
Accretion of
redeemable
preferred stock.... (23,083)
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
Balance at December
31, 1991......... 10,180,558 1,018,056 3,034,060 303,406 2,545,139 254,514 12,550,522 (74,290,322) (1,280,000)
Net loss........... (4,389,365)
Cash dividends
declared and paid.. (7,987,026)
Cash dividends
payable............ (2,607,435)
Accretion of
redeemable
preferred stock.... (194,740)
Class A Common
Stock issued....... 4,330,000 433,000 47,197,000
Class A Common
Stock exchanged
for Class B
Common Stock....... 4,482,021 448,202 (2,817,159) (281,716) (166,486)
Class A Common
Stock issuance
and exchange
offer costs...... (4,924,164)
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
Balance at December
31, 1992......... 18,992,579 1,899,258 216,901 21,690 2,545,139 254,514 54,462,132 (89,274,148) (1,280,000)
Net loss........... (17,359,300)
Cash dividends
declared and paid.. (8,909,470)
Cash dividends
payable............ (3,063,380)
Accretion of
redeemable
preferred stock.... (45,873)
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
Balance at
September 30,
1993............... 18,992,579 $ 1,899,258 216,901 $ 21,690 2,545,139 $ 254,514 $54,416,259 $(118,606,298)$(1,280,000)
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
----------- ----------- ---------- --------- ---------- --------- ----------- ------------- -----------
<CAPTION>
TOTAL
------------
Balance at December
31, 1989, as
previously
reported........... $ (3,287,136)
Effect of exchange
of Class C Common
Stock for Class A
Common Stock.......
------------
Balance at December
31, 1989, as
adjusted........... (3,287,136)
Net loss........... (29,267,451)
Cash dividends
declared and paid.. (6,243,096)
Cash dividends
payable............ (1,289,475)
------------
Balance at December
31, 1990......... (40,087,158)
Net loss........... (16,562,565)
Cash dividends
declared and paid.. (3,927,446)
Cash dividends
payable............ (292,610)
Redeemable
preferred stock
issuance costs..... (550,962)
Accretion of
redeemable
preferred stock.... (23,083)
------------
Balance at December
31, 1991......... (61,443,824)
Net loss........... (4,389,365)
Cash dividends
declared and paid.. (7,987,026)
Cash dividends
payable............ (2,607,435)
Accretion of
redeemable
preferred stock.... (194,740)
Class A Common
Stock issued....... 47,630,000
Class A Common
Stock exchanged
for Class B
Common Stock....... --
Class A Common
Stock issuance
and exchange
offer costs...... (4,924,164)
------------
Balance at December
31, 1992......... (33,916,554)
Net loss........... (17,359,300)
Cash dividends
declared and paid.. (8,909,470)
Cash dividends
payable............ (3,063,380)
Accretion of
redeemable
preferred stock.... (45,873)
------------
Balance at
September 30,
1993............... $(63,294,577)
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------------
1990 1991 1992 1992 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (29,267,451) $ (16,562,565) $ (4,389,365) $ (9,522,949) $ (17,359,300)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of customer lists.............. 25,570,792 24,839,983 23,496,438 17,469,592 18,236,229
Depreciation and amortization of plant and
equipment....................................... 5,795,654 5,550,381 5,534,205 4,152,623 4,368,314
Amortization of deferred charges and debt
discount.................................. 4,988,415 5,223,354 5,394,397 4,078,537 4,148,045
Provision for losses on accounts
receivable...................................... 1,953,691 2,156,320 2,444,581 1,723,912 1,649,988
Provision for supplemental benefit.......... -- -- 1,973,728 -- 193,122
(Gain) loss on bond redemptions............. -- (60,147) 332,590 332,590 867,110
(Gain) loss on sales of fixed assets........ 154,824 104,911 (8,297) 5,379 28,817
Amortization of acquired pension plan
obligation...................................... (21,712) (23,328) (24,785) (18,497) (19,819)
Decrease (increase) in accounts
receivable...................................... 12,036,996 8,217,612 (6,994,519) 32,662,403 33,522,017
Decrease (increase) in inventory............ 7,398,733 12,509,679 (2,438,308) 519,311 2,941,246
Decrease in income taxes receivable......... 3,078,781 668,000 -- -- --
Decrease (increase) in prepaid expenses,
notes receivable and other current assets....... (514,729) 279,716 (12,823) (147,400) (1,465,990)
Decrease (increase) in other assets......... (35,000) (100,000) (200,000) (175,000) 10,000
Increase (decrease) in accounts payable..... (12,147,594) (6,133,548) 2,360,312 (5,995,795) (6,115,613)
Increase (decrease) in customer credit
balances........................................ 6,209,289 2,378,664 (822,574) 6,428,953 7,168,515
Increase (decrease) in unearned service
contract revenue................................ 938,660 104,643 823,902 (701,399) (845,939)
Decrease in deferred taxes.................. (1,520,000) -- -- -- --
Increase (decrease) in accrued expenses..... (227,157) 461,857 (756,093) (3,143,508) (150,670)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating
activities...................................... 24,392,192 39,615,532 26,713,389 47,668,752 47,176,072
------------- ------------- ------------- ------------- -------------
Cash flows used in investing activities:
Acquisition of customer lists................. (18,536,065) (10,127,482) (33,361,262) (18,416,935) (10,199,182)
Increase in deferred charges.................. (8,958,281) (2,570,234) (1,800,647) (1,045,225) (3,047,753)
Capital expenditures.......................... (6,486,285) (4,146,765) (14,509,037) (5,377,188) (4,309,984)
Proceeds from sales of fixed assets........... 651,840 261,333 528,376 145,014 129,638
------------- ------------- ------------- ------------- -------------
Net cash used in investing
activities...................................... (33,328,791) (16,583,148) (49,142,570) (24,694,334) (17,427,281)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock........ -- -- 47,630,000 47,630,000 --
Costs of issuing and exchanging common
stock........................................... -- -- (4,924,164) (4,134,100) --
Net proceeds from issuance of redeemable
exchangeable preferred stock.................... 15,000,000 4,449,055 7,499,950 7,499,950 --
Net proceeds from issuance of subordinated
notes........................................... 5,000,000 5,700,000 6,800,000 6,800,000 48,067,642
Repurchase of subordinated notes.............. -- (5,616,508) (6,964,693) (6,964,693) (25,368,574)
Net borrowings (reductions) under financing
arrangement..................................... 2,500,000 (19,250,000) (7,750,000) (39,750,000) (32,000,000)
Increase in Cash Collateral Account........... -- (5,000,000) (10,000,000) (10,000,000) (5,000,000)
Decrease in other debt........................ (2,924,188) (33,345) (33,346) (25,009) (250,009)
Principal payments under capital lease
obligations..................................... (688,794) (686,577) (596,833) (497,115) (103,595)
Cash dividends paid........................... (7,631,158) (5,216,921) (8,279,636) (5,840,187) (11,516,905)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities............................ 11,255,860 (25,654,296) 23,381,278 (5,281,154) (26,171,441)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash........ 2,319,261 (2,621,912) 952,097 17,693,264 3,577,350
Cash at beginning of year....................... 3,210,111 5,529,372 2,907,460 2,907,460 3,859,557
------------- ------------- ------------- ------------- -------------
Cash at end of year............................. $ 5,529,372 $ 2,907,460 $ 3,859,557 $ 20,600,724 $ 7,436,907
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Petroleum
Heat and Power Co., Inc. (Petro) and its subsidiaries (the Company), each of
which is wholly owned and, like Petro, is engaged in the retail distribution of
home heating oil and propane in the Northeast. The Company currently operates in
26 major markets in the Northeast, including the metropolitan areas of Boston,
New York City, Baltimore, Providence and Washington, D.C., serving approximately
421,000 customers in those areas. Credit is granted to substantially all of
these customers with no individual account comprising a concentrated credit
risk.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. The components of inventories were as follows at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------
1991 1992 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Fuel oil.................................... $ 6,447,306 $ 8,151,053 $ 4,919,040
Parts....................................... 6,843,691 7,578,252 7,869,019
-------------- -------------- --------------
$ 13,290,997 $ 15,729,305 $ 12,788,059
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Customer Lists and Deferred Charges
Customer lists are recorded at cost less accumulated amortization.
Amortization is computed using the straight-line method with 90% of the cost
amortized over six years and 10% of the cost amortized over 25 years.
Deferred charges include goodwill, acquisition costs and payments related
to covenants not to compete. The covenants are amortized using the straight-line
method over the terms of the related contracts, acquisition costs are amortized
using the straight-line method over a six-year period, while goodwill is
amortized using the straight-line method over a twenty-five year period. Also
included as deferred charges are the costs associated with the issuance of the
Company's subordinated notes. Such costs are being amortized using the straight
line method over the lives of the notes.
The Company assesses the recoverability of intangible assets by comparing
the carrying values of such intangibles to market values, where a market exists,
supplemented by cash flow analyses to determine that the carrying values are
recoverable over the remaining estimated lives of the intangibles through
undiscounted future operating cash flows. When an intangible asset is deemed to
be impaired, the amount of intangible impairment is measured based on market
values, as available, or by projected operating cash flows, using a discount
rate reflecting the Company's assumed average cost of funds.
Customer Credit Balances
Customer credit balances represent payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated annual
fuel charges on a fixed monthly basis) in excess of actual deliveries billed.
Unearned Service Contract Revenue
Payments received from customers for burner service contracts are deferred
and amortized into income over the terms of the respective service contracts,
which generally do not exceed one year.
F-7
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- (CONTINUED)
Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. When appropriate, deferred income taxes are provided to reflect
the tax effects of timing differences between financial and tax reporting.
Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (SFAS No. 109). (See Note 9)
Pensions
The Company funds accrued pension costs currently on its pension plans, all
of which are noncontributory.
Common Stock
In July 1992, the holders of Class A Common Stock exchanged 2,545,139
shares of Class A Common Stock for 2,545,139 shares of Class C Common Stock (see
note 6). All numbers of Class A and Class C Common Stock and related amounts
have been retroactively adjusted in the accompanying financial statements to
reflect such exchange.
Earnings per Common Share
Earnings per common share are computed utilizing the three class method
based upon the weighted average number of shares of Class A Common Stock, Class
B Common Stock and Class C Common Stock outstanding, after adjusting the net
loss for preferred dividends declared and the accretion of 1991 Redeemable
Preferred Stock, aggregating $1,357,000, $3,292,000, $4,452,000, $4,057,000 and
$3,367,000 for the years ended 1990, 1991, 1992, and for the nine months ended
September 30, 1992 and 1993, respectively. Fully diluted earnings per common
share are not presented because the effect is not material or is antidilutive.
Interim Financial Information
The financial information as of September 30, 1993 and for the nine-month
periods ended September 30, 1992 and September 30, 1993 is unaudited; however,
such information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the financial position, results of operations and changes in cash
flows for the interim periods. Because of the seasonality of the business, the
results for the nine months ended September 30, 1993 are not indicative of the
results to be expected for the full year.
(2) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and their estimated useful
lives were as follows at the indicated dates:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------- ESTIMATED
1991 1992 1993 USEFUL LIVES
-------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Land........................................ $ 1,404,565 $ 1,469,065 $ 1,519,065
Buildings................................... 6,442,729 7,151,142 7,482,228 20-45 years
Fleet and other equipment................... 31,931,137 38,507,056 39,248,389 3-17 years
Furniture and fixtures...................... 8,927,844 10,784,419 12,332,105 5-7 years
Leasehold improvements...................... 2,914,640 3,180,615 3,384,381 Terms of leases
-------------- -------------- --------------
51,620,915 61,092,297 63,966,168
Less accumulated depreciation
and amortization.......................... 27,325,673 28,342,302 31,432,958
-------------- -------------- --------------
$ 24,295,242 $ 32,749,995 $ 32,533,210
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-8
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(3) NOTES PAYABLE AND OTHER LONG-TERM DEBT
Notes payable and other long-term debt, including working capital
borrowings and current maturities of long-term debt, consisted of the following
at the indicated dates:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------
1991 1992 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Notes payable to banks under working capital borrowing
arrangements(a)(c)............................................... $ 39,750,000 $ 32,000,000 $ --
Notes payable in connection with the acquisition
of Whale Oil Corp., due on June 1, 1994 with interest at the
rate of 9% per annum(b)(c)....................................... 50,000,000 50,000,000 50,000,000
Amounts payable in connection with the purchase
of a fuel oil dealer, due in monthly installments with interest
at 6% per annum, maturing June 1, 1996
(see note 10).................................................. 147,095 113,749 88,740
-------------- -------------- --------------
89,897,095 82,113,749 50,088,740
Less current maturities, including working capital borrowings.... 39,783,345 32,033,345 27,533,345
-------------- -------------- --------------
$ 50,113,750 $ 50,080,404 $ 22,555,395
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- -----------------------------
(a) Pursuant to a Credit Agreement, dated December 31, 1992 as restated and
amended (Credit Agreement), the Company may borrow up to $75 million under a
revolving credit facility with a sublimit under a borrowing base established
each month. Amounts borrowed under the revolving credit facility are subject
to a 45 day clean-up requirement prior to September 30 of each year and the
revolver portion of the facility terminates on June 30, 1996. The credit
agreement includes a letter of credit facility, which expires on October 20,
1994 pursuant to which the Company may open letters of credit in the
aggregate amount of $20 million to support the Company's obligation to
redeem equity securities issued in acquisitions. No such letters of credit
are currently outstanding. The Company's ability to incur revolving credit
loans is reduced to the extent that the amount of such letters of credit
exceed $10 million. As collateral for the financing arrangement, the Company
granted to the lenders a security interest in the customer lists, trademarks
and trade names owned by the Company, including the proceeds therefrom.
Interest on borrowings is payable monthly and is based upon the floating
rate selected at the option of the Company of either the Eurodollar Rate
(as defined below) or the Alternate Base Rate (as defined below), plus 125
to 175 basis points on Eurodollar Loans or 0 to 50 basis points on
Alternative Base Rate Loans, based upon the ratio of Consolidated Operating
Profit to Interest Expense (as defined in the Credit Agreement). The
Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market
adjusted for reserve requirements. The Alternate Base Rate is the greater
of (i) the prime rate or base rate of Chemical Bank in effect or (ii) the
Federal Funds Rate in effect plus 1/2 of 1%. At December 31, 1992, the rate
on the working capital borrowings was 5.4%. The Company pays a facility fee
of 0.375% on the unused portion of the revolving credit facility.
Compensating balances equal to 5.0% of the average amount outstanding
during the relevant period are also required under the agreement.
(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly owned subsidiary of
Petro, acquired certain assets of Whale Oil Corp. for $50 million. The
purchase price was paid by the issuance of $50 million of 9% notes due June
1, 1994. The notes are nonrecourse to Petro, but are secured by letters of
credit issued by certain banks pursuant to the Credit Agreement. Maxwhale
pays a fee on
(Footnotes continued on following page)
F-9
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(3) NOTES PAYABLE AND OTHER LONG-TERM DEBT-- (CONTINUED)
(Footnotes continued from preceding page)
these letters of credit, calculated at a range of 1.75% to 2.25% on $50
million less the balance maintained in a Cash Collateral Account, plus 0.25%
on the Cash Collateral Account balance. Petro has fully guaranteed these
letters of credit. The Maxwhale customer list is pledged pursuant to a
security agreement in favor of the banks.
Under the Credit Agreement, the Company is required to make annual deposits into
a Cash Collateral Account to secure the outstanding letters of credit. The first
such deposit of $5 million was made on June 15, 1991 with additional
deposits of $10 million occurring on April 1, 1992 and $5 million on May 15,
1993. An additional deposit of $7.5 million is required to be made on May
15, 1994. A term loan commitment is available under the Credit Agreement to
refinance the balance due on the Maxwhale Note in excess of the Cash
Collateral Account. Interest on the term loan, if the commitment is
exercised, will be calculated either at the Alternate Base Rate, plus 25 to
75 basis points or the Eurodollar Rate plus 225 to 275 basis points, based
upon the ratio of Consolidated Operating Profit to Interest Expense (as
defined in the Credit Agreement). However, the Company's intention is to
repay the Maxwhale Notes from the proceeds of the Offering, allowing the
$20.0 million in the Cash Collateral Account to become unrestricted.
(c) The customer lists, trademarks and tradenames pledged to the banks under the
Credit Agreement are carried on the September 30, 1993 balance sheet at
$78,056,096. Under the terms of the Credit Agreement, the Company is
required, among other things, to maintain certain minimum levels of cash
flow, as well as certain ratios on consolidated debt. In the event of
noncompliance with certain of the covenants, the banks have the right to
declare all amounts outstanding under the loans to be due and payable
immediately.
Aggregate annual maturities of the long-term debt outstanding at December
31, 1992, including working capital borrowings, but excluding Cash Collateral
Account requirements, and assuming the term loan commitment as mentioned in the
last paragraph of (b) above is exercised, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------------------------------------------------------------
<S> <C>
1993............................................................ $ 32,033,000
1994............................................................ 27,533,000
1995............................................................ 7,533,000
1996............................................................ 7,515,000
1997............................................................ 7,500,000
</TABLE>
(4) LEASES AND CAPITAL LEASE OBLIGATIONS
The Company is obligated under various capital leases entered into during
1988 and 1989 for service vans. The leases expired in 1993 and were renewed on a
month to month basis thereafter. The gross amounts of fleet and other equipment
and related accumulated amortization recorded under the capital leases were as
follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
1991 1992 1993
------------- ------------- -------------
<S> <C> <C> <C>
Fleet and other equipment................................ $ 2,701,658 $ 2,701,658 $ 2,701,658
Less accumulated amortization............................ 2,001,230 2,598,063 2,701,658
------------- ------------- -------------
$ 700,428 $ 103,595 $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
F-10
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(4) LEASES AND CAPITAL LEASE OBLIGATIONS-- (CONTINUED)
The Company also leases real property and equipment under noncancelable
operating leases which expire at various times through 2008. Certain of the real
property leases contain renewal options and require the Company to pay property
taxes.
Future minimum lease payments for all operating leases (with initial or
remaining terms in excess of one year), and the present value of future minimum
capital lease obligations as of December 31, 1992, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- -------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
1993.................................................................... $ 109,594 $ 3,126,000
1994.................................................................... -- 2,831,000
1995.................................................................... -- 2,491,000
1996.................................................................... -- 1,659,000
1997.................................................................... -- 1,083,000
Thereafter.............................................................. -- 4,426,000
----------- --------------
Total minimum lease payments....................................... 109,594 $ 15,616,000
--------------
--------------
Less amount representing interest (at rates ranging from 9.50% to
10.75%)................................................................... 5,999
-----------
Present value of net minimum capital lease obligations............... $ 103,595
-----------
-----------
</TABLE>
Rental expense under operating leases for the years ended December 31,
1990, 1991, and 1992 was $4,787,000, $4,916,000, and $4,448,000 respectively,
and for the nine months ended September 30, 1992 and 1993 was $3,314,000 and
$3,877,000, respectively.
(5) SUBORDINATED NOTES PAYABLE
Subordinated notes payable, net of unamortized original discounts, at the
dates indicated, consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------- ----------------
1991 1992 1993
-------------- ---------------- ----------------
<S> <C> <C> <C>
11.40% Subordinated Notes due July 1, 1993(a)(b).................. $ 12,389,105 $ 12,400,373 $ --
14.275% Subordinated Notes due October 1, 1995(b)................. 19,227,962 12,478,349 --
11.85%, 12.17%, and 12.18% Subordinated Notes due October 1,
1998(c)........................................................... 60,000,000 60,000,000 60,000,000
14.10% Subordinated Notes due January 15, 2001(d)................. 5,700,000 12,500,000 12,500,000
Subordinated Notes due March 1, 2000(e)........................... -- -- 12,763,663
10 1/8% Subordinated Notes due April 1, 2003(f)................... -- -- 50,000,000
-------------- ---------------- ----------------
97,317,067 97,378,722 135,263,663
Less current maturities..........................................] 5,704,000 12,400,373 --
-------------- ---------------- ----------------
$ 91,613,067 $ 84,978,349 $ 135,263,663
-------------- ---------------- ----------------
-------------- ---------------- ----------------
</TABLE>
- -----------------------------
(a) On July 2, 1984, the Company sold $20,000,000 of subordinated notes at an
original discount of approximately $150,000. These notes (11.40% Notes) bore
interest at 11.40% and were redeemable at the Company's option in whole, at
any time, or in part, from time to time, at a redemption price of 101.5% of
principal amount through June 30, 1993. Interest was payable quarterly.
(Footnotes continued on following page)
F-11
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(5) SUBORDINATED NOTES PAYABLE-- (CONTINUED)
(Footnotes continued from preceding page)
(b) On October 8, 1985, the Company sold $25,000,000 of subordinated fixed rate
notes at an original discount of approximately $330,000. These notes
(14.275% Notes) bore interest at 14.275% and were redeemable at the option
of the Company, in whole or in part, from time to time, upon payment of a
premium rate of approximately 3.7%, which declined on October 1, 1992 to
approximately 2.0% until October 1, 1993, when the 14.275% Notes were
redeemable at par.
In April 1991, the Company purchased $5,519,000 and $376,000 face value of its
11.40% Notes and 14.275% Notes, respectively, for an aggregate of $5,617,000.
Unamortized deferred charges and bond discounts of $218,000 associated with
the issuances of the 11.40% Notes and the 14.275% Notes were written off
upon the repurchase of the debt. The Company included a gain of $60,000 in
1991 on these repurchases and included such gain in other income. In March
1992, the Company purchased $2,445,000 of the 14.275% Notes at par.
Unamortized deferred charges and bond discounts of $62,000 associated with
the issuance of these notes were written off on the repurchase of the debt
in March 1992. On May 15, 1992 the Company purchased $4,355,000 of the
14.275% Notes at a premium of 3.7%. Unamortized deferred charges and bond
discounts of $106,000 associated with the issuance of these Notes were
written off on the repurchase of the debt in May 1992. The Company included
a loss of $333,000 in 1992 on these repurchases and included such loss in
other expenses. In May 1993, the Company repurchased all of its outstanding
11.40% Subordinated Notes due July 1, 1993 having a face amount of
$12,430,000, at a redemption price of 101.5% of face value for an aggregate
of approximately $12.6 million and repurchased all of its outstanding
14.275% Subordinated Notes due October 1, 1995 having a face amount of
$12,524,000, at a redemption price of 102.0% of face value for an aggregate
of approximately $12.8 million. Unamortized deferred charges and bond
discounts of $447,000 associated with the issuance of these Notes were
written off on the repurchase of the debt in May 1993. The Company recorded
an extraordinary loss of $867,000 as a result of the early retirement of
this debt.
(c) On September 1, 1988, the Company authorized the issuance of $60,000,000 of
Subordinated Notes due October 1, 1998 bearing interest payable semiannually
on the first day of April and October. The Company issued $40,000,000 of
such notes on October 14, 1988 bearing interest at the rate of 11.85% per
annum, $15,000,000 of such notes on March 31, 1989 bearing interest at the
rate of 12.17% per annum and $5,000,000 of such notes on May 1, 1990 bearing
interest at the rate of 12.18% per annum. All such notes are redeemable at
the option of the Company, in whole or in part, from time to time, upon
payment of a premium rate as defined.
(d) On January 15, 1991, the Company authorized the issuance of $12,500,000 of
14.10% Subordinated Notes due January 15, 2001 bearing interest payable
quarterly on the fifteenth day of April, July, October and January. The
Company issued $5,700,000 of such notes in April 1991 and $6,800,000 in
March 1992. The notes are redeemable at the option of the Company, in whole
or in part, from time to time, upon payment of a premium rate as defined. On
each January 15, commencing 1996 and ending January 15, 2000, the Company is
required to prepay $2,100,000 of the Notes. The remaining principal of
$2,000,000 is due on January 15, 2001. No premium is payable in connection
with these required payments.
(e) In March 1993, the Company issued $12,764,000 of Subordinated Notes due
March 1, 2000 in exchange for an equal amount of 1991 Redeemable Preferred
Stock. The Company issued the 1991 Redeemable Preferred Stock under an
agreement which required the Company to redeem the 1991 Redeemable Preferred
Stock as soon as, and to the extent that it was permitted to incur Funded
Debt. Under the applicable provisions of the Company's debt agreements, the
Company was allowed to incur Funded Debt in the first quarter of 1993 and as
such, was required to enter into the exchange. These notes call for interest
payable monthly based on the sum of LIBOR plus 9.28% At September 30, 1993,
LIBOR was 3.1875%
(f) On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated
Notes due April 1, 2003. These Notes are redeemable at the Company's option,
in whole or in part, at any time on or after April 1, 1998 upon payment of a
premium rate as defined. Interest is payable semiannually on the first day
of April and October.
Expenses connected with the above six offerings, and amendments thereto,
amounted to approximately $8,057,000. At December 31, 1991, 1992 and September
30, 1993, the unamortized balances
F-12
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(5) SUBORDINATED NOTES PAYABLE-- (CONTINUED)
relating to notes then outstanding amounted to approximately $2,350,000,
$1,675,000 and $3,172,000, respectively, and such balances are included in
deferred charges.
With the repurchase in 1993 of the $24.9 million outstanding 14.275% and
11.40% Notes with a portion of the proceeds of the 10 1/8% Subordinated Notes,
there are no other annual maturities for each of the next five years as of
December 31, 1992 except for the required prepayments of $2,100,000 in 1996 and
1997 for the 14.10% Subordinated Notes.
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS
The Company's outstanding Common Stock consists of Class A Common Stock,
Class B Common Stock and Class C Common Stock, each with various designations,
rights and preferences. In 1992, the Company restated and amended its Articles
of Incorporation increasing the authorized shares of Class A Common Stock to
40,000,000 and authorizing 5,000,000 shares of Class C Common Stock, $.10 par
value. On July 29, 1992, the holders of Class A Common Stock exchanged pro rata
2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C Common
Stock. The financial statements, as well as the table below, give retroactive
effect to this exchange.
Holders of Class A Common Stock and Class C Common Stock have identical
rights, except that holders of Class A Common Stock are entitled to one vote per
share and holders of Class C Common Stock are entitled to ten votes per share.
Holders of Class B Common Stock do not have voting rights, except as required by
law, or in certain limited circumstances.
Holders of Class B Common Stock are entitled to receive, as and when
declared by the Board of Directors, Special Dividends equal to .000001666% per
share per quarter of the Company's Cash Flow, as defined, for its prior fiscal
year. For purposes of computing Special Dividends, Cash Flow represents the sum
of (i) consolidated net income, plus (ii) depreciation and amortization of plant
and equipment, and (iii) amortization of customer lists and restrictive
covenants. Special Dividends are cumulative and are payable quarterly. If not
paid, dividends on any other class of stock may not be paid until all Special
Dividends in arrears are declared and paid.
The Company may, in its sole discretion, terminate the payment of the
Special Dividends if all Special Dividends have then been paid or duly provided
for. If the Company exercises its right to terminate the Special Dividends, it
must give notice to the holders of Class B Common Stock not less than 30 days
nor more than 60 days prior to the date fixed for termination. In such event,
the Special Dividends will terminate on the date specified in the notice (the
Parity Date). Each holder of Class B Common Stock will then have a period of 60
days from the date of the notice to elect to require the Company to purchase all
or part of such holder's Class B Common Stock at a price of $17.50 per share, as
adjusted for stock splits, reclassifications and the like, plus all accrued and
unpaid Special Dividends to the date of purchase, or to elect to retain such
holder's Class B Common Stock. After the Parity Date, no dividends will be paid
to the holders of Class B Common Stock until the holders of Class A Common Stock
and Class C Common Stock receive dividends equal to the Common Stock Allocation,
as defined.
On July 29, 1992 and September 2, 1992, the Company sold an aggregate of
4,330,000 shares of its Class A Common Stock in a Public Offering at an initial
offering price of $11.00 per share. The Class A Common Stock is listed on the
Nasdaq National Market under the symbol "HEAT".
F-13
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS-- (CONTINUED)
On September 17, 1992 the Company commenced an Exchange Offer (Exchange
Offer) for all of the outstanding shares of its Class B Common Stock, pursuant
to which each holder of Class B Common Stock who validly tendered a share of
Class B Common Stock for exchange was entitled to receive 1.591 shares of Class
A Common Stock. The Exchange Offer expired on October 16, 1992 and, as a result,
2,817,159 shares of Class B Common Stock (92.8% of the total then outstanding)
were exchanged for 4,482,021 shares of Class A Common Stock.
The following table summarizes the cash dividends declared on Common Stock
and the cash dividends declared per common share for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, END SEPTEMBER 30,
------------------------------------------- ----------------------------
1990 1991 1992 1992 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash dividends declared
Class A................................ $ 814,000 $ -- $ 3,157,000 $ 1,020,000 $ 7,360,000
Class B................................ 5,157,000 952,000 2,715,000 2,601,000 306,000
Class C................................ 204,000 -- 465,000 179,000 986,000
Cash dividends declared per share
Class A................................ $ 0.08 $ -- $ 0.18 $ 0.07 $ 0.39
Class B................................ 1.70 0.31 1.14 0.86 1.41
Class C................................ 0.08 -- 0.18 0.07 0.39
</TABLE>
Under the Company's most restrictive dividend limitation, $14.2 million was
available at December 31, 1992 for the payment of dividends on all classes of
Common Stock.
In the event of liquidation of the Company, each outstanding share of Class
B Common Stock would be entitled to a distribution equal to its share of all
accrued and unpaid Special Dividends, without interest, plus $5.70 per share,
before any distribution is made with respect to the Class A or Class C Common
Stock. Thereafter, each share of Class B Common Stock and each share of Class A
and Class C Common Stock would participate equally in all liquidating
distributions, subject to the rights of the holders of the Cumulative Redeemable
Exchangeable Preferred Stock. The aggregate liquidation preference on the Class
B Common Stock at December 31, 1992 amounted to an aggregate of $1,236,336.
(7) CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
The Company entered into agreements dated as of August 1, 1989 with John
Hancock Mutual Life Insurance Company and Northwestern Mutual Life Insurance
Company to sell up to 250,000 shares of its Redeemable Preferred Stock, par
value $.10 per share, at a price of $100 per share, which shares are
exchangeable into Subordinated Notes due August 1, 1999 (1999 Notes). The
Company sold 50,000 shares of the Redeemable Preferred Stock in August 1989,
50,000 shares in December 1989 and 150,000 shares in May 1990. The Redeemable
Preferred Stock issued in August 1989 calls for dividends of $12 per share,
while the stock issued in December 1989 and May 1990 calls for dividends of
$11.84 and $12.61 per share, respectively. The shares of the Redeemable
Preferred Stock are exchangeable in whole, or in part, at the option of the
Company, for 1999 Notes.
F-14
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(7) CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK-- (CONTINUED)
On August 1, 1994, and on August 1 of each year thereafter, so long as any
of the shares of Redeemable Preferred Stock remain outstanding, one-sixth of the
number of originally issued shares of each series of Redeemable Preferred Stock
outstanding less the number of shares of such series previously exchanged for
1999 Notes, are to be redeemed, with the final redemption of remaining
outstanding shares occurring on August 1, 1999. The redemption price is $100 per
share plus all accrued and unpaid dividends to such August 1.
The Company entered into an agreement dated September 1, 1991 with United
States Leasing International Inc. to sell up to 159,722 shares of its 1991
Redeemable Preferred Stock, par value $.10 per share, at an initial price of
$78.261 per share, which shares are exchangeable into Subordinated Notes due
March 1, 2000 (2000 Notes). The Company sold 63,889 shares of the Redeemable
Preferred Stock in September 1991 at $78.261 per share and 94,995 shares in
March 1992 at $78.951 per share, the accreted value of the initial price. The
holders of the shares of 1991 Preferred Stock were entitled to receive monthly
dividends based on the annual rate of the sum of LIBOR plus 4.7%.
In March 1993, the Company issued $12,763,663 of 2000 Notes in exchange for
all of the 1991 Redeemable Preferred Stock (see Note No. 5). The Company issued
the 1991 Redeemable Preferred Stock under an agreement which required the
Company to redeem the 1991 Redeemable Preferred Stock as soon as, and to the
extent that it was permitted to incur Funded Debt. Under the applicable
provisions of the Company's debt agreements, the Company was allowed to incur
Funded Debt in the first quarter of 1993 and as such, was required to enter into
the exchange.
Preferred dividends of $1,357,000 in the aggregate were declared in 1990 on
the Redeemable Preferred Stock. Preferred dividends of $3,269,000 were declared
on all classes of preferred stock in 1991, while preferred dividends of
$4,258,000 were declared on all classes of preferred stock in 1992. For the nine
months ended September 30, 1992 and 1993, Preferred Dividends of $3,922,000 and
$3,321,000 respectively, were declared on all classes of preferred stock.
Aggregate annual maturities for all classes of Redeemable Preferred Stock
for each of the next five years, are as follows as of December 31, 1992:
<TABLE>
<S> <C>
1993.......................................................................... $ --
1994.......................................................................... 4,167,000
1995.......................................................................... 4,167,000
1996.......................................................................... 4,167,000
1997.......................................................................... 4,167,000
</TABLE>
(8) PENSION PLANS
The Company has several noncontributory defined contribution and defined
benefit pension plans covering substantially all of its nonunion employees.
Benefits under the defined benefit plans are generally based on years of service
and each employee's compensation, while benefits under the defined contribution
plans are based solely on compensation. Pension expense under all plans for the
years ended December 31, 1990, 1991 and 1992 was $2,964,000, $2,774,000 and
$2,447,000, respectively, net of amortization of the pension obligation
acquired.
F-15
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(8) PENSION PLANS-- (CONTINUED)
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's balance sheets at the indicated dates:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1991 1992
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations including vested benefits of $16,768,633 and
$18,409,871.................................................................... $ 17,122,268 $ 18,790,759
--------------- ---------------
--------------- ---------------
Projected benefit obligation................................................... $ (20,079,225) $ (21,715,790)
Plan assets at fair value (primarily listed stocks and bonds).................. 16,097,127 16,581,099
--------------- ---------------
Projected benefit obligation in excess of plan assets (3,982,098) (5,134,691)
Unrecognized net loss from past experience different from the assumed and
effects of changes in assumptions.............................................. 2,192,311 3,645,967
Unrecognized net transitional obligation....................................... 666,004 606,394
Unrecognized prior service cost due to plan amendments......................... 748,706 674,044
Additional liability........................................................... (1,060,942) (2,133,731)
--------------- ---------------
Accrued pension cost for defined benefit plans included in accrued
expenses--pension.............................................................. $ (1,436,019) $ (2,342,017)
--------------- ---------------
--------------- ---------------
</TABLE>
Net pension cost for defined benefit plans for the periods indicated
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1990 1991 1992
------------- ------------- --------------
<S> <C> <C> <C>
Service cost-benefits earned during the period...................... $ 1,109,837 $ 1,154,607 $ 1,162,736
Interest cost on projected benefit obligation....................... 1,598,584 1,665,229 1,781,444
Actual return on assets............................................. (325,861) (2,515,808) (1,248,604)
Net amortization and deferral of gains and losses................... (896,750) 1,471,819 (71,885)
------------- ------------- --------------
Net periodic pension cost for defined benefit plans............ $ 1,485,810 $ 1,775,847 $ 1,623,691
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
Assumptions used in the above accounting were:
<TABLE>
<S> <C>
Discount rate..................................................................... 8.5%
Rates of increase in compensation levels.......................................... 6%
Expected long-term rate of return on assets....................................... 10%
</TABLE>
In addition to the above, the Company made contributions to
union-administered pension plans during the years ended December 31, 1990, 1991
and 1992 of $2,418,000, $2,365,000 and $2,442,000, respectively.
F-16
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(8) PENSION PLANS-- (CONTINUED)
In connection with the purchase of shares of a predecessor company as of
January 1, 1979 by a majority of the Company's present holders of Class C Common
Stock, the Company assumed a pension liability in the aggregate amount of
$1,512,000, as adjusted, representing the excess of the actuarially computed
present value of accumulated vested plan benefits over the net assets available
for such benefits. Such liability, which amounted to $1,239,250 at December 31,
1992, is being amortized over 40 years.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's
chairman and co-chief executive officer, was entitled to receive $25,000 per
month for a period of 120 months following his retirement. In the event of his
death, his designated beneficiary is entitled to receive such benefit. The
expense related to this benefit was being accrued over the estimated remaining
period of Mr. Sevin's employment. Mr. Sevin passed away in December 1992, prior
to his retirement. The accrual for such benefit payable was accelerated at
December 31, 1992 to $1,974,000, the present value (using a discount rate of 9%)
of the payments now payable to his beneficiary, which payments commenced in
January 1993.
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standard No. 106 ("SFAS No. 106"), "Employers' Accounting
for Post Retirement Benefits Other Than Pensions." This statement requires that
the expected cost of post retirement benefits be fully accrued by the first date
of full benefit eligibility, rather than expensing the benefit when payment is
made. As the Company generally does not provide for post retirement benefits,
other than pensions, the adoption of the new statement did not have any material
effect on the Company's financial condition or results of operations.
(9) INCOME TAXES
Income tax expense (benefit) was comprised of the following for the
indicated years:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ------------------------
1990 1991 1992 1992 1993
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current:
Federal.................................... $ (668,000) $ -- $ -- $ -- $ --
State...................................... 321,000 250,000 400,000 218,000 218,000
Deferred................................... (1,520,000) -- -- -- --
-------------- ----------- ----------- ----------- -----------
$ (1,867,000) $ 250,000 $ 400,000 $ 218,000 $ 218,000
-------------- ----------- ----------- ----------- -----------
-------------- ----------- ----------- ----------- -----------
</TABLE>
F-17
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(9) INCOME TAXES-- (CONTINUED)
Deferred income tax expense results from timing differences in the
recognition of revenue and expense for tax and financial statement purposes. The
sources of these differences and the tax effects of each were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1990 1991 1992
-------------- ------------ ------------
<S> <C> <C> <C>
Excess of tax over book (book over tax) depreciation.................. $ 377,000 $ (114,000) $ (11,000)
Excess of book over tax vacation expense.............................. (223,000) (223,000) (3,000)
Excess of book over tax bad debt expense.............................. (3,000) (74,000) (165,000)
Excess of book over tax supplemental benefit expense.................. -- -- (671,000)
Deferred service contracts............................................ 66,000 66,000 66,000
Other, net............................................................ (97,000) 36,000 50,000
Recognition of tax benefit of net operating loss to the extent of
current and previously recognized timing differences................ (1,640,000) -- --
Deferred tax assets not recognized.................................... -- 309,000 734,000
-------------- ------------ ------------
$ (1,520,000) $ -- $ --
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
For Federal income tax reporting purposes, the Company carried back its
1990 loss to prior years to recover taxes previously paid in the amount of
$668,000. Total income tax expense (benefit) amounted to ($1,867,000) for 1990,
$250,000 for 1991, and $400,000 for 1992. The Company's federal income tax
returns have been examined by the Internal Revenue Service through the year
ended December 31, 1990. The following reconciles the effective tax (benefit)
rates to the "expected" statutory rates for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax (benefit) rate......................................... (34.0)% (34.0)% (34.0)%
Reduction (increase) of income tax benefit resulting from:
Net operating loss carryback limitation................................... 27.0 34.0 34.0
State income taxes, net of Federal income tax benefit..................... 0.9 1.5 10.0
Other..................................................................... 0.1 -- --
--------- --------- ---------
(6.0)% 1.5% 10.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This statement requires that deferred income taxes be recorded following
the liability method of accounting and adjusted periodically when income tax
rates change. Adoption of the new Statement did not have any effect on the
Company's financial condition or results of operations since the Company did not
carry any deferred tax accounts on its balance sheet at December 31, 1992 and
any net deferred assets set up as a result of applying FAS No. 109 have been
fully reserved.
Under SFAS No. 109, as of January 1, 1993, the Company had net deferred tax
assets of approximately $14.6 million subject to a valuation allowance of
approximately $14.6 million. The
F-18
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(9) INCOME TAXES-- (CONTINUED)
components of and changes in the net deferred tax assets and the changes in the
related valuation allowance for the first nine months of 1993 using current
rates were as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED
JANUARY 1, EXPENSE SEPTEMBER 30,
1993 (BENEFIT) 1993
---------- --------- -------------
<S> <C> <C> <C>
Federal book net operating loss carryforwards.............................. $ 14,873 $ 5,902 $ 20,775
Excess of tax over book depreciation....................................... (2,472) (120) (2,592)
Excess of book over tax vacation expense................................... 1,042 15 1,057
Excess of book over tax supplemental benefit expense....................... 671 (20) 651
Excess of book over tax bad debt expense................................... 440 (50) 390
Other, net................................................................. 76 (30) 46
---------- --------- -------------
14,630 5,697 20,327
Valuation allowance........................................................ (14,630) (5,697) (20,327)
---------- --------- -------------
$ -- $ -- $ --
---------- --------- -------------
---------- --------- -------------
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent history of annual net losses, that a
full valuation allowance is appropriate.
At December 31, 1992, the Company had the following income tax
carryforwards for federal tax reporting purposes (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
DATE AMOUNT
- ------------------------------------------------------------------- ---------
<S> <C>
2005............................................................... $ 26,651
2006............................................................... 15,012
2007............................................................... 1,367
---------
$ 43,030
---------
---------
</TABLE>
(10) RELATED PARTY TRANSACTIONS
In connection with the acquisition of customer lists, equipment and other
assets of previously unaffiliated fuel oil businesses, the Company entered into
lease agreements covering certain vehicles with individuals, including certain
stockholders, directors and executive officers. These leases are currently on a
month-to-month basis, on terms comparable with leases from unrelated parties.
Annual rentals under these leases are approximately $150,000.
During 1981, the Company acquired the customer list, equipment and accounts
receivable of a fuel oil business from two individuals, one of whom is, and the
other of whom was, prior to his death, stockholders, directors and executive
officers of the Company. The purchase price was approximately $1,233,000, of
which $733,000 was paid at the closing and the balance was financed through the
issuance of a $500,000, 6%, 15-year term note secured by property of the
Company. The unpaid balance of this note at September 30, 1993 was $88,740 (see
note 3).
On November 6, 1985, the Company sold a building to certain related parties
for $660,000, the same price the Company originally paid for the property in
June 1984 and which was also the facility's independently appraised fair market
value. The parties then leased the facility back to the Company pursuant to a
ten-year agreement providing for rentals of $90,000 per annum plus escalation
and taxes.
F-19
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(10) RELATED PARTY TRANSACTIONS-- (CONTINUED)
Until 1985, the Company occupied a certain building under a lease agreement
with an unaffiliated lessor. The lease was accounted for as a capital lease and,
as such, the capitalized leased asset and obligation were included on the
Company's balance sheet. In November 1985, pursuant to a competitive bidding
process, the Company purchased the building from the landlord for $1,500,000.
The building was resold for $1,500,000 in December 1985 to certain related
parties, some of whom are stockholders, directors and executive officers of the
Company. These related parties are leasing the building to the Company under a
lease agreement which calls for rentals of $315,000 per annum (which was the
independently appraised lease rental) plus escalations, and which expires in
1995.
In October 1986, Irik P. Sevin purchased 161,313 shares of Class A Common
Stock and 40,328 shares of Class C Common Stock (after giving retroactive effect
to the exchange of Class C Common Stock for Class A Common Stock in July 1992)
of the Company for $1,280,000 (which was the fair market value as established by
the Pricing Committee pursuant to the Stockholders' Agreement described below).
The purchase price was financed by a note originally due December 31, 1989, but
which has been extended to December 31, 1993. The note was amended in 1991 to
increase the principal amount by $152,841, the amount of interest due from
October 22, 1990 through December 31, 1991 and to change the interest rate on
the note effective January 1, 1992 from 10% per annum to the LIBOR rate in
effect for each month plus 0.75%. The note was amended again in 1992 to increase
the principal amount by $66,537, the amount of interest due from January 1, 1992
through December 31, 1992. At any time prior to the due date of the note, Mr.
Sevin has the right to require the Company to repurchase all or any of these
shares (as adjusted for stock splits, dividends and the like) for $6.35 per
share (the Put Price), provided, however, that Mr. Sevin may retain all shares
of Class B Common Stock issued as stock dividends on the shares without
adjustments to the Put Price. In December 1986, 50,410 shares of Class B Common
Stock were issued as a stock dividend with respect to these shares, which shares
were exchanged in October 1992 for 80,202 Class A Common Shares pursuant to the
Exchange Offer discussed in Note 6. Upon the repurchase of the shares, the
Company has agreed to issue an eight-year option to Mr. Sevin to purchase a like
number of shares at the Put Price. Mr. Sevin has entered into an agreement with
the Company that he will not sell or otherwise transfer to a third party any of
the shares of Class A Common Stock or Class C Common Stock received pursuant to
this transaction until the note has been paid in full.
In November 1986, the Company issued stock options to purchase 30,000
shares and 20,000 shares, of the Class A Common Stock of the Company to Irik P.
Sevin and Malvin P. Sevin, respectively, subject to adjustment for stock splits,
stock dividends, and the like, upon the successful completion of a public
offering of at least 10% of the common stock of the Company. Such a public
offering was completed in December 1986. The option price for the shares of
Class A Common Stock was $20 per share. The options, which expire on November
30, 1994, are nontransferrable. As a result of stock dividends in the form of
Class A Common Stock and Class B Common Stock declared by the Company in
December 1986, the exchange of Class C Common Stock for Class A Common Stock in
July 1992, and special antidilution adjustments, the options held by Irik P.
Sevin now apply to 89,794 shares of Class A Common Stock and 22,448 shares of
Class C Common Stock and the options held by Malvin P. Sevin now apply to 59,862
shares of Class A Common Stock and 14,966 shares of Class C Common Stock. The
adjusted option price for each such share is $4.10.
On December 2, 1986, the Company issued stock options to purchase 75,000
shares and 50,000 shares of Class A Common Stock to Irik P. Sevin and Malvin P.
Sevin, respectively. The option price for
F-20
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(10) RELATED PARTY TRANSACTIONS-- (CONTINUED)
the shares of Class A Common Stock was $20 per share. These options are
nontransferrable and expire November 30, 1994. As a result of stock dividends in
the form of Class A Common Stock and Class B Common Stock declared by the
Company in December 1986, the exchange of Class C for Class A Common Stock in
July 1992, and special antidilution adjustments, the options held by Irik P.
Sevin now apply to 224,483 shares of Class A Common Stock and 56,121 shares of
Class C Common Stock and the options held by Malvin P. Sevin now apply to
149,655 shares of Class A Common Stock and 37,414 shares of Class C Common
Stock. The adjusted option price for each such share became $4.10.
On December 28, 1987, the Company issued stock options to purchase 24,000
shares of Class A Common Stock and 6,000 shares of Class C Common Stock (after
giving retroactive effect to the exchange of Class C Common Stock for Class A
Common Stock in July 1992) to Irik P. Sevin. The option price for each such
share is $7.50. These options are not transferrable and expire on January 1,
1996.
On March 3, 1989, the Company issued stock options to purchase 72,000
shares of Class A Common Stock and 18,000 shares of Class C Common Stock (after
giving retroactive effect to the exchange of Class C Common Stock for Class A
Common Stock in July 1992) to Irik P. Sevin and 48,000 shares of Class A Common
Stock and 12,000 shares of Class C Common Stock (after giving retroactive effect
to the exchange of Class C Common Stock for Class A Common Stock in July 1992)
to Malvin P. Sevin. The option price for each such share is $11.25. These
options are nontransferrable and expire in March 1994.
On November 1, 1992, the Company issued stock options to an officer of the
Company to purchase 25,000 shares of Class A Common Stock and issued another
25,000 stock options to this officer in June 1993. The option price for each
such share is $11.00. Twenty percent of the options become exercisable on each
of the next five anniversary dates of the grants.
In December 1992, Malvin P. Sevin passed away. All options previously owned
by him are exercisable by his estate for a period of one year from his date of
death.
During the first quarter of 1991, the Company contemplated the acquisition
of a business engaged in the distribution of packaged industrial gases for other
than heating purposes ("Packaged Industrial Gas Business"). As the Company was
prohibited from making this acquisition because of restrictions under the Credit
Agreement from which the Company was unable to obtain a waiver, the acquisition
was consummated by certain of the principal holders of the Class C Common Stock.
The Company entered into an agreement with the Packaged Industrial Gas Business
to provide management services on request for a fee equal to the allocable cost
of Company personnel devoted to the business with a minimum fee of $50,000 per
annum plus an incentive bonus equal to 10% of the cash flow above budget. The
fee received under such management contract for the seven months ended December
31, 1991 was $29,000 and for the year ended December 31, 1992 was $50,000.
Simultaneously with this acquisition, the Company entered into an option
agreement expiring May 31, 1996 pursuant to which the Company had the right,
exercisable at any time, to acquire the Packaged Industrial Gas Business for its
fair market value, as determined by an independent appraisal. In January 1993,
the Packaged Industrial Gas Business was sold by its owners to an unrelated
third party and the Company's option agreement and management services agreement
was cancelled.
On August 1, 1991, the Company agreed to purchase certain assets of a fuel
oil distributor for approximately $17 million. However, certain restrictions
under the Company's lending arrangements
F-21
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(10) RELATED PARTY TRANSACTIONS-- (CONTINUED)
made the cost of the acquisition unduly burdensome. Accordingly, in October
1991, certain shareholders of the Company, owning approximately 9% of the Class
C Common Stock and certain unaffiliated investors, organized RAC Fuel Oil Corp.
(RAC) to acquire such business, but gave Petro a five year option, which Petro
was required to exercise when permitted by its lending arrangements, to purchase
RAC for the same price, as adjusted for operations while the business was owned
by RAC. Pending exercise of its option, the Company had been managing RAC's
business at an annual fee of $161,000, which was designed to compensate the
Company for its estimated costs, and supplying fuel oil to RAC at the Company's
cost. In August 1992, the Company was able to and did exercise its option to buy
RAC. The acquisition price was approximately $17 million.
The existing holders of Class C Common Stock of the Company have entered
into a Shareholders' Agreement which provides that, in accordance with certain
agreed-upon procedures, each will vote his shares to elect certain designated
directors. The Shareholders' Agreement also provides for first refusal rights to
the Company if a holder of Class C Common Stock receives a bona fide written
offer from a third party to buy such holder's Class C Common Stock.
(11) ACQUISITIONS
During 1990, the Company acquired the customer lists and equipment of 12
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$28,000,000.
During 1991, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$12,500,000.
During 1992, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$41,500,000.
Sales and net income of the acquired companies are included in the
consolidated statements of operations from the respective dates of acquisition.
Unaudited pro forma data giving effect to the purchased businesses as if
they had been acquired in the year preceding the year of purchase, with
adjustments, primarily for amortization of intangibles, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1990 1991 1992
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales....................................................... $ 612,537 $ 593,876 $ 573,970
----------- ----------- -----------
----------- ----------- -----------
Net loss........................................................ $ (27,303) $ (15,547) $ (1,995)
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per common share
Class A Common Stock.......................................... $ (2.70) $ (1.62) $ (.74)
Class B Common Stock.......................................... 1.87 .57 1.77
Class C Common Stock.......................................... (2.70) (1.62) (.74)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
During the nine months ended September 30, 1993, the Company acquired the
customer lists and equipment of nine unaffiliated fuel oil dealers. The
aggregate consideration for these acquisitions, accounted for by the purchase
method, was approximately $13,800,000.
F-22
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(11) ACQUISITIONS-- (CONTINUED)
The Company has previously announced the signing of a letter of intent to
purchase an approximate 29.5% interest in Star Gas Corporation. The Company's
investment, currently estimated to be approximately $16 million, will be
financed out of cash flow from its operations. Final consummation of the
transaction is subject to the execution of a definitive agreement and various
consents and is anticipated to take place before December 31, 1993.
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- ------------------------------
1990 1991 1992 1992 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash paid during the
year for:
Interest..................... $ 21,773,525 $ 21,928,724 $ 20,238,486 $ 13,130,279 $ 13,062,177
Income taxes................. 320,601 202,650 319,487 240,900 280,655
</TABLE>
(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Accounts Receivable, Notes Receivable and Other Current Assets, U.S.
Treasury Notes held in a Cash Collateral Account, Working Capital Borrowings,
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value because of the short
maturity of these instruments.
Long-Term Debt, Subordinated Notes Payable and Cumulative Redeemable
Exchangeable Preferred Stock
The fair values of each of the Company's long-term financing
instruments, including current maturities, are based on the amount of
future cash flows associated with each instrument, discounted using the
Company's current borrowing rate for similar instruments of comparable
maturity.
The estimated fair value of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1992
----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
--------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Long-term debt...................................................... $ 50,114 $ 50,106
Subordinated notes payable.......................................... 97,379 104,943
Cumulative Redeemable Exchangeable Preferred Stock.................. 37,718 39,350
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-23
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 IS
UNAUDITED)
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1991 1991 1991 1991 TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 250,069 $ 71,348 $ 48,146 $ 153,680 $ 523,243
Gross profit....................................... 78,073 16,034 7,007 43,357 144,471
Income (loss) before taxes......................... 32,090 (21,404) (28,592) 1,593 (16,313)
Net income (loss).................................. 31,759 (21,374) (28,509) 1,561 (16,563)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings (loss) per common share
Class A Common Stock............................. $ 2.35 $ (1.70) $ (2.38) $ .09 $ (1.64)
Class B Common Stock............................. .08 .08 .08 .08 .31
Class C Common Stock............................. 2.35 (1.70) (2.38) .09 (1.64)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1992 1992 1992 1992 TOTAL
---------- ---------- ---------- ---------- ----------
Net sales.......................................... $ 219,975 $ 74,006 $ 46,912 $ 171,537 $ 512,430
Gross profit....................................... 84,098 17,660 6,800 52,931 161,489
Income (loss) before taxes......................... 39,268 (20,020) (28,553) 5,316 (3,989)
Net income (loss).................................. 38,937 (19,990) (28,470) 5,134 (4,389)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings (loss) per common share
Class A Common Stock............................. $ 2.86 $ (1.67) $ (2.04) $ .22 $ (.81)
Class B Common Stock............................. .29 .29 .29 .29 1.14
Class C Common Stock............................. 2.86 (1.67) (2.04) .22 (.81)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
THREE MONTHS ENDED
----------------------------------
MARCH 31, JUNE 30, SEPT. 30,
1993 1993 1993 TOTAL
---------- ---------- ---------- ----------
Net sales.......................................... $ 251,271 $ 71,978 $ 54,135 $ 377,384
Gross profit....................................... 89,595 15,817 9,604 115,016
Income (loss) before taxes......................... 39,269 (25,972) (29,571) (16,274)
Net income (loss).................................. 38,938 (26,809) (29,488) (17,359)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share
Class A Common Stock............................. $ 1.72 $ (1.25) $ (1.45) $ (.98)
Class B Common Stock............................. .47 .47 .47 1.41
Class C Common Stock............................. 1.72 (1.25) (1.45) (.98)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
STAR GAS CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1993 and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Star Gas
Corporation and subsidiaries at September 30, 1993 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
December 28, 1993
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Star Gas Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1992 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended September 30, 1992. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Star Gas
Corporation and subsidiaries at September 30, 1992, and the consolidated results
of their operations and their cash flows for each of the two years in the
period ended September 30, 1992 in conformity with generally accepted
accounting principles.
ERNST & YOUNG
December 3, 1992,
except for Notes 5 and 9, as to which the date is
April 1, 1993
F-26
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1993 1992
------------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash.............................................................................. $ 730,256 1,301,882
Receivables:
Trade........................................................................... 9,408,107 13,336,058
Other........................................................................... 342,886 394,969
Allowance for doubtful accounts................................................. (716,105) (700,000)
Inventories:
Propane......................................................................... 4,982,284 6,986,544
Appliances and equipment........................................................ 1,463,009 2,264,347
Prepaid expenses.................................................................. 1,005,002 1,189,419
Other current assets.............................................................. 591,455 1,195,726
Assets held for sale (note 1)..................................................... 7,378,126 --
------------- ------------
Total current assets....................................................... 25,185,020 25,968,945
------------- ------------
Property, plant and equipment, at cost:
Land.............................................................................. 3,329,314 4,732,441
Buildings......................................................................... 6,589,431 7,823,785
Customer equipment and machinery.................................................. 128,056,431 146,928,612
Construction in progress.......................................................... -- 36,617
------------- ------------
137,975,176 159,521,455
Less accumulated depreciation.............................................. 30,306,574 26,803,620
------------- ------------
107,668,602 132,717,835
------------- ------------
Other assets:
Excess of cost over net assets acquired, net of accumulated amortization of
$3,527,340 and $1,862,456........................................................... 5,496,847 18,317,613
Other intangible assets:
Covenants not to compete and capitalized consulting costs, net of accumulated
amortization of $17,301,712 and $13,723,866......................................... 1,166,089 8,567,108
Customer contracts and lists, net of accumulated amortization of $10,526,491 and
$8,429,154.......................................................................... 10,629,476 12,919,084
Deferred charges.................................................................. 1,154,357 1,652,362
Other............................................................................. 1,083,204 1,955,891
------------- ------------
19,529,973 43,412,058
------------- ------------
Total assets............................................................... $ 152,383,595 202,098,838
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt and working capital borrowings (note 5)...... $ 7,485,774 6,077,873
Accounts payable.................................................................. 9,433,402 9,684,768
Accrued interest.................................................................. 7,833,308 6,000,014
Other accrued expenses............................................................ 2,720,074 2,286,988
Customer credit balances.......................................................... 2,733,000 1,280,000
Other current liabilities (note 9)................................................ 880,478 3,941,644
------------- ------------
Total current liabilities.................................................. 31,086,036 29,271,287
------------- ------------
Long-term debt and obligations under capital leases (notes 5 and 8)................. 118,425,184 124,570,257
Other long-term liabilities (note 9)................................................ 6,162,343 5,865,557
Deferred income taxes (note 6)...................................................... 221,400 235,100
------------- ------------
Total long-term liabilities................................................ 124,808,927 130,670,914
------------- ------------
Shareholders' equity (deficiency) (notes 1, 2, 5 and 9):
Common stock, $1 par value--20,000 shares authorized; 266.43 shares issued........ 266 266
Series A Preferred stock, no par value--48,000 and 300,000 shares authorized in
1993 and 1992, respectively; 40,309.5 shares issued................................. 40,309 40,309
Preferred stock--8% cumulative convertible, no par value--1,420 shares authorized;
1,420 shares issued at September 30, 1993........................................... 1,420 --
Capital in excess of par value.................................................... 58,471,501 57,052,921
Deficit........................................................................... (59,836,948) (12,748,943)
Treasury stock, at cost (15.12 common shares)..................................... (2,187,916) (2,187,916)
------------- ------------
Total shareholders' equity (deficiency).................................... (3,511,368) 42,156,637
------------- ------------
Total liabilities and shareholders' equity................................. $ 152,383,595 202,098,838
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1993 1992 1991
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Net sales................................................. $ 132,194,740 117,877,556 127,688,470
Hauling revenue........................................... 16,220,657 16,225,561 14,190,015
Other revenue, net........................................ 5,780,581 6,636,627 6,101,663
---------------- ---------------- ----------------
154,195,978 140,739,744 147,980,148
---------------- ---------------- ----------------
Costs and expenses:
Cost of sales............................................. 74,716,501 63,452,403 71,076,004
Operating................................................. 57,063,237 52,044,642 49,599,117
Depreciation and amortization............................. 16,092,452 14,128,104 13,576,609
General and administrative................................ 3,772,546 3,002,555 2,623,264
---------------- ---------------- ----------------
151,644,736 132,627,704 136,874,994
---------------- ---------------- ----------------
Impairment of long-lived assets (note 10) 33,047,065 -- --
---------------- ---------------- ----------------
Income (loss) before interest expense and income taxes...... (30,495,823) 8,112,040 11,105,154
Interest expense............................................ 16,335,155 16,665,525 18,056,685
---------------- ---------------- ----------------
Loss before income taxes............................... (46,830,978) (8,553,485) (6,951,531)
Income tax expense (benefit)................................ 257,027 (1,294,003) (1,603,012)
---------------- ---------------- ----------------
Net loss............................................... $ (47,088,005) (7,259,482) (5,348,519)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
8%
CUMULATIVE
SERIES A CONVERTIBLE CAPITAL IN
COMMON PREFERRED PREFERRED EXCESS OF TREASURY
STOCK STOCK STOCK PAR VALUE DEFICIT STOCK
----------- ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1990............. $ 225 31,191 -- 41,069,581 (140,942) (2,187,916)
Conversion of subordinated debt into
preferred stock.............................. -- 3,992 -- 3,988,507 -- --
Issuance of common stock..................... 31 -- -- 4,873,869 -- --
Issuance of Series A preferred stock......... -- 5,126 -- 5,120,974 -- --
Net loss..................................... -- -- -- -- (5,348,519) --
----- ----------- ------ ----------- ------------ -----------
Balance as of September 30, 1991............. 256 40,309 -- 55,052,931 (5,489,461) (2,187,916)
Issuance of common stock..................... 10 -- -- 1,999,990 -- --
Net loss..................................... -- -- -- -- (7,259,482) --
----- ----------- ------ ----------- ------------ -----------
Balance as of September 30, 1992............. 266 40,309 -- 57,052,921 (12,748,943) (2,187,916)
Conversion of junior subordinated debt into
preferred stock.............................. -- -- 1,420 1,418,580 -- --
Net loss..................................... -- -- -- -- (47,088,005) --
----- ----------- ------ ----------- ------------ -----------
Balance as of September 30, 1993............. $ 266 40,309 1,420 58,471,501 (59,836,948) (2,187,916)
----- ----------- ------ ----------- ------------ -----------
----- ----------- ------ ----------- ------------ -----------
<CAPTION>
SHAREHOLDERS'
EQUITY
(DEFICIENCY)
------------
Balance as of September 30, 1990............. 38,772,139
Conversion of subordinated debt into
preferred stock.............................. 3,992,499
Issuance of common stock..................... 4,873,900
Issuance of Series A preferred stock......... 5,126,100
Net loss..................................... (5,348,519)
------------
Balance as of September 30, 1991............. 47,416,119
Issuance of common stock..................... 2,000,000
Net loss..................................... (7,259,482)
------------
Balance as of September 30, 1992............. 42,156,637
Conversion of junior subordinated debt into
preferred stock.............................. 1,420,000
Net loss..................................... (47,088,005)
------------
Balance as of September 30, 1993............. (3,511,368)
------------
------------
<CAPTION>
TOTAL
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1993 1992 1991
--------------- ------------ --------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................................ $ (47,088,005) (7,259,482) (5,348,519)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Impairment of long-lived assets............................ 33,047,065 -- --
Depreciation and amortization.............................. 16,092,452 14,128,104 13,576,609
Deferred income taxes...................................... (13,700) (1,497,840) (1,813,291)
Loss on sale of fixed assets............................... -- -- 514,590
Amortization of accrued pension costs...................... -- (2,300) (27,600)
Changes in operating assets and liabilities:
Decrease in receivables, net.................................. 2,439,982 1,545,617 2,296,277
Decrease (increase) in inventories............................ 2,170,477 (770,937) 1,295,444
Decrease (increase) in other current and prepaid assets....... 205,475 1,197,019 (1,832,701)
Increase in other long-term assets............................ (199,610) (743,085) (1,261,870)
Increase (decrease) in accounts payable....................... 131,132 (105,714) 1,667,450
Increase (decrease) in accrued interest and other accrued
expenses.......................................................... 2,524,004 3,074,016 (1,857,965)
Increase (decrease)in other current and long-term
liabilities....................................................... 482,931 (1,330,070) (3,374,412)
--------------- ------------ --------------
Net cash provided by operating activities................ 9,792,203 8,235,328 3,834,012
--------------- ------------ --------------
Investing activities:
Purchase of companies, net of cash acquired:
Net working capital........................................... (2,035) (155,771) (147,812)
Noncurrent tangible assets.................................... (58,474) (984,852) (1,546,120)
Intangible assets............................................. (600) (66,058) (198,749)
Acquisition of property, plant and equipment.................... (4,787,637) (6,730,179) (3,682,230)
Disposals of fixed assets....................................... 937,575 901,774 534,061
--------------- ------------ --------------
Net cash used in investing activities.................... (3,911,171) (7,035,086) (5,040,850)
--------------- ------------ --------------
Financing activities:
Proceeds from issuance of debt.................................. 123,955,184 37,124,588 84,279,454
Repayment of debt and liability obligations..................... (130,407,842) (50,484,387) (84,095,969)
Proceeds from issuance of common stock.......................... -- 6,873,900 --
Proceeds from issuance of preferred stock....................... -- 5,126,100 --
--------------- ------------ --------------
Net cash (used in) provided by financing activities...... (6,452,658) (1,359,799) 183,485
--------------- ------------ --------------
Net decrease in cash..................................... (571,626) (159,557) (1,023,353)
Cash at beginning of year......................................... 1,301,882 1,461,439 2,484,792
--------------- ------------ --------------
Cash at end of year............................................... $ 730,256 1,301,882 1,461,439
--------------- ------------ --------------
--------------- ------------ --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes.................................................. $ 296,372 276,097 159,968
--------------- ------------ --------------
--------------- ------------ --------------
Interest...................................................... $ 15,145,124 14,257,459 18,896,319
--------------- ------------ --------------
--------------- ------------ --------------
Other non-cash transactions:
Conversion of subordinated debt into preferred stock.......... $ 1,420,000 -- 3,992,499
--------------- ------------ --------------
--------------- ------------ --------------
Reclassification to assets held for sale:
Property, plant and equipment, net......................... $ 4,399,914 -- --
Net operating assets....................................... 2,978,212 -- --
--------------- ------------ --------------
$ 7,378,126 -- --
--------------- ------------ --------------
--------------- ------------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Star Gas Corporation (the "Company") primarily sells and distributes
propane gas and related appliances to retail and wholesale customers through its
branch offices located principally in the Northeastern, Southeastern and
Midwestern United States. The Company had been owned 45% by Star Energy Inc.,
("SEI"), a wholly owned subsidiary of The Brooklyn Union Gas Company, and 55% by
a group of limited partnerships--American Gas and Oil Investors, AmGO II, AmGO
III, and First Reserve Secured Energy Assets Fund, L.P. These limited
partnerships are managed by the First Reserve Corporation (and are collectively
referred to herein as "FRC").
In September 1989, the Company purchased 15.12 shares of common stock owned
by an officer for a 10% Junior Subordinated Promissory Note in the amount of
$2,187,916 (see note 5). These shares were held in treasury at September 30,
1993 and 1992.
In June 1991, the Company converted $1,796,500 and $2,196,000 of Junior
Subordinated Debt owed to SEI and FRC into 1,796.5 shares and 2,196 shares of
Series A Preferred Stock, respectively. The conversion rate was one share of
Series A Preferred Stock for every $1,000 of Junior Subordinated Debt.
In September 1991, the Company sold 13.77 shares of common stock to SEI and
16.83 shares of common stock to FRC for $2,193,300 and $2,680,600, respectively,
and sold 2,306.7 shares of Series A Preferred Stock to SEI and 2,819.4 shares of
Series A Preferred Stock to FRC for $2,306,700 and $2,819,400, respectively.
In August 1992, the Company sold 4.81 shares of common stock to SEI and
5.88 shares of common stock to FRC for $900,000 and $1,100,000, respectively.
In March 1993, the Company and the shareholders signed a Cancellation of
Indebtedness and Deferral Agreement (the "Cancellation Agreement"). Under the
terms of the Cancellation Agreement, SEI and FRC agreed to cancel $639,000 and
$781,000, respectively, of long-term liabilities acquired from a third party
(see note 9) in consideration of 639 and 781 shares, respectively, of newly
issued 8% Cumulative Convertible Preferred Stock.
As a result of the above mentioned transactions, SEI and FRC continued to
own 45% and 55%, respectively, of the common, Series A Preferred and 8%
Cumulative Convertible Preferred Stock of the Company at September 30, 1993 and
1992.
On December 2, 1993, the Company sold the branches of its wholly owned
subsidiary, Federal Petroleum Company ("Federal"), for $1,650,000 in cash and a
note receivable of $500,000. At September 30, 1993, the Company adjusted the
carrying value of the net assets sold to equal the sales price, $2,150,000. The
Company is also negotiating to sell the branches of its wholly owned subsidiary,
Highway Pipeline Trucking Co. ("Highway"), and has adjusted the carrying value
of Highway's net assets to equal the value of a recent offer received,
$5,228,126. The net assets of Federal and Highway have been reflected in the
1993 Consolidated Balance Sheet as assets held for sale in the aggregate amount
of $7,378,126. (See note 10)
On December 23, 1993, the Company was recapitalized and, as a part of the
recapitalization, issued 269,750 shares of 8% Cumulative Convertible Preferred
Stock (see note 2) for $26,975,000 in the indicated amounts to the following
investors: Petroleum Heat and Power Co., Inc. ("Petro") ($14,000,000), FRC
($1,975,000) and Star Gas Holdings Inc. ("Holdings") ($11, 000,000). Holdings is
a corporation recently formed for the purpose of investing in the Company.
Holdings was formed by a group of investors, including Petro who contributed
$2,000,000 of the $11,000,000 invested by
F-31
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND BUSINESS--(CONTINUED)
Holdings. The cash proceeds received by the Company from the issuance of the
preferred stock were used to repay $14,325,000 of its outstanding 11.56% Senior
Notes, to repay $2,800,000 of its outstanding Term Loan, and to pay interest in
arrears of $7,957,000. The Company estimates that the expenses relating to the
recapitalization will approximate $1 million. Also on that date, the Company
issued 250,000 shares of its 8% Cumulative Convertible Preferred Stock and
75,000 shares of its 12.625% Cumulative Redeemable Preferred Stock to The
Prudential Insurance Company of America ("Prudential") in exchange for
$32,500,000 of its 12.625% Senior Subordinated Participating Notes. (See note 5)
The Company simultaneously entered into a management services agreement
with Petro under which Petro will provide executive, financial, and managerial
oversight services to the Company. In full consideration and compensation for
its services, Petro will receive $500,000 per year plus expenses, plus an annual
bonus fee to be paid in the Company's Class A Common Stock equal in value to 5%
of the increase in operating income before depreciation and amortization, as
defined, over the amount generated for the year ended September 30, 1993.
Petro has an option to buy all of the shares of common stock and the 8%
Cumulative Convertible Preferred Stock owned by FRC, Prudential, and Holdings.
This option commences after the receipt of the audited financial statements for
the year ended September 30, 1994 and ends on December 31, 1998. In addition,
FRC, Prudential and Holdings have the option, beginning on January 1, 1999 and
ending on December 31, 1999, to require Petro to purchase all of their shares of
the Company's common stock and 8% Cumulative Convertible Preferred Stock. Under
the terms of the put/call agreements with FRC and Prudential, Petro has the
right to purchase these shares with either cash or shares of Petro's Class A
Common Stock. Under the terms of the put/call agreement with Holdings, Petro has
the right to purchase these shares for cash, notes or Petro preferred stock.
In addition, Petro and FRC have each been granted an option to purchase
500,000 shares of the Company's Class A Common Stock for $9.9031 and $14.8546
per share, respectively. These options expire on December 20, 1998.
(2) RECAPITALIZATION
On December 21, 1993, the Company amended its Articles of Incorporation and
authorized the issuance of three new classes of common stock, Class A, Class B,
and Class C, each with identical rights and preferences, except that Class A has
one vote per share, Class B is nonvoting and Class C has 10 votes per share, and
two new classes of preferred stock, a new 8% Cumulative Convertible Preferred
Stock and a 12.625% Cumulative Redeemable Preferred Stock.
The Company is authorized to issue the indicated number of shares in the
following classes of its common stock:
<TABLE>
<CAPTION>
AUTHORIZED
NO. OF SHARES
-------------
<S> <C>
Class A Common Stock.......................................................... 30,000,000
Class B Common Stock.......................................................... 5,000,000
Class C Common Stock.......................................................... 3,000,000
-------------
Total.................................................................. 38,000,000
-------------
-------------
</TABLE>
F-32
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The Company is authorized to issue the indicated number of shares in the
following series of its 8% Cumulative Convertible Preferred Stock:
<TABLE>
<CAPTION>
AUTHORIZED
NO. OF SHARES
-------------
<S> <C>
Series A...................................................................... 530,000
Series B...................................................................... 300,000
Series C...................................................................... 160,000
Series D...................................................................... 500,000
Series E...................................................................... 10,000
-------------
Total 1,500,000
-------------
-------------
</TABLE>
The Company is authorized to issue the indicated number of shares in the
following series of its 12.625% Cumulative Redeemable Preferred Stock:
<TABLE>
<CAPTION>
AUTHORIZED
NO. OF SHARES
-------------
<S> <C>
Series A...................................................................... 30,000
Series B...................................................................... 120,000
-------------
Total.................................................................. 150,000
-------------
-------------
</TABLE>
All dividends on the Series A, B, D and E 8% Cumulative Convertible
Preferred Stock and on the Series A and B 12.625% Cumulative Redeemable
Preferred Stock are to be paid in additional shares of the same preferred stock
series. The holders of the Series C 8% Cumulative Convertible Preferred Stock
have the option, upon delivering proper notice, to be paid in cash or in
additional shares of Series C 8% Cumulative Convertible Preferred Stock.
Each share of Series A, C and E 8% Cumulative Convertible Preferred Stock
is convertible into 9.2278 shares of Class A Common Stock and the shareholders
are entitled to one vote for each as-if-converted common share. Each share of
Series B 8% Cumulative Convertible Preferred Stock is convertible into 7.0746
shares of nonvoting Class B Common Stock and each share of Series D 8%
Cumulative Convertible Preferred Stock is convertible into 9.2278 shares of
nonvoting Class B Common Stock.
The holders of Series A, C and E 8% Cumulative Convertible Preferred Stock
are entitled to vote together, with the holders of shares of common stock, as a
single class, with each as-if-converted common share of such 8% Cumulative
Convertible Preferred Stock entitled to one vote. The holders of shares of the
Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B
12.625% Cumulative Redeemable Preferred Stock are not entitled to vote on any
matters, except as required by law or as specified in the Company's Articles of
Incorporation.
Upon the occurrence of any liquidating event, each holder of shares of
Series A, B, C and D 8% Cumulative Convertible Preferred Stock and Series A
12.625% Cumulative Redeemable Preferred Stock is entitled, before any
distribution or payment is made upon any shares of common stock or any other
junior security, to a pro rata amount of each series' liquidation value per
share. In the event of liquidation, the remaining order of liquidation is as
follows: Series B 12.625% Cumulative Redeemable Preferred Stock, Series E 8%
Cumulative Convertible Preferred Stock and finally, the common stock of the
Company, with each share of Class A, B, and C Common Stock sharing ratably.
F-33
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
As part of the recapitalization, the Company issued the following shares of
8% Cumulative Convertible Preferred Stock for $100 per share, $26,975,000 in the
aggregate:
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
<TABLE>
<S> <C>
Series A.......................................................................... 179,750
Series C.......................................................................... 90,000
---------
269,750
---------
---------
</TABLE>
In addition, the Company exchanged $32,500,000 of its 12.625% Senior
Subordinated Participating Notes held by Prudential for the following shares of
preferred stock at $100 per share:
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK
<TABLE>
<S> <C>
Series B.......................................................................... 150,000
Series D.......................................................................... 100,000
---------
250,000
---------
---------
12.625% CUMULATIVE REDEEMABLE PREFERRED STOCK
Series A.......................................................................... 15,000
Series B.......................................................................... 60,000
---------
75,000
---------
---------
</TABLE>
The Company, simultaneously with the issuance of the 8% Cumulative
Convertible Preferred Stock and the 12.625% Cumulative Redeemable Preferred
Stock, redeemed $4,080,000 plus accrued interest in certain notes held by FRC,
$1,420,000 in previously outstanding 8% Cumulative Convertible Preferred Stock,
the previously outstanding Series A Preferred Stock and all previously
outstanding shares of common stock in exchange for 5,000 shares of Series E 8%
Cumulative Convertible Preferred Stock and 480,695 shares of Class A Common
Stock. In addition, prior to the recapitalization, all shares previously held by
SEI were acquired by FRC.
Upon the sale of Highway and Federal, the Company is required to apply the
net proceeds from the sales to repurchase, at $100 per share plus an additional
amount sufficient to generate a yield equal to 12.625% compounded semiannually
from December 21, 1993, the Series D 8% Cumulative Convertible Preferred Stock
from Prudential. The Company also has an option, which expires on December 31,
1995, to repurchase the balance of the Series D shares at the same formula
price. As the Company redeems shares of its Series D 8% Cumulative Convertible
Preferred Stock, FRC has agreed to return, as a contribution to the capital of
the Company, a number of shares of Class A Common Stock of the Company owned by
FRC, determined by multiplying 48,569 by a fraction, the numerator of which is
the face value of the Series D 8% Cumulative Convertible Preferred Stock
redeemed and the denominator of which is $10 million. On December 2, 1993, the
Company sold Federal for an aggregate price of $2.15 million, consisting of
$1.65 million in cash and a $500,000 note. The cash from the sale was held in
escrow until the recapitalization was completed. On December 23, 1993, such cash
was used to repurchase a portion of the Series D 8% Cumulative Convertible
Preferred Stock as described above. The Company is currently negotiating to sell
Highway. (See note 1).
F-34
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The 12.625% Cumulative Redeemable Preferred Stock must be exchanged into
subordinated notes once the Company meets certain financial ratios; to the
extent not previously exchanged, the Company is required to apply up to $2
million on January 10, 2000 to redeem 12.625% Cumulative Redeemable Preferred
Stock plus an amount sufficient to redeem any 12.625% Cumulative Redeemable
Preferred Stock received as dividends thereon, and to the extent shares still
remain outstanding, the Company is required to redeem the remaining shares on
January 10, 2001.
As of December 23, 1993, after giving effect to the recapitalization of the
Company, assuming conversion of all of the 8% Cumulative Convertible Preferred
Stock into common stock and assuming no issuance of any option shares, the
investors would have the following equity interests and voting percentages on
most matters, except for certain voting rights for the Series B and D 8%
Cumulative Convertible Preferred Stock and the Series A and B 12.625% Cumulative
Redeemable Preferred Stock designated by law or as specified in the Company's
Articles of Incorporation:
<TABLE>
<CAPTION>
EQUITY VOTING
PERCENTAGE PERCENTAGE
----------- -----------
<S> <C> <C>
Petro............................................................... 25.8% 42.8%
Holdings............................................................ 20.3 33.7
FRC................................................................. 14.2 23.5
Prudential.......................................................... 39.7 --
----------- -----------
100.0% 100.0%
----------- -----------
----------- -----------
</TABLE>
Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 29.5%, but its voting interest would remain at
42.8%.
Assuming further that the Series D 8% Cumulative Convertible Preferred
Stock is repurchased from Prudential and FRC contributes the full 48,569 common
shares back to the Company, the investors would then have the following
interests:
<TABLE>
<CAPTION>
EQUITY VOTING
PERCENTAGE PERCENTAGE
----------- -----------
<S> <C> <C>
Petro............................................................... 32.1% 43.5%
Holdings............................................................ 25.2 34.2
FRC................................................................. 16.4 22.3
Prudential.......................................................... 26.3 --
----------- -----------
100.0% 100.0%
----------- -----------
----------- -----------
</TABLE>
Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 36.7%, but its voting interest would remain at
43.5%.
F-35
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
The following represents the capitalization of the Company as of September
30, 1993 and as adjusted to give effect to the recapitalization as discussed
above, as if such recapitalization had occurred on September 30, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
----------------------------------
AS ADJUSTED HISTORICAL
---------------- ----------------
<S> <C> <C>
Long-term debt and working capital borrowings (including current portion) (see
note 5)....................................................................... $ 76,285,958 125,910,958
---------------- ----------------
Obligations under consulting and covenant not-to-compete contracts (including
current portion) (see note 9)................................................. 2,232,322 6,278,259
---------------- ----------------
Preferred stock--12.625% Cumulative Redeemable................................ 7,500,000 --
---------------- ----------------
Shareholders' equity (deficiency):
Common stock--266 shares, $1 par value...................................... -- 266
Class A Common Stock--480,695 shares, $.10 par value........................ 48,070 --
Class B Common Stock........................................................ -- --
Class C Common Stock........................................................ -- --
Series A Preferred Stock.................................................... -- 40,309
Preferred Stock--8% Cumulative Convertible--No par.......................... -- 1,420
Preferred Stock--8% Cumulative Convertible--$1 par value
Series A--179,750 shares.................................................... 179,750 --
Series B--150,000 shares.................................................... 150,000 --
Series C-- 90,000 shares.................................................... 90,000 --
Series D--100,000 shares.................................................... 100,000 --
Series E-- 5,000 shares.................................................... 5,000 --
Capital in excess of par value.............................................. 110,403,205 58,471,501
Deficit..................................................................... (59,836,948) (59,836,948)
Treasury stock.............................................................. -- (2,187,916)
---------------- ----------------
Total shareholders' equity (deficiency)................................ 51,139,077 (3,511,368)
---------------- ----------------
Total capitalization................................................... $ 137,157,357 128,677,849
---------------- ----------------
---------------- ----------------
</TABLE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market following the moving
weighted average method, which approximates first-in, first-out cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the depreciable assets (generally thirty
years for buildings and seven to thirty years for equipment) using the
straight-line method. Gain or loss on property retired, sold or otherwise
disposed
F-36
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of is included in operations. Expenditures for renewals and improvements are
capitalized, while maintenance and repairs are expensed.
Intangible Assets
Beginning on October 1, 1992, the excess of cost over the fair value of net
assets acquired is being amortized using the straight-line method over 10 years.
Prior to October 1, 1992, such assets were being amortized over 40 years. The
effect of the change in 1993 was to increase amortization expense by $1,160,000.
Other intangible assets, principally covenants not to compete, capitalized
consulting costs and customer contracts and lists are being amortized over their
estimated useful lives, ranging from one to ten years. Deferred charges,
representing costs associated with the issuance of the Company's debt, are being
amortized over the lives of the related debt.
The Company assesses the recoverability of intangible assets by comparing
the carrying values of such intangibles to market values, where a market exists,
supplemented by cash flow analyses to determine that the carrying values are
recoverable over the remaining estimated lives of the intangibles through
undiscounted future operating cash flows. Where an intangible asset is deemed to
be impaired, the amount of intangible impairment, is measured based on market
values, as available, or by projected cash flows.
Customer Credit Balances
Customer credit balances represent payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated annual
propane gas charges on a fixed monthly basis) in excess of actual deliveries
billed.
Cash Equivalents
For the purpose of determining cash equivalents used in the preparation of
the Statements of Cash Flows, the Company considers all highly liquid
investments with a maturity of three months or less when purchased, to be cash
equivalents.
Basis of Presentation
Certain reclassifications have been made to the 1992 and 1991 financial
statements to conform to the 1993 presentation.
(4) ACQUISITIONS
The Company expanded its operations in the retail and wholesale propane gas
businesses by making several acquisitions during the fiscal years ended
September 30, 1991, 1992 and 1993 as described below. The acquisitions were
accounted for under the purchase method of accounting and, therefore, the
purchase prices have been allocated to the assets and liabilities acquired based
on their respective fair market values at the dates of acquisition. The purchase
prices in excess of the fair values of net assets acquired were classified as
excess of cost over net assets acquired in the Consolidated Balance Sheets. The
results of operations of the respective acquired companies have been included in
the Consolidated Statements of Operations from the dates of acquisition.
During fiscal 1991, the Company acquired certain assets of six unaffiliated
liquified petroleum gas businesses. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$1,420,000.
F-37
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACQUISITIONS--(CONTINUED)
During fiscal 1991, the Company also entered into an operating lease for
certain assets of a water treatment company. Annual payments on the lease are
$47,760 per year for three years. The Company has an irrevocable option at the
end of the lease to purchase these assets for $60,000.
During fiscal 1992, the Company acquired certain assets of five
unaffiliated liquified petroleum gas businesses. The aggregate consideration for
these acquisitions, accounted for by the purchase method, was approximately
$1,047,000.
During fiscal 1993, the Company acquired certain assets of one unaffiliated
liquified petroleum gas business. The aggregate consideration for this
acquisition, accounted for by the purchase method, was approximately $60,000.
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993* SEPTEMBER 30,
-------------------- ------------------------------
(AS ADJUSTED) 1993 1992
-------------- --------------
<S> <C> <C> <C>
Revolving and line of credit loans payable to bank(a)...... $ 6,808,704 6,808,704 5,227,996
11.56% Senior Notes (b).................................... 30,675,000 45,000,000 45,000,000
12.625% Senior Subordinated Participating Notes (b)........ 7,500,000 40,000,000 40,000,000
11.77% Senior Reset Term Notes (c)......................... 20,000,000 20,000,000 20,000,000
Term loan agreement (d).................................... 9,325,000 12,125,000 15,625,000
10% Junior Subordinated Promissory Note payable to former
shareholder, prepaid in 1993(e)............................ -- -- 1,593,090
Senior subordinated promissory notes, net of discount of
$8,934, $8,934 and $17,641................................. 701,535 701,535 1,507,197
11% Note payable in $60,000 annual installments to 2004,
net of discount of $48,200, $48,200 and $55,300.......... 611,800 611,800 664,700
Other debt, net of discount $0, $0 and $4,658.............. 20,585 20,585 76,513
Obligations under capital leases (see note 8).............. 643,334 643,334 953,634
-------------------- -------------- --------------
76,285,958 125,910,958 130,648,130
Less current maturities.......................... 7,485,774 7,485,774 6,077,873
-------------------- -------------- --------------
$ 68,800,184 118,425,184 124,570,257
-------------------- -------------- --------------
-------------------- -------------- --------------
</TABLE>
- ---------------
* As adjusted gives effect to the recapitalization discussed in notes 1 and 2
and in (b) and (d) below, as if such recapitalization had occurred on
September 30, 1993.
<TABLE>
<S> <C>
(a) On July 2, 1993, the Company entered into a $20,000,000 Amended and Restated Revolving Credit Agreement (the
"Credit Agreement") with The First National Bank of Boston. The Credit Agreement matured on October 15, 1993,
was renewed to December 22, 1993, and bore interest at the higher of the annual rate of interest announced as
the base rate of the bank making the loan plus 2% or 2.5% above the overnight federal funds rate.
</TABLE>
hA
(Footnotes continued on following page)
F-38
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
<TABLE>
<S> <C>
As of September 30, 1993 and 1992, outstanding revolving loans and letters of credit aggregated $9,457,520
(including $2,648,816 for letters of credit), and $9,257,522 (including $4,029,526 for letters of credit),
respectively.
The Credit Agreement was again restated and amended as of December 21, 1993. Under the terms of the restated
and amended Credit Agreement, the Company may borrow up to $25 million to finance working capital needs under
a revolving credit facility which expires on June 30, 1996. Amounts borrowed under the revolving credit
facility are subject to a 30 day clean up requirement each year. Interest on borrowings is payable monthly
and is based upon either the Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined
below), plus 2 1/4% on Eurodollar loans or 1/4% on Alternative Base Rate Loans, at the Company's option. The
Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted for reserve requirements,
if any. The Alternate Base Rate is the higher of (i) the prime rate or base rate of The First National Bank
of Boston in effect or (ii) the Federal Funds Rate in effect plus 1/2%.
The Credit Agreement also provides for a revolving credit acquisition facility under which the Company may
borrow up to $20 million to fund acquisitions of propane companies. This acquisition facility expires on June
30, 1996 and the Company has the option to convert this facility into a term loan, payable in 36 consecutive
monthly installments commencing on July 1, 1996. Interest on the borrowings is payable monthly and is based
upon either the Eurodollar Rate plus 2 1/2% on loans made before the acquisition loan conversion date and 3%
after the acquisition loan conversion date or the Alternate Base Rate plus 1/2% on loans made before the
acquisition loan conversion date and 1% on loans made after the acquisition loan conversion date, at the
Company's option.
The Company pays a commitment fee equal to 1/2% of the unused portion of the bank facilities with a
reduction, through June 30, 1994, on the Acquisition Facility to 1/4% annually if it is not used through that
date.
Under the terms of the Credit Agreement, as amended , the Company is restricted as to the declaration and
distribution of dividends and is also required to maintain certain financial and operational ratios. The
amounts borrowed under the Credit Agreement are secured by substantially all of the Company's assets.
(b) On January 10, 1989, the Company issued $85,000,000 of notes (the "Note Agreements") to Prudential for cash.
The Note Agreements consisted of $45,000,000 of 11.56% Senior Notes due in six consecutive annual
installments of $7,500,000 commencing January 10, 1994; $30,000,000 of 12.625% Senior Subordinated
Participating Notes, Series A, due in six consecutive annual installments of $4,250,000 commencing January
10, 1995, with a final installment of $4,500,000 due on January 10, 2001; and $10,000,000 of 12.625% Senior
Subordinated Participating Notes, Series B, due in six consecutive annual installments of $1,500,000
commencing January 10, 1995, with a final installment of $1,000,000 due on January 10, 2001.
The Series A and Series B Senior Subordinated Participating Notes bore additional interest aggregating to the
greater of (a) $487,500 or 2.5% of the first $33,500,000 of the Company's operating profit (as defined) for
each of the fiscal years ended September 30, 1991 through 1999 and (b) $622,400 or 3.19% of the first
$33,500,000 of the Company's operating profit (as defined) for the fiscal year ended September 30, 2000.
</TABLE>
(Footnotes continued on following page)
F-39
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
<TABLE>
<S> <C>
As part of the recapitalization (see notes 1 and 2), the Company exchanged in direct order of maturity,
$15,000,000 of Series A 12.625% Senior Subordinated Participating Notes for 150,000 shares of Series B 8%
Cumulative Convertible Preferred Stock, the entire $10,000,000 of Series B 12.625% Senior Subordinated
Participating Notes for 100,000 shares of Series D 8% Cumulative Convertible Preferred Stock, and in inverse
order of maturity, $1,500,000 of Series A 12.625% Senior Subordinated Participating Notes for 15,000 shares
of Series A 12.625% Cumulative Redeemable Preferred Stock and $6,000,000 of Series A 12.625% Senior
Subordinated Participating Notes for 60,000 shares of Series B 12.625% Cumulative Redeemable Preferred Stock.
In addition, the participating interest feature on the Series A and B 12.625% Senior Subordinated
Participating Notes was eliminated.
Additionally, the Company was also allowed to prepay $14,325,000 of the 11.56% Senior Notes in direct order
of their maturity. The remaining 1995 payment of $675,000 and part of the 1996 payment of $1,325,000 were
deferred such that the 1997, 1998 and 1999 payments were increased from $7,500,000 per year to $8,166,667 per
year.
Under the terms of the Note Agreements, as amended at various dates through December 23, 1993, the Company is
restricted as to the declaration and distribution of dividends and is also required to maintain certain
financial and operational ratios. The amounts borrowed under the 11.56% Senior Notes and the 12.625% Senior
Subordinated Participating Notes are secured by substantially all of the Company's assets.
(c) On February 28, 1991, the Company issued $20,000,000 in Senior Reset Term Notes (the "Notes") to Prudential
for cash. The Notes were due in consecutive semi-annual installments of $2,500,000 commencing August 28,
1994. The Notes bore interest at 10.72% until February 28, 1994. Thereafter, until maturity, the Notes would
have borne interest at the 2.25 year Treasury Rate on February 28, 1994 plus 3.75%.
The Company amended the Notes at various dates through November 30, 1993. The required prepayments under the
amended terms of the Notes are $2,500,000 on August 28, 1999, $5,000,000 on each of February 28, 2000, August
28, 2000 and February 28, 2001 and $2,500,000 on August 28, 2001. As part of the recapitalization, the Notes
were amended such that the interest rate on the Notes became the 6.5 year Treasury Rate plus 3.3%.
Under the terms of the Notes, as amended, the Company is restricted as to the declaration and distribution of
dividends and is also required to maintain certain financial and operational ratios. The amounts outstanding
under the Notes are secured by substantially all of the Company's assets.
(d) On March 7, 1991, the Company entered into a Term Loan Agreement (the "Term Loan") with PruSupply, Inc. which
provided a $20,000,000 facility. The Company amended the Term Loan at various dates through November 30,
1993. The Term Loan was to be repaid in nineteen consecutive quarterly installments of $875,000, which
commenced in May 1991, with a final payment of $3,375,000 due at maturity in February 1996. The Term Loan
bears interest at the one month London Interbank Offered Rate ("LIBOR") plus 2.7%.
As part of the recapitalization, the Term Loan was amended to allow for the prepayment of $1,925,000 on
December 23, 1993. In addition, the Company paid $875,000 that had been deferred. This agreement was further
amended such that the required payments on these notes will be $4,325,000 in 1996 and $5,000,000 in 1997.
Under the terms of the Term Loan, as amended, the Company is restricted as to the declaration and
distribution of dividends and is also required to maintain certain financial and operational ratios. The
amounts outstanding under the Term Loan are secured by substantially all of the Company's assets.
</TABLE>
(Footnotes continued on following page)
F-40
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
(Footnotes continued from preceding page)
<TABLE>
<S> <C>
(e) On March 30, 1993, the Company and a former shareholder reached an agreement whereby the former shareholder
received payments in settlement of all amounts owed under a 10% Junior Subordinated Promissory Note and a
Consulting Agreement. The Company recognized a gain of $178,415 on the settlement. (See note 9)
</TABLE>
As of September 30, 1993, the Company was not in compliance with certain
financial covenants contained in the Credit Agreement, the Note Agreements, the
Notes and the Term Loan. All appropriate covenants have been amended or waivers
have been obtained, where necessary.
As of September 30, 1993, annual maturities of long-term debt and
obligations under capital leases, after giving effect to the recapitalization,
are set forth in the following table:
<TABLE>
<S> <C>
1994.............................................. $ 7,485,774
1995.............................................. 209,852
1996.............................................. 10,708,138
1997.............................................. 13,270,354
1998.............................................. 10,253,745
Remaining......................................... 34,358,095
--------------
$ 76,285,958
--------------
--------------
</TABLE>
(6) INCOME TAXES
The income tax provision (benefit) shown in the accompanying Consolidated
Statements of Operations consists of the components set forth below:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ------------ ------------
<S> <C> <C> <C>
Federal:
Deferred..................................... $ -- (1,489,055) (1,748,266)
State:
Current...................................... 270,727 203,837 210,279
Deferred..................................... (13,700) (8,785) (65,025)
----------- ------------ ------------
257,027 195,052 145,254
----------- ------------ ------------
$ 257,027 (1,294,003) (1,603,012)
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-41
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES--(CONTINUED)
The following is a reconciliation between reported income tax (benefit)
expense and tax (benefit) expense computed at the statutory rate:
<TABLE>
<CAPTION>
1993 1992 1991
--------------- ------------ ------------
<S> <C> <C> <C>
Computed at Federal statutory rate (fiscal 1993, 1992 and
1991--34%)......................................................... $ (15,922,533) (2,908,185) (2,363,521)
Tax effect of:
Losses for which no tax benefit was recognized................... 15,435,673 909,532 --
Depreciation on excess of book cost over tax basis of plant and
equipment and amortization of excess of cost over net assets
acquired........................................................... 434,080 476,192 495,863
Gain on sale of equipment resulting from book cost over tax basis
of equipment....................................................... 118,039 76,155 130,036
State income taxes, net of Federal benefit....................... 169,638 128,734 95,868
Other............................................................ 22,130 23,569 38,742
--------------- ------------ ------------
$ 257,027 (1,294,003) (1,603,012)
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
The (benefit) provision for income taxes is based upon pretax book income.
Deferred income taxes result primarily from the difference in depreciation
expense as a result of the use of accelerated methods in determining
depreciation for income tax purposes in excess of the straight-line basis used
for financial statement purposes.
At September 30, 1993, the Company had approximately $84,000,000 of Federal
and state net operating loss (NOL) carryforwards available to offset future
taxable income. Such NOLs expire in the years 2004 through 2008.
Effective with the recapitalization on December 23, 1993 (see note 2), the
Company's NOL's were substantially limited for purposes of general carryforward
availability and otherwise limited for specified carryforward purposes since the
recapitalization constitutes a change in control for income tax reporting
purposes.
In February 1992, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("FASB 109"). The Company is not required to adopt the new method of
accounting for income taxes until fiscal 1994. Because the Company was not
carrying substantial deferred taxes on its Consolidated Balance Sheet,
management believes that the adoption of FASB 109 will not have a material
effect on financial position or results of operations. However, as a result of
the recapitalization and change in control, the Company is in the process of
determining what effect, if any, the limitation on the use of the NOLs will have
on financial position and results of operations, and what tax planning
strategies are available to retain the maximum benefit thereof.
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan which provides benefits for all eligible
employees except those covered by union plans and employees of Highway. Subject
to IRS limitations, the 401(k) plan provides for employees to contribute from 1%
to 15% of compensation with the Company contributing a matching amount of the
employees' contribution up to a maximum of 3% of compensation. The Company may
also contribute an additional amount on behalf of each employee in an amount
equal to
F-42
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE BENEFIT PLANS--(CONTINUED)
3% of each employee's compensation. Effective, March 1, 1992, an amendment to
the plan eliminated the ability to make this additional contribution.
Aggregate Company contributions made to the 401(k) plan during 1993, 1992
and 1991 were $313,652, $537,703 and $627,447, respectively.
The Company makes monthly contributions to a union defined benefit pension
plan for all union employees. The amount charged to expense was $198,206,
$202,545 and $186,871 in fiscal 1993, 1992 and 1991, respectively.
(8) LEASE COMMITMENTS
The Company has entered into noncancellable capital lease agreements with
former owners of acquired businesses for certain premises and related equipment.
All leases contain bargain purchase options, exercisable on the lease
termination dates.
The premises and equipment under capital leases are carried at $828,725 and
$2,023,660 on the Consolidated Balance Sheets with accumulated depreciation of
$79,234 and $141,426 at September 30, 1993 and 1992, respectively. Depreciation
of premises and equipment under capital leases is included in depreciation
expense.
The Company has entered into operating leases for office space, trucks and
other equipment. The future minimum rental commitments at September 30, 1993
under leases having an initial or remaining noncancellable term of one year or
more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -------------
<S> <C> <C>
1994........................................................ $ 157,476 $ 2,700,000
1995........................................................ 157,476 2,400,000
1996........................................................ 144,726 1,600,000
1997........................................................ 80,976 900,000
1998........................................................ 80,976 200,000
Thereafter.................................................. 506,097 100,000
------------- -------------
Total minimum lease payments................................ 1,127,727 $ 7,900,000
-------------
-------------
Less amount representing interest........................... 484,393
-------------
Present value of net minimum rentals........................ $ 643,334
-------------
-------------
</TABLE>
The Company incurred rent expense of $4,150,765, $3,586,450 and $3,437,423
in 1993, 1992 and 1991, respectively.
(9) OTHER CURRENT AND LONG-TERM LIABILITIES
As a result of various acquisition agreements, the Company was required to
pay an aggregate of $6,278,259 and $9,268,487 (net of discounts of $406,596 and
$1,155,492), as of September 30, 1993 and 1992, respectively, pursuant to
certain consulting and covenant not-to-compete agreements. These obligations are
included in other current liabilities and long-term liabilities in the amounts
of $712,179 and $3,812,670 and $5,566,080 and $5,455,817 as of September 30,
1993 and 1992, respectively.
On December 4, 1992, the Company and its shareholders entered into a
Purchase Agreement with a third party for the shareholders to purchase from the
third party $5,500,000 of consulting and non-competition payments (the
"Purchased Payments") owed to the third party by the Company. This
F-43
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) OTHER CURRENT AND LONG-TERM LIABILITIES--(CONTINUED)
amount due was $2,750,000 on November 17, 1992 and $2,750,000 on November 17,
1993. The shareholders deferred the $2,750,000 installment payment (the
"Deferred Amount") due on November 17, 1992 under the original agreement to June
1, 1993. This Deferred Amount bore interest at 13.76% per annum.
On March 30, 1993, the Company and its shareholders signed a Cancellation
of Indebtedness and Deferral Agreement (the "Cancellation Agreement"). Under the
terms of the Cancellation Agreement, the shareholders agreed to cancel
$1,420,000 of the Deferred Amount in consideration of 1,420 of newly issued
shares of 8% Cumulative Convertible Preferred Shares of the Company. The balance
of the Deferred Amount, after giving effect to such cancellation, plus interest
accrued through March 30, 1993, aggregated $1,470,848 (the "New Deferred
Amount"). The shareholders agreed to the deferral of the New Deferred Amount to
December 31, 1994 and to the deferral of the remainder of the Purchased Payments
from November 17, 1993 to December 31, 1994. The New Deferred Amount bore
interest at the rate of 13.75% per annum from March 30, 1993. The remainder of
the Purchased Payments bore interest at the rate of 13.76% per annum from
November 17, 1993 (See note 1).
On December 23, 1993, as part of the recapitalization (see note 2), the
Company exchanged the 1,420 8% Cumulative Convertible Preferred Shares plus the
New Deferred Amount and the balance of the Purchased Payments plus accrued
interest for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock
and 230,695 shares of Class A Common Stock.
On March 30, 1993, the Company and a former shareholder reached an
agreement whereby the former shareholder received payments in settlement of all
amounts owed to him under a 10% Junior Subordinated Promissory Note and a
Consulting Agreement. The Company recognized a gain of $178,415 on the
settlement (See note 5).
At September 30, 1993, annual maturities of amounts payable in connection
with certain covenants not to compete and consulting agreements, after giving
effect to the recapitalization, are as follows:
<TABLE>
<S> <C>
1994................................................. $ 712,179
1995................................................. 637,346
1996................................................. 412,994
1997................................................. 379,504
1998................................................. 90,299
</TABLE>
(10) IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1993, in connection with the recapitalization (see note 2)
and the sale of certain of the Company's branches (see note 1), the Company
reviewed the carrying values of its long-lived assets and identifiable
intangible assets for possible impairment. The Company determined, based on
expected future cash flows and the estimated fair values of certain branches,
that it would not be able to recover the carrying values of some of these
assets. Accordingly, as of September 30, 1993 the Company recorded a write-off
of approximately $33 million representing the estimated impairment to its long
lived assets.
F-44
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following Pro Forma Financial Statements for the year ended December
31, 1992 are derived from the Company's audited consolidated financial
statements for the year ended December 31, 1992. The Pro Forma Financial
Statements at and for the nine and twelve months ended September 30, 1993 are
derived from the unaudited financial statements of the Company at and for the
nine and twelve months ended September 30, 1993, which include all adjustments
(consisting of only normal recurring accruals) that, in the opinion of
management, are necessary for a fair presentation of such data. The Pro Forma
Financial Statements do not purport to represent what the Company's financial
position or results of operations would have been if the events described
therein had occurred on the dates specified, nor are they intended to project
the Company's financial position or results of operations for any future period.
The Pro Forma Financial Statements should be read in conjunction with the
Consolidated Financial Statements, and the Notes thereto, appearing elsewhere
herein.
P-1
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1993
(IN THOUSANDS)
The following pro forma balance sheet at September 30, 1993 gives effect to
(a) the offering by the Company (the "Offering") of $75.0 million of %
Subordinated Debentures due 2006 (the "Debentures"), (b) the repurchase (the
"Maxwhale Notes Repurchase") of the Company's senior 9% Notes due June 1, 1994
(the "Maxwhale Notes"), (c) the $16.0 million investment in Star Gas Corporation
("Star Gas") resulting in an approximate 29.5% interest in Star Gas, accounted
for under the equity method (the "Star Gas Investment"), (d) the release (the
"Collateral Release") of the $20 million cash collateral account partially
securing the Maxwhale Notes (the "Maxwhale Collateral") and (e) the Subordinated
Debt Amendments, as if each such transaction had occurred on September 30, 1993.
<TABLE>
<CAPTION>
PETROLEUM HEAT PRO FORMA
AND POWER CO., INC. ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 7,437 $ 72,300(1) $ 30,404
(51,333)(2)
(16,000)(3)
20,000(4)
(2,000)(5)
Accounts receivable........................................................... 43,187 43,187
Inventories................................................................... 12,788 12,788
Other current assets.......................................................... 7,770 7,770
Cash collateral account....................................................... 20,000 (20,000)(4) --
---------- ------------ -----------
Total current assets........................................................ 91,182 2,967 94,149
Property plant and equipment--net............................................... 32,533 32,533
Intangibles--net................................................................ 92,639 2,700(1) 97,339
2,000(5)
Other assets.................................................................... 550 550
Investment in Star Gas Corporation.............................................. -- 16,000(3) 16,000
---------- ------------ -----------
$ 216,904 $ 23,667 $ 240,571
---------- ------------ -----------
---------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.......................................... $ 33 $ 33
Current maturities of Maxwhale Notes.......................................... 27,500 $ (27,500)(2) --
Current maturities of preferred stock......................................... 4,167 4,167
Accounts payable.............................................................. 9,174 9,174
Customer credit balances...................................................... 26,486 26,486
Unearned service contract revenue............................................. 12,335 12,335
Accrued expenses.............................................................. 18,975 18,975
---------- ------------ -----------
Total current liabilities................................................... 98,670 (27,500) 71,170
Long-term debt.................................................................. 22,555 (22,500)(2) 42,687
42,632(6)
Supplemental benefits payable................................................... 1,657 1,657
Pension plan obligation acquired................................................ 1,220 1,220
Subordinated notes payable...................................................... 135,264 75,000(1) 167,632
(42,632)(6)
---------- ------------ -----------
Total liabilities........................................................... 259,366 25,000 284,366
---------- ------------ -----------
Cumulative redeemable exchangeable preferred stock.............................. 20,833 20,833
---------- -----------
Stockholders' equity (deficiency):..............................................
Common stock.................................................................. 2,176 2,176
Additional paid in capital.................................................... 54,416 54,416
Deficit....................................................................... (118,607) (1,333)(2) (119,940)
Note receivable from stockholder.............................................. (1,280) (1,280)
---------- ------------ -----------
Total stockholders' equity (deficiency)..................................... (63,295) (1,333) (64,628)
---------- ------------ -----------
$ 216,904 $ 23,667 $ 240,571
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
- -----------------------------
(1) Reflects the Offering, net of estimated offering costs of $2.7 million, with
net proceeds to the Company of $72.3 million. Such amounts include
approximately $21.0 million in cash and principal amount of Debentures, the
proceeds of which are not required for the Maxwhale Notes Repurchase.
(2) Reflects the Maxwhale Notes Repurchase and the related extraordinary loss
representing the premium paid on the early retirement of the Maxwhale Notes.
If such repurchase had occurred on September 30, 1993, such extraordinary
loss would have been approximately $1.3 million.
(3) Reflects a cash payment of $16.0 million for the Star Gas Investment.
(4) Reflects the Collateral Release.
(5) Reflects the estimated consideration and expenses to be paid in connection
with the Subordinated Debt Amendments and the related amendments to the
Credit Agreement.
(6) Reflects the reclassification of subordinated debt to senior debt in
connection with the Subordinated Debt Amendments.
P-2
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS)
The following pro forma statement of operations for the year ended December
31, 1992 is derived from the Company's financial statements for the year ended
December 31, 1992, adjusted to give effect to the following transactions, as if
each such transaction had occurred on January 1, 1992:
(a) the acquisitions by the Company of nine individually insignificant
distributorships during 1992 (the "1992 Acquisitions") and nine
individually insignificant distributorships during the nine months ended
September 30, 1993 (the "1993 Acquisitions");
(b) the issuance in March 1993 of approximately $12.8 million of
Subordinated Notes due March 1, 2000 in exchange for an equal amount of the
Company's 1991 Redeemable Preferred Stock (the "Preferred Stock Exchange");
(c) the repurchase in May 1993 of approximately $12.4 million of
11.40% Subordinated Notes due July 1, 1993 and approximately $12.5 million
of 14.275% Subordinated Notes due October 1, 1995 (the "Subordinated Debt
Repurchases");
(d) the Maxwhale Notes Repurchase;
(e) the Star Gas Investment and the effect of concurrent agreements
entered into in connection with such investment;
(f) the issuance in April 1993 (the "10 1/8% Notes Issuance") of $50
million of 10 1/8% Subordinated Notes due 2003 (the "10 1/8% Notes");
(g) the Collateral Release; and
(h) the Offering, at an assumed interest rate of 10%; provided,
however, that the pro forma data do not give effect to approximately $2.7
million of interest expense on, or the use of, approximately $27.4 million
of the Debentures, the proceeds of which are not required for acquisitions
or refinancings. A change in the interest rate on the Debentures by 0.25%
would result in an increase in pro forma interest expense of approximately
$0.1 million.
The results of operations of the acquired distributors are based on their
individual fiscal year ends. The combination of the acquired distributors on
their individual fiscal year bases, rather than the Company's fiscal year, does
not produce a materially different effect. The acquisitions have been accounted
for as purchases. The unaudited statements of operations of the individually
insignificant distributorships for the year ended December 31, 1992 include all
adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the results of
operations.
P-3
<PAGE>
<TABLE>
<CAPTION>
PETROLEUM
HEAT AND
POWER CO., DISTRIBUTORSHIPS PRO FORMA PRO FORMA
INC. ACQUIRED(1) ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Net sales................................................ $ 512,430 $ 92,061 $ 604,491
Cost of sales............................................ 350,941 65,132 416,073
-------------- -------------- -----------
Gross profit........................................... 161,489 26,929 188,418
Operating expenses....................................... 110,165 19,705 $ (4,185)(2) 125,185
(500)(3)
Amortization of customer lists........................... 23,496 1,958 3,564(4) 29,018
Depreciation and amortization of plant and equipment..... 5,534 1,571 123(4) 7,228
Amortization of deferred charges......................... 5,363 -- 590(4) 5,953
Provision for supplemental benefit....................... 1,974 -- 1,974
-------------- -------------- -----------
Operating Income....................................... 14,957 3,695 19,060
Interest expense--net.................................... (1,498)(5)
18,622 1,572 3,168(6) 21,864
Other income (expenses).................................. (324) 10 (314)
Share of loss of Star Gas................................ -- -- (1,434)(7) 167
1,601(8)
-------------- -------------- -----------
Income (loss) before income taxes...................... (3,989) 2,133 (2,951)
Income taxes............................................. 400 -- 400
-------------- -------------- -----------
Net income (loss)........................................ $ (4,389) $ 2,133 $ (3,351)
-------------- -------------- -----------
-------------- -------------- -----------
</TABLE>
- ------------------------------
(1) Represents the results of the 1992 Acquisitions from January 1, 1992 to
their dates of acquisition by the Company. Results from the dates of
acquisition to December 31, 1992 are included in the Company's December 31,
1992 consolidated results. The results of the 1993 Acquisitions are also
included in their entirety in this column for 1992.
(2) Elimination of general and administrative expenses of the acquired
distributorships which do not have a continuing impact on income from
continuing operations as follows:
<TABLE>
<S> <C>
Salaries and related costs............................................................ $ 3,342
Other................................................................................. 843
---------
$ 4,185
---------
---------
</TABLE>
The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1992 and 1993. These employees were not
employed by the Company when the distributorships were acquired, and the
Company was able to integrate the businesses without incurring any
incremental costs.
(3) Reflects a management agreement pursuant to which the Company will be paid
$0.5 million per year by Star Gas. The Company does not anticipate having to
hire any additional personnel to perform its obligations under the
management agreement. Rather, it plans to deploy responsibilities within its
own organization to provide the needed services to Star Gas.
(4) Adjustment of amortization of customer lists, depreciation and amortization
of plant and equipment and amortization of deferred charges, as applicable,
to reflect an annual charge in accordance with the Company's accounting
policies.
(5) Elimination of interest expense on debt incurred by the previous owners of
two of the distributorships acquired during 1992. The debt was incurred by
such previous owners to purchase the distributorships and such debt was not
assumed by the Company in its acquisitions.
(6) Reflects (a) increased interest expense as a result of (i) the Preferred
Stock Exchange, (ii) the 10 1/8% Notes Issuance, (iii) a portion of the
Debentures issued in the Offering, the proceeds of which are required for
acquisitions or refinancings and (iv) the elimination of interest income on
the Maxwhale Collateral and (b) decreased interest expense as a result of
(i) the Subordinated Debt Repurchases and (ii) the Maxwhale Notes
Repurchase. If the Subordinated Debt Repurchases and the Maxwhale Notes
Repurchase had occurred on January 1, 1992, the Company would have recorded
a $6.2 million extraordinary loss as the result of the early retirement of
such debt.
(7) Represents the Company's share of the net loss of Star Gas based on Star
Gas' operating results for the twelve months ended December 31, 1992.
(8) Reflects the Company's share of decreased interest expense of Star Gas as a
result of the repayment of debt with a portion of the capital infusion in
Star Gas and the conversion of debt and preferred stock of Star Gas to
equity of Star Gas by certain of Star Gas' investors (the "Star Gas
Recapitalization") and the Company's share of Star Gas' cost for the Petro
management agreement. (See note 3)
P-4
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993
(IN THOUSANDS)
The following pro forma statement of operations for the nine months ended
September 30, 1993 is derived from the Company's financial statements for the
nine months ended September 30, 1993, adjusted to give effect to the following
transactions, as if each such transaction had occurred on January 1, 1992:
(a) the 1993 Acquisitions;
(b) the Preferred Stock Exchange;
(c) the Subordinated Debt Repurchase;
(d) the Maxwhale Notes Repurchase;
(e) the Star Gas Investment and the effect of concurrent agreements
entered into in connection with such investment;
(f) the 10 1/8% Notes Issuance;
(g) the Collateral Release; and
(h) the Offering, at an assumed interest rate of 10%; provided,
however, that the pro forma data do not give effect to approximately $2.6
million of interest expense on, or the use of, approximately $34.4 million
in principal amount of the Debentures, the proceeds of which are not
required for acquisitions or refinancings. A change in the interest rate on
the Debentures by 0.25% would result in an increase in pro forma interest
expense of less than $0.1 million.
The unaudited statements of operations of the Company and the individually
insignificant distributorships for the nine months ended September 30, 1993
include all adjustments (consisting of only normal recurring adjustments) which,
in the opinion of management, are necessary for a fair presentation of the
results of operations. Because of the seasonality of the home heating oil and
propane businesses, nine-month results are not indicative of the results to be
expected for a full year.
P-5
<PAGE>
<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA PRO FORMA
POWER CO. INC. ACQUIRED(1) ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Net sales............................................ $ 377,384 $ 14,621 $ 392,005
Cost of sales........................................ 262,368 10,308 272,676
-------------- --------------- -----------
Gross profit....................................... 115,016 4,313 119,329
$ (298)(2)
Operating expenses................................... 89,180 2,422 (375)(3) 90,929
Amortization of customer lists....................... 18,236 325 410(4) 18,971
Depreciation and amortization of plant and
equipment............................................ 4,368 105 73(4) 4,546
Amortization of deferred charges..................... 4,137 -- 131(4) 4,268
Provision for supplemental benefit................... 193 -- 193
-------------- --------------- -----------
Operating Income................................... (1,098) 1,461 422
Interest expense--net................................ 15,147 -- 984(5) 16,131
Other income (expenses).............................. (29) -- (29)
Equity in (share of loss of) Star Gas................ -- -- (14,617)(6) (3,213)
1,645(7)
9,759(8)
-------------- --------------- -----------
Income (loss) before income taxes and extraordinary
item................................................. (16,274) 1,461 (18,951)
Income taxes......................................... 218 -- 218
-------------- --------------- -----------
Loss before extraordinary item..................... $ (16,492) $ 1,461 $ (19,169)
-------------- --------------- -----------
-------------- --------------- -----------
</TABLE>
- ------------------------------
(1) Represents the results of the 1993 Acquisitions from January 1, 1993 to
their dates of acquisition by the Company. Results from the dates of
acquisition to September 30, 1993 are included in the Company's September
30, 1993 consolidated results.
(2) Elimination of general and administrative expenses of the acquired
distributorships which do not have a continuing impact on income from
continuing operations as follows:
<TABLE>
<S> <C>
Salaries and related cost.................................................. $ 185
Other...................................................................... 113
---------
$ 298
---------
---------
</TABLE>
The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1993. These employees were not employed by the
Company when the distributorships were acquired, and the Company was able to
integrate the businesses without incurring any incremental costs.
(3) Reflects a management agreement pursuant to which the Company will be paid
$0.5 million per year by Star Gas. The Company does not anticipate having to
hire any additional personnel to perform its obligations under the
management agreement. Rather, it plans to deploy responsibilities within its
own organization to provide the needed services to Star Gas.
(4) Adjustment of amortization of customer lists, depreciation and amortization
of plant and equipment and amortization of deferred charges, as applicable,
to reflect an annual charge in accordance with the Company's accounting
policies.
(5) Reflects (a) increased interest expense as a result of (i) the Preferred
Stock Exchange, (ii) the 10 1/8% Notes Issuance, (iii) a portion of the
Debentures issued in the Offering, the proceeds of which are required for
acquisitions or refinancings and (iv) the elimination of interest income on
the Maxwhale Collateral and (b) decreased interest expense as a result of
(i) the Subordinated Debt Repurchases and (ii) the Maxwhale Notes
Repurchase. If the Subordinated Debt Repurchases and the Maxwhale Notes
Repurchase had occurred on January 1, 1992, the Company would have recorded
a $6.2 million extraordinary loss as the result of the early retirement of
such debt.
(6) Represents the Company's share of the net loss of Star Gas based on Star
Gas' operating results for the nine months ended September 30, 1993.
(7) Reflects the Company's share of decreased interest expense as a result of
the Star Gas Recapitalization and the Company's share of Star Gas cost for
the Petro management agreement. (See note 3).
(8) Adjustment to eliminate the Company's share of Star Gas' one time $33.0
million charge for the impairment of long-lived assets so as to reflect the
Company's share of Star Gas' recurring operations.
P-6
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1993
(IN THOUSANDS)
The following pro forma statement of operations for the twelve months ended
September 30, 1993 is derived from the Company's financial statements for the
twelve months ended September 30, 1993, adjusted to give effect to the following
transactions, as if each such transaction had occurred on October 1, 1992:
(a) the acquisitions by the Company of fourteen individually
insignificant distributorships during the twelve months ended September 30,
1993 (the "Twelve Month Acquisitions");
(b) the Preferred Stock Exchange;
(c) the Subordinated Debt Repurchases;
(d) the Maxwhale Notes Repurchase;
(e) the Star Gas Investment and the effect of concurrent agreements
enetered into in connection with such investments;
(f) the 10 1/8% Notes Issuance;
(g) the Collateral Release; and
(h) the Offering, at an assumed interest rate of 10%; provided,
however, that the pro forma data do not give effect to approximately $3.3
million of interest expense on, or the use of, approximately $33.3 million
of the Debentures, the proceeds of which are not required for acquisitions
or refinancings. A change in the interest rate on the Debentures by 0.25%
would result in an increase in pro forma interest expense of approximately
$0.1 million.
The unaudited statements of operations of the Company and the individually
insignificant distributorships for the twelve months ended September 30, 1993
include all adjustments (consisting of only normal recurring adjustments) which,
in the opinion of management, are necessary for a fair presentation of the
results of operations.
P-7
<PAGE>
<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA PRO FORMA
POWER CO., INC. ACQUIRED(1) ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Net sales............................................. $ 548,922 $ 28,408 $ 577,330
Cost of sales......................................... 380,976 20,259 401,235
--------------- --------------- ------------
Gross profit........................................ 167,946 8,149 176,095
Operating expenses.................................... 121,524 4,292 $ (397)(2) 124,919
(500)(3)
Amortization of customer lists........................ 24,262 400 1,107(4) 25,769
Depreciation and amortization of plant and
equipment............................................. 5,749 155 325(4) 6,229
Amortization of deferred charges...................... 5,446 -- 244(4) 5,690
Provision for supplemental benefit.................... 2,167 -- 2,167
--------------- --------------- ------------
Operating income.................................... 8,798 3,302 11,321
Interest expense--net................................. 19,742 -- 1,680(5) 21,422
Other income (expenses)............................... (14) -- (14)
Share of loss in Star Gas............................. -- -- (13,905)(6) (1,953)
2,193(7)
9,759(8)
--------------- --------------- ------------
Income (loss) before income taxes and extraordinary
item.................................................. (10,958) 3,302 (12,068)
Income taxes.......................................... 400 -- 400
--------------- --------------- ------------
Loss before extraordinary item...................... $ (11,358) $ 3,302 $ (12,468)
--------------- --------------- ------------
--------------- --------------- ------------
</TABLE>
- ------------------------------
(1) Represents the results of the Twelve Month Acquisitions from October 1, 1992
to their dates of acquisition by the Company. Results from the dates of
acquisition to September 30, 1993 are included in the Company's twelve
months ended September 30, 1993 consolidated results.
(2) Elimination of general and administrative expenses of the acquired
distributorships which do not have a continuing impact on income from
continuing operations as follows:
<TABLE>
<S> <C>
Salaries and related cost......................................................... $ 247
Other............................................................................. 150
---------
$ 397
---------
---------
</TABLE>
The above costs represent the salaries and related costs of employees of certain
distributorships acquired during the twelve months ended September 30, 1993.
These employees were not employed by the Company when the distributorships
were acquired, and the Company was able to integrate the businesses without
incurring any incremental costs.
(3) Reflects a management agreement pursuant to which the Company will be paid
$0.5 million per year by Star Gas. The Company does not anticipate having to
hire any additional personnel to perform its obligations under the
management agreement. Rather, it plans to deploy responsibilities within its
own organization to provide the needed services to Star Gas.
(4) Adjustment of amortization of customer lists, depreciation and amortization
of plant and equipment and amortization of deferred charges, as applicable,
to reflect an annual charge in accordance with the Company's accounting
policies.
(5) Reflects (a) increased interest expense as a result of (i) the Preferred
Stock Exchange, (ii) the 10 1/8% Notes Issuance, (iii) a portion of the
Debentures issued in the Offering, the proceeds of which are required for
acquisitions or refinancings and (iv) the elimination of interest income on
the Maxwhale Collateral and (b) decreased interest expense as a result of
(i) the Subordinated Debt Repurchases and (ii) the Maxwhale Notes
Repurchase. If the Subordinated Debt Repurchases and the Maxwhale Notes
Repurchase had occurred on October 1, 1992, the Company would have recorded
a $4.3 million extraordinary loss as the result of the early retirement of
such debt.
(6) Represents the Company's share of the net loss of Star Gas based on Star
Gas' operating results for the twelve months ended September 30, 1993.
(7) Reflects the Company's share of decreased interest expense as a result of
the Star Gas Recapitalization and the Company's share of Star Gas' cost for
the Petro management agreement.(see note 3)
(8) Adjustment to eliminate the Company's share of Star Gas' one time $33.0
million charge for the impairment of long-lived assets so as to reflect the
Company's share of Star Gas' recurring operations.
P-8
<PAGE>
- ------------------------------------- ----------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, $75,000,000
SUCH INFORMATION OR REPRESENTATION 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 THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE DEBENTURES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER PETROLEUM HEAT
TO BUY ANY OF THE DEBENTURES TO ANY PERSON AND POWER CO., INC.
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALES MADE HEREUNDER SHALL UNDER ANY % SUBORDINATED DEBENTURES
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE DUE 2006
INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
Available Information....................... 2 ----------
Prospectus Summary.......................... 3 PROSPECTUS
The Company................................. 9 ----------
Risk Factors................................ 9
Use of Proceeds............................. 13
Capitalization.............................. 14
Selected Financial and Other Data........... 15
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................... 18 DONALDSON, LUFKIN & JENRETTE
Business.................................... 27 SECURITIES CORPORATION
Management.................................. 36
Description of Debentures................... 39 KIDDER, PEABODY & CO.
Description of Other Indebtedness INCORPORATED
and Redeemable Preferred Stock............ 59
Underwriting................................ 62 CHEMICAL SECURITIES INC.
Legal Matters............................... 63
Experts..................................... 63 MORGAN SCHIFF & CO., INC.
Incorporation of Documents by
Reference................................. 63
Index to Financial Statements............... F-1
Pro Forma Financial Statements.............. P-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee............................................................ $25,863
NASD filing fee................................................................. 8,000
Printing and engraving.......................................................... 100,000
Accountants' fees and expenses.................................................. 100,000
Legal fees and expenses......................................................... 125,000
Trustee's fees and expenses..................................................... 15,000
Blue Sky fees and expenses...................................................... 30,000
Miscellaneous................................................................... 46,137
-----------
Total................................................................. $450,000
-----------
-----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act (the "MBCA")
provides mandatory and exclusive standards for indemnification, although the
Articles of Incorporation or by-laws of a corporation can specifically limit the
statutory indemnification. Minnesota law generally provides that a corporation
shall indemnify a person made or threatened to be made a party to a proceeding
by reason of such person's official capacity as an officer, director or employee
of the corporation, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against such person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorney's fees and disbursements, incurred by that person in connection with
the proceeding, if such person (a) has not been indemnified by another entity
for the same proceedings and in connection with the same acts or omission; (b)
acted in good faith; (c) received no improper personal benefit; (d) in the case
of a criminal proceeding, had no reason to believe such person's conduct was
unlawful; and (e) in connection with the acts or omissions in question, the
person reasonably believed that such person's conduct was in the best interests
of the corporation (or, in the case of a question of improper personal benefit,
believed that the conduct was not opposed to the best interests of the
corporation; or in the case of an employee benefit plan, believed that the
conduct was in the best interests of the participants or beneficiaries of the
employee benefit plan).
Section 302A.521 of the MBCA further provides that if an officer, director
or employee is made or threatened to be made a party to a proceeding in such
person's official capacity, such person is entitled, upon written request to the
corporation, to payment or reimbursement by the corporation of reasonable
expenses incurred by such person in advance of the final disposition of the
proceeding (a) upon receipt by the corporation of a written confirmation by such
person of such person's good faith belief that the criteria for indemnification
set forth under Minnesota law have been satisfied, an undertaking by such person
to repay all amounts paid or reimbursed by the corporation if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under Minnesota law.
Finally, Section 302A.521 of the MBCA provides that a corporation's
Articles of Incorporation or by-laws may prohibit indemnification or advances or
may impose conditions on such indemnification or advance, as long as those
conditions apply equally to all persons or to all persons with a given class.
II-1
<PAGE>
Registrant's Restated Articles of Incorporation, as amended, contains the
limitation of liability provision set forth below:
"ARTICLE VIII--A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
302A.559 of the Minnesota Business Corporation Act or Section 80A.23 of the
Minnesota Securities law, or (iv) for any transaction from which the
director derived an improper personal benefit. If the Minnesota Business
Corporation Act is hereafter amended to authorize any further limitation of
the liability of a director, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted
by the Minnesota Business Corporation Act, as amended. No amendment to or
repeal of this Article VIII shall apply to or have any effect on the
liability or alleged liability of any director of the corporation for or
with respect to any acts or omissions of such director occurring prior to
such amendment or repeal."
Registrant's by-laws, as amended, contains the indemnification provision
set forth below:
"Section 8.01. The corporation shall indemnify all officers and
directors of the corporation, for such expenses and liabilities, in such
manner, under such circumstances, and to such extent as permitted by
Minnesota Statutes Section 302A.521, as now enacted or hereafter amended.
Unless otherwise approved by the Board of Directors, the corporation shall
not indemnify or advance expenses to any employee of the corporation who is
not otherwise entitled to indemnification pursuant to the prior sentence of
this Section 8.01."
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1 --Form of Underwriting Agreement. (1)
3.1 --Restated and Amended Articles of Incorporation, as amended, and Articles of Amendment thereto. (2)
3.2 --Restated By-Laws of the Registrant. (2)
4.1 --Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as trustee, including Form
of Notes. (8)
4.2 --Indenture, dated as of October 1, 1985 between the Company and Manufacturers Hanover Trust Company, as
trustee, including Form of Notes. (3)
4.3 --Restated and Amended Articles of Incorporation and Articles of Amendment thereto. (2)
4.4 --Certificate of Designation creating a series of preferred stock designated as Cumulative Redeemable
Exchangeable 1991 Preferred Stock and Certificate of Amendment relating thereto. (6)
4.5 --Certificate of Designation creating a series of preferred stock designated as Cumulative Redeemable
1991 Preferred Stock. (6)
4.6 --Form of Indenture between the Company and Chemical Bank, as trustee, including Form of Debentures. (1)
4.7 --Certificate of Designation creating a series of Preferred Stock designated as Cumulative Redeemable
Exchangeable 1993 Preferred Stock. (1)
5 --Opinion of Phillips, Nizer, Benjamin, Krim & Ballon. (1)
7 --Opinion of Dorsey & Whitney re: liquidation preference. (1)
9.1 --Shareholders' Agreement dated as of July 1992, among the Company and certain of its stockholders. (2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.1 --Amended and Restated Credit Agreement dated as of December 31, 1992 among the Company, Maxwhale Corp.,
certain banks party thereto and Chemical Bank. (8)
10.2 --Pension Plan, as amended, of Petroleum Heat and Power Co., Inc. (2)
10.3 --Savings Plan, as amended of Petroleum Heat and Power Co., Inc. (2)
10.4 --Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc. (2)
10.5 --Lease dated July 15, 1981 with respect to offices and garage located at 477 West John Street and 5
Alpha Plaza, Hicksville, New York. (4)
10.6 --Lease dated February 15, 1982,(4) First Amendment dated February 14, 1986, and Second Amendment dated
July 1, 1989, with respect to offices, garage and terminal located at 818 Michigan Avenue, N.E.,
Washington, D.C. (2)
10.7 --Lease dated June 26, 1989 with respect to offices and garage located at 40 Lee Burbank Highway, Revere,
Massachusetts. (2)
10.8 --Lease dated December 1, 1985 with respect to office and garage located at 3600-3620 19th Avenue,
Astoria, New York. (3)
10.9 --Lease dated November 1, 1985 with respect to office and garage located at 522 Grand Blvd., Westbury,
New York. (5)
10.10 --Lease dated June 5, 1986 with respect to office and garage located at 2541 Richmond Terrace Co., Staten
Island, New York. (5)
10.11 --Lease dated July 31, 1986 with respect to office and garage located at 71 Day Street, Norwalk,
Connecticut. (5)
10.12 --Lease dated July 9, 1984 with respect to office located at 1245 Westfield Avenue, Clark, New Jersey.
(5)
10.13 --Lease dated April 5, 1991 with respect to office and garage located at 10 Spring Street, New Milford,
Connecticut. (2)
10.14 --Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey Street, Brooklyn,
New York. (2)
10.15 --Lease dated February 6, 1990 with respect to office and garage located at 62 Oakland Avenue and 64
Oakland Avenue, East Hartford, Connecticut. (2)
10.16 --Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988 with respect to office, garage and
terminal located at 224 North Main Street, Southampton, New York. (2)
10.17 --Lease dated April 1, 1988 with respect to office and garage located at 171 Ames Court, Plainview, New
York. (2)
10.18 --Lease dated August 12, 1988 with respect to office and garage located at 326 South Second Street,
Emmaus, Pennsylvania. (2)
10.19 --Lease dated July 15, 1990, Addendum to lease dated July 27, 1990 and Second Addendum to lease dated
November 30, 1990, with respect to office and garage located at 212 Elm Street, North Haven,
Connecticut. (2)
10.20 --Lease dated August 14, 1989 with respect to office and garage located at foot of South Street, Oyster
Bay, New York. (2)
10.21 --Lease and Addendum to lease dated September 26, 1990 with respect to office and garage located at 930
Park Avenue, Lakewood, New Jersey. (2)
10.22 --Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street, Brooklyn, New York.
(2)
10.23 --Lease dated May 9, 1991 with respect to office and garage located at 260 Route 10 East, Whippany, New
Jersey. (2)
10.24 --Lease dated June 1, 1987 with respect to garage located at 817 Pennsylvania Avenue, Linden, New Jersey.
(2)
10.25 --Lease dated June 1, 1989 with respect to office and garage located at 2 Selleck Street, Stamford,
Connecticut. (2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.26 --Lease dated April 28, 1992 with respect to office and garage located at 8087-8107 Parston Drive,
Forestville, Maryland. (8)
10.27 --Demand Promissory Notes of Thomas J. Edelman in favor of Petro, Inc. in the amounts of $500,000 and
$100,000 dated April 15, 1985 and May 17, 1985, respectively, and Pledge and Security Agreement, as
amended, made by Thomas J. Edelman in favor of Petro, Inc. dated April 15, 1986. (5)
10.28 --Letter dated June 5, 1985 with respect to redemption of 55,250 shares of common stock of Petroleum Heat
and Power Co., Inc. from Thomas J. Edelman and promissory note of Petroleum Heat and Power Co., Inc. in
the amount of $884,000 in favor of Thomas J. Edelman, dated June 6, 1985. (3)
10.29 --Option dated October 18, 1984 granted to Irik P. Sevin to purchase 64,000 shares of common stock of
Petroleum Heat and Power Co., Inc. (3)
10.30 --Form of Equipment Lease and related documentation dated as of October 21, 1983 relating to vehicle
leasing transaction between Atlas Oil Corporation and various equipment lessors. (3)
10.31 --Form of Equipment Lease and related documentation dated as of March 2, 1985 relating to vehicle leasing
transaction between Petro, Inc. and various equipment lessors. (3)
10.32 --Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A Common Stock by Irik
P. Sevin. (5)
10.33 --Agreement dated December 2, 1986 relating to stock options granted to Malvin P. Sevin. (5)
10.34 --Agreement dated December 2, 1986 relating to stock options granted to Irik P. Sevin. (5)
10.35 --Agreements dated December 28, 1987 and March 6, 1989 relating to stock options granted to Irik P. Sevin
and Malvin P. Sevin. (2)
10.36 --Form of Note dated December 31, 1992, in the amount of $1,499,378, due December 31, 1993, from Irik P.
Sevin to the Company. (8)
10.37 --Subordinated Note Agreement relating to $60 million Subordinated Notes due October 1, 1998 issued to
John Hancock Mutual Life Insurance Company and other Investors. (2)
10.38 --Note Agreement, dated as of January 15, 1991, relating to $12.5 million Subordinated Notes due January
15, 2001, between the Company and Connecticut General Life Insurance Company. (2)
10.39 --Purchase Agreement, dated as of September 1, 1991, between the Company and United States Leasing
International, relating to purchase of 159,722 shares of the 1991 Preferred Stock. (2)
10.40 --Purchase Agreement, dated as of August 1, 1989, between the Company and John Hancock Mutual Life
Insurance Company and The Northwestern Mutual Life Insurance Company, relating to the purchase of the
1989 Preferred Stock. (2)
10.41 --Agreement dated as of November 1, 1992 relating to stock options granted to George Leibowitz. (8)
10.42 --Letter Agreement dated March 15, 1993 relating to the Credit Agreement. (8)
10.43 --Lease dated June 17, 1993 with respect to office facilities located at 2187 Atlantic Street in Stamford
Connecticut. (10)
10.44 --Form of Note dated December 31, 1993, in the amount of $1,559,827, due December 31, 1994, from Irik P.
Sevin to the Company. (9)
10.45 --Agreement dated December 1993 relating to stock options granted to Malvin P. Sevin. (9)
10.46 --Purchase Agreement, dated as of December 21, 1993, among Star Gas Holdings, Inc., First Reserve Secured
Energy Assets Fund, L.P. American Gas & Oil Investors, AmGo II, AmGo III, FRC Star Gas, Inc., Star Gas
and the Company. (11)
10.47 --Option from Star Gas to the Company, dated as of December 21, 1993. (11)
10.48 --Shareholder Put/Call Agreement, dated as of December 21, 1993, among the Company, the Other Investors
and Prudential. (11)
10.49 --Shareholders' Agreement, dated as of December 21, 1993, among the Company, the Other Investors and
Prudential. (11)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.50 --Management Services Agreement, dated as of December 21, 1993, between the Company and Star Gas. (11)
10.51 --Form of Amendment to the Company's Subordinated Debt Indentures. (9)
11.0 --Computation of Per Share Earnings. (10)
12.0 --Computation of Ratio of Earnings to Fixed Charges. (10)
22.1 --Subsidiaries of Registrant. (10)
24.1 --Consent of KPMG Peat Marwick.(1)
24.2 --Consent of Ernst & Young.(1)
24.3 --Consent of Phillips, Nizer, Benjamin, Krim & Ballon (included in Exhibit 5).
24.4 --Consent of Dorsey & Whitney (included in Exhibit 7).
25.0 --Power of Attorney.(included on page II-7 hereof)
26.0 --Statement of Eligibility of Trustee on Form T-1 of Chemical Bank.(separately bound)(10)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-48051,
and incorporated herein by reference.
(3) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794,
and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526,
and incorporated herein by reference.
(5) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088,
and incorporated herein by reference.
(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 2-88526, and incorporated herein by
reference.
(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 2-88526, and incorporated herein by
reference.
(8) Filed as Exhibits to the Company's Registration Statement on Form S-2, File
No. 33-58034, and incorporated herein by reference.
(9) To be filed by Amendment.
(10) Previously filed.
(11) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on
January 4, 1994, File No. 2-88526, and incorporated herein by reference.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefor unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of New York, State of New York,
on the 12th day of January, 1994.
PETROLEUM HEAT AND POWER CO., INC.
By: /s/ IRIK P. SEVIN
..................................
Irik P. Sevin
President, Chairman of the Board
Chief Executive Officer and Chief
Financial
and Accounting Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints IRIK P. SEVIN, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement relating to the offering of $75,000,000 of
Subordinated Notes of Petroleum Heat and Power Co., Inc. and any and all
amendments to said Registration Statement, and to file the same, with all
exhibits thereto, and any other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ IRIK P. SEVIN President, Chairman of the Board, January 12, 1994
.................................... Chief Executive Officer, Financial
Irik P. Sevin and Accounting Officer and Director
/s/ AUDREY L. SEVIN Secretary and Director January 12, 1994
....................................
Audrey L. Sevin
/s/ PHILLIP E. COHEN Director January 12, 1994
....................................
Phillip E. Cohen
/s/ THOMAS J. EDELMAN Director January 12, 1994
....................................
Thomas J. Edelman
Director January , 1994
....................................
Wolfgang Traber
Director January , 1994
....................................
Richard O'Connell
Director January , 1994
....................................
Max Warburg
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NUMBER
- --------- -----------
<S> <C>
1 --Form of Underwriting Agreement.
4.6 --Form of Indenture between the Company and Chemical Bank, as trustee, including Form of Debentures.
4.7 --Certificate of Designation creating a series of Preferred Stock designated as Cumulative Redeemable
Exchangeable 1993 Preferred Stock.
5 --Opinion of Phillips, Nizer, Benjamin, Krim & Ballon.
7 --Opinion of Dorsey & Whitney re: liquidation preference.
24.1 --Consent of KPMG Peat Marwick .
24.2 --Consent of Ernst & Young.
24.3 --Consent of Phillips, Nizer, Benjamin, Krim & Ballon (included in Exhibit 5).
24.4 --Consent of Dorsey & Whitney (included in Exhibit 7).
25.0 --Power of Attorney.(included on page II-7 hereof)
</TABLE>
EXHIBIT 1
PETROLEUM HEAT AND POWER CO., INC.
_____% Subordinated Debentures Due 2006
UNDERWRITING AGREEMENT
January ___, 1994
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
KIDDER, PEABODY & CO. INCORPORATED
CHEMICAL SECURITIES INC.
MORGAN SCHIFF & CO., INC.
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
140 Broadway
New York, New York 10005
Ladies and Gentlemen:
Petroleum Heat and Power Co., Inc., a Minnesota corporation
(the "Company"), proposes to issue and sell to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Kidder, Peabody & Co. Incorporated,
Chemical Securities Inc. and Morgan Schiff & Co., Inc. (collectively, the
"Underwriters") an aggregate of $75,000,000 principal amount of its ____%
Subordinated Debentures due 2006 (the "Securities"). The Securities are
to be issued pursuant to the provisions of an Indenture to be dated as of
January __, 1994 by and between the Company and Chemical Bank, as Trustee
(the "Indenture").
1. Registration Statement and Prospectus. The Company has
-------------------------------------
prepared and filed with the Securities and Exchange Commission (the
"Commission"), in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations of the Commission there-
under (collectively, the "Act"), a registration statement on Form S-2 (No.
33-72354), including a preliminary prospectus, subject to completion,
relating to the Securities. The registration statement, as amended at the
time it becomes effective or, if a post-effective amendment is filed with
respect thereto, as amended by such post-effective amendment at the time of
its effectiveness, including, in each case, all documents incorporated by
reference therein, all financial statements and exhibits thereto, and the
information (if any) contained in a prospectus subsequently filed with the
Commission pursuant to Rule 424(b) under the Act and deemed to be a part of
the registration statement at the time of its effectiveness pursuant to
Rule 430A under the Act, is hereinafter referred to as the "Registration
Statement"; and the prospectus in the form first used to confirm sales of
the Securities, whether or not filed with the Commission pursuant to Rule
424(b) under the Act, including all documents incorporated by reference
therein, is hereinafter referred to as the "Prospectus."
<PAGE>
2. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to
its terms and conditions, the Company agrees to issue and sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Company, Securities in the respective principal amounts
set forth opposite their names on Schedule A hereto at a purchase price
equal to ___% of the principal amount thereof (the "Purchase Price").
3. Delivery and Payment. Delivery to you of and payment for
--------------------
the Securities shall be made at 9:00 A.M., New York City time, on the fifth
business day (such time and date being referred to as the "Closing Date")
following the date of the initial public offering of the Securities as
advised by you to the Company, at the offices of Latham & Watkins, 885
Third Avenue, New York, New York. The Closing Date and the location of
delivery of the Securities may be varied by agreement among you and the
Company.
The Securities in definitive form shall be registered in such
names and issued in such denominations as you shall request in writing not
later than two full business days prior to the Closing Date, and shall be
made available to you at the offices of DLJ (or at such other place as
shall be acceptable to you) for inspection not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date. The
Securities shall be delivered to you on the Closing Date with any transfer
taxes payable upon initial issuance thereof duly paid by the Company, for
your respective accounts against payment of the Purchase Price by certified
or official bank check or checks payable in New York Clearing House or
similar next-day funds to the order of the Company.
4. Agreements of the Company. The Company agrees with each of
-------------------------
you that:
(a) The Company will, if necessary, file an amend-
ment to the Registration Statement including, if
necessary pursuant to Rule 430A under the Act, a
post-effective amendment to the Registration Statement,
in each case as soon as practicable after the execution
and delivery of this Agreement, and will use its best
efforts to cause the Registration Statement or such
post-effective amendment to become effective at the
earliest possible time. The Company will comply fully
and in a timely manner with the applicable provisions
of Rule 424 and Rule 430A under the Act.
(b) The Company will advise you promptly and, if
requested by any of you, confirm such advice in
writing, (i) when the Registration Statement has become
effective, if and when the Prospectus is sent for
filing pursuant to Rule 424 under the Act and when any
post-effective amendment to the Registration Statement
becomes effective, (ii) of the receipt of any comments
from the Commission or any state securities commission
or regulatory authority that relate to the Registration
Statement or requests by the Commission or any state
2
<PAGE>
securities commission or regulatory authority for
amendments to the Registration Statement or amendments
or supplements to the Prospectus or for additional
information, (iii) of the issuance by the Commission of
any stop order suspending the effectiveness of the
Registration Statement, or of the suspension of
qualification of the Securities for offering or sale in
any jurisdiction, or the initiation of any proceeding
for such purpose by the Commission or any state securi-
ties commission or other regulatory authority, and (iv)
of the happening of any event during such period as in
your reasonable judgment you are required to deliver a
prospectus in connection with sales of the Securities
by you which makes any statement of a material fact
made in the Registration Statement untrue or which
requires the making of any additions to or changes in
the Registration Statement (as amended or supplemented
from time to time) in order to make the statements
therein not misleading or that makes any statement of a
material fact made in the Prospectus (as amended or
supplemented from time to time) untrue or which
requires the making of any additions to or changes in
the Prospectus (as amended or supplemented from time to
time) in order to make the statements therein, in the
light of the circumstances under which they were made,
not misleading. The Company shall use its best efforts
to prevent the issuance of any stop order or order
suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws,
and, if at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration
Statement, or any state securities commission or other
regulatory authority shall issue an order suspending
the qualification or exemption of the Securities under
any state securities or Blue Sky laws, the Company
shall use every reasonable effort to obtain the
withdrawal or lifting of such order at the earliest
possible time.
(c) The Company will furnish to you without charge
four signed copies (plus one additional signed copy to
your legal counsel) of the Registration Statement as
first filed with the Commission and of each amendment
thereto, including all exhibits filed therewith, and
will furnish to you such number of conformed copies of
the Registration Statement as so filed and of each
amendment thereto, without exhibits, as you may
reasonably request.
(d) The Company will not file any amendment or
supplement to the Registration Statement, whether
before or after the time when it becomes effective, or
make any amendment or supplement to the Prospectus, of
which you shall not previously have been advised and
3
<PAGE>
provided a copy within two business days prior to the
filing thereof (or such reasonable amount of time as is
necessitated by the exigency of such amendment or
supplement) or to which you shall reasonably object;
and it will prepare and file with the Commission,
promptly upon your reasonable request, any amendment to
the Registration Statement or supplement to the
Prospectus which may be necessary or advisable in
connection with the distribution of the Securities by
you, and will use its best efforts to cause the same to
become effective as promptly as possible.
(e) Promptly after the Registration Statement
becomes effective, and from time to time thereafter for
such period in your reasonable judgment as a prospectus
is required to be delivered in connection with sales of
the Securities by you, the Company will furnish to each
Underwriter and dealer without charge as many copies of
the Prospectus (and of any amendment or supplement to
the Prospectus) as such Underwriters and dealers may
reasonably request.
(f) If during such period as in your reasonable
judgment you are required to deliver a prospectus in
connection with sales of the Securities by you any
event shall occur as a result of which it becomes
necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of
the circumstances existing as of the date the Pro-
spectus is delivered to a purchaser, not misleading, or
if it is necessary to amend or supplement the
Prospectus to comply with any law, the Company will
promptly prepare and file with the Commission an
appropriate amendment or supplement to the Prospectus
so that the statements in the Prospectus, as so amended
or supplemented, will not, in the light of the
circumstances existing as of the date the Prospectus is
so delivered, be misleading, and will comply with
applicable law, and will furnish to each Underwriter
and dealer without charge such number of copies thereof
as such Underwriters and dealers may reasonably
request.
(g) The Company will timely complete all required
filings and otherwise fully comply in a timely manner
with all provisions of the Securities Exchange Act of
1934, as amended, including the rules and regulations
thereunder (collectively, the "Exchange Act"), in
connection with the registration, if any, of the
Securities thereunder.
(h) So long as any of the Securities are
outstanding, the Company will mail to each of you with-
out charge a copy of each report or other publicly
4
<PAGE>
available information required to be furnished to
holders of the Securities by law or pursuant to the
Indenture at the same time as such reports or other
information are required to be furnished to such
holders.
(i) Whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated,
the Company will pay and be responsible for all costs,
expenses, fees and taxes in connection with or incident
to (i) the printing, processing, filing, distribution
and delivery under the Act of the Registration
Statement, each preliminary prospectus, the Prospectus
and all amendments or supplements thereto, (ii) the
printing, processing, execution, distribution and
delivery of this Agreement, the Indenture, any
memoranda describing state securities or Blue Sky laws
and all other agreements memoranda, correspondence and
other documents printed, distributed and delivered in
connection with the offering of the Securities, (iii)
the registration with the Commission and the issuance
and delivery of the Securities, (iv) the registration
or qualification of the Securities for offer and sale
under the securities or Blue Sky laws of the
jurisdictions referred to in paragraph (m) below
(including, in each case, the fees and disbursements of
counsel relating to such registration or qualification
and memoranda relating thereto and any filing fees in
connection therewith), (v) furnishing such copies of
the Registration Statement, Prospectus and preliminary
prospectus, and all amendments and supplements to any
of them, as may be reasonably requested by you, (vi)
filing, registration and clearance with the National
Association of Securities Dealers, Inc. (the "NASD") in
connection with the offering of the Securities
(including the fees and disbursements of counsel
relating thereto), (vii) the listing of the Securities,
if any, on a stock exchange or automated quotation
system, (viii) the rating of the Securities by
investment rating agencies, (ix) any "qualified
independent underwriter" as required by Schedule E of
the Bylaws of the NASD (including fees and
disbursements of counsel for such qualified independent
underwriter) and (x) the performance by the Company of
its other obligations under this Agreement, including
(without limitation) the fees of the Trustee, the cost
of its personnel and other internal costs, the cost of
printing and engraving the certificates representing
the Securities, and all expenses and taxes incident to
the sale and delivery of the Securities to you.
(j) The Company will use the proceeds from the
sale of the Securities in the manner described in the
Prospectus under the caption "Use of Proceeds."
5
<PAGE>
(k) The Company will not voluntarily claim, and
will actively resist any attempts to claim, the benefit
of any usury laws against the holders of the
Securities.
(l) The Company will use its best efforts to do
and perform all things required to be done and
performed under this agreement by it prior to or after
the Closing Date and to satisfy all conditions
precedent on its part to the delivery of the
Securities.
(m) Prior to any public offering of the
Securities, the Company will cooperate with you and
your counsel in connection with the registration or
qualification of the Securities for offer and sale by
you under the state securities or Blue Sky laws of such
jurisdiction as you may request (provided, that the
Company shall not be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so
qualified or to take any action that would subject it
to general consent to service of process in any
jurisdiction in which it is not now so subject). The
Company will continue such qualification in effect so
long as required by law for distribution of the
Securities.
(n) The Company will mail and make generally
available to its security holders as soon as reasonably
practicable a consolidated earning statement covering a
period of at least twelve months beginning after the
"effective date" (as defined in Rule 158 under the Act)
of the Registration Statement (but in no event
commencing later than 90 days after such effective
date) which shall satisfy the provisions of Section
11(a) of the Act and Rule 158 thereunder, and to advise
you in writing when such statement has been so made
available.
5. Representations and Warranties. The Company represents and
------------------------------
warrants to each of you that:
(a) When the Registration Statement becomes
effective, including at the date of any post-effective
amendment, at the date of the Prospectus (if different)
and at the Closing Date, the Registration Statement
will comply in all material respects with the
provisions of the Act and will not contain any untrue
statement of a material fact or omit to state any
material fact required to be stated therein or
necessary to make the statements therein not
misleading; the Prospectus and any supplements or
amendments thereto will not at the date of the
Prospectus, at the date of any such supplements or
6
<PAGE>
amendments and at the Closing Date contain any untrue
statement of a material fact or omit to state any
material fact necessary in order to make the statements
therein, in the light of the circumstances under which
they were made, not misleading, except that the
representations and warranties contained in this
paragraph (a) shall not apply to statements in or
omissions from the Registration Statement or the
Prospectus (or any supplement or amendment to them)
made in reliance upon and in conformity with
information relating to you furnished to the Company in
writing by you expressly for use therein. The Company
acknowledges for all purposes under this Agreement that
the statements set forth in the last paragraph on the
cover page and in the second paragraph below the table
under the caption "Underwriting" in the Prospectus (or
any amendment or supplement) constitute the only
written information furnished to the Company by any
Underwriter expressly for use in the Registration
Statement or the Prospectus (or any amendment or
supplement to them). When the Registration Statement
becomes effective, including at the date of any
post-effective amendment, at the date of the Prospectus
and any amendment or supplement thereto (if different)
and at the Closing Date, the Indenture will have been
qualified under and will conform in all material
respects to the requirements of the Trust Indenture Act
of 1939, as amended, and the rules and regulations
thereunder (collectively, the "TIA"). No contract or
document of a character required to be described in the
Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement is not
described or filed as required.
(b) Each preliminary prospectus filed as part of
the Registration Statement as originally filed or as
part of any amendment thereto, or filed pursuant to
Rule 424 Under the Act, complied when so filed in all
material respects with the Act.
(c) The Company and each of its subsidiaries
(each, a "Subsidiary" and, collectively, the
"Subsidiaries") is a duly organized and validly
existing corporation in good standing under the laws of
its jurisdiction of incorporation, has the requisite
corporate power and authority to own, lease and operate
its properties and to conduct its business as it is
currently being conducted, and is duly qualified as a
foreign corporation and is in good standing in each
jurisdiction where the ownership, leasing or operation
of property or the conduct of its business requires
such qualification, except where the failure to be so
qualified would not, singly or in the aggregate, have a
material adverse effect on the properties, business,
7
<PAGE>
results of operations, condition (financial or
otherwise), affairs or prospects of the Company and the
Subsidiaries taken as a whole (a "Material Adverse
Effect").
(d) The Company has full power and authority to execute,
deliver and perform this Agreement and to authorize, issue, sell
and deliver the Securities as contemplated by this Agreement.
(e) This Agreement has been duly authorized and
validly executed and delivered by the Company and
constitutes a valid and legally binding agreement of
the Company, enforceable against the Company in
accordance with its terms (assuming the due execution
and delivery hereof by you).
(f) The Securities have been duly authorized by
the Company and, on the Closing Date, will have been
duly executed by the Company and will conform in all
material respects to the description thereof in the
Prospectus. When the Securities are issued,
authenticated and delivered in accordance with the
Indenture and paid for in accordance with the terms of
this Agreement, the Securities will constitute valid
and legally binding obligations of the Company,
enforceable against the Company in accordance with
their terms and entitled to the benefits of the
Indenture.
(g) The Indenture has been duly authorized by the
Company and, on the Closing Date, will have been duly
executed by the Company and will conform in all
material respects to the description thereof in the
Prospectus. When the Indenture has been duly executed
and delivered, the Indenture will be a valid and
legally binding agreement of the Company, enforceable
against the Company in accordance with its terms.
(h) The engagement letter, dated as of December
___, 1993, among the Company and you (the "Engagement
Letter"), relating to the solicitation of consents to
amendments to certain of the Company's existing debt
agreements, has been duly authorized and validly
executed and delivered by the Company and constitutes a
valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its
terms.
(i) All of the issued and outstanding shares of
capital stock of, or other ownership interests in, each
Subsidiary have been duly and validly authorized and
issued, and all of the shares of capital stock of, or
other ownership interests in, each Subsidiary are
owned, directly or through Subsidiaries, by the Compa-
8
<PAGE>
ny. All such shares of capital stock are fully paid
and nonassessable, and are owned free and clear of any
security interest, mortgage, pledge, claim, lien or
encumbrance (each, a "Lien"). There are no outstanding
subscriptions, rights, warrants, options, calls, con-
vertible securities, commitments of sale or Liens
related to or entitling any person to purchase or
otherwise to acquire any shares of the capital stock
of, or other ownership interest in, any Subsidiary.
(j) Neither the Company nor any of the
subsidiaries is in violation of its respective charter
or bylaws or in default in the performance of any bond,
debenture, note or any other evidence of indebtedness
or any indenture, mortgage, deed of trust or other
contract, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by
which any of them is bound, or to which any of the
property or assets of the Company or any of the
Subsidiaries is subject.
(k) The execution and delivery of this Agreement,
the Indenture and the Engagement Letter by the Company,
the issuance and sale of the Securities, the per-
formance of this Agreement, the Indenture and the
Engagement Letter and the consummation of the
transactions contemplated by this Agreement, the
Indenture and the Engagement Letter will not conflict
with or result in a breach or violation of any of the
respective charters or bylaws of the Company or any of
the Subsidiaries or any of the terms or provisions of,
or constitute a default or cause an acceleration of any
obligation under, or result in the imposition or
creation of (or the obligation to create or impose) a
Lien with respect to, any bond, note, debenture or
other evidence of indebtedness or any indenture,
mortgage, deed of trust or other agreement or
instrument to which the Company or any of the
Subsidiaries is a party or by which it or any of them
is bound, or to which any properties of the Company or
any of the Subsidiaries is or may be subject, or
contravene any order of any court or governmental
agency or body having jurisdiction over the Company or
any of the Subsidiaries or any of their properties, or
violate or conflict with any statute, rule or
regulation or administrative or court decree applicable
to the Company or any of the Subsidiaries, or any of
their respective properties.
(l) There is no action, suit or proceeding before
or by any court or governmental agency or body,
domestic or foreign, pending against or affecting the
Company or any of the Subsidiaries, or any of their
respective properties, which is required to be
9
<PAGE>
disclosed in the Registration Statement or the
Prospectus, or which might result, singly or in the
aggregate, in a Material Adverse Effect or which might
materially and adversely affect the consummation of
this Agreement or the transactions contemplated hereby,
and to the best of the Company's knowledge, no such
proceedings are contemplated or threatened.
(m) No action has been taken and no statute, rule
or regulation or order has been enacted, adopted or
issued by any governmental agency or body which
prevents the issuance of the Securities, suspends the
effectiveness of the Registration Statement, prevents
or suspends the use of any preliminary prospectus or
suspends the sale of the Securities in any jurisdiction
referred to in Section 4(m) hereof; no injunction,
restraining order or order of any nature by a federal
or state court of competent jurisdiction has been
issued with respect to the Company or any of the
Subsidiaries which would prevent or suspend the
issuance or sale of the Securities, the effectiveness
of the Registration Statement, or the use of any
preliminary prospectus in any jurisdiction referred to
in Section 4(m) hereof; no action, suit or proceeding
is pending against or, to the best of the Company's
knowledge, threatened against or affecting the Company
or any of the Subsidiaries before any court or
arbitrator or any governmental body, agency or
official, domestic or foreign, which, if adversely
determined, would materially interfere with or ad-
versely affect the issuance of the Securities or in any
manner draw into question the validity of this
Agreement, the Indenture or the Securities; and every
request of the Commission or any securities authority
or agency of any jurisdiction for additional
information (to be included in the Registration
Statement or the Prospectus or otherwise) has been
complied with in all material respects.
(n) Neither the Company nor any of the
Subsidiaries has violated any environmental safety or
similar law or regulation applicable to its business
relating to the protection of human health and safety,
the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental
Laws"), lacks any permits, licenses or other approvals
required of them under applicable Environmental Laws or
is violating any terms and conditions of any such
permit, license or approval, nor has the Company or any
of the Subsidiaries violated any federal, state or
local law relating to discrimination in the hiring,
promotion or pay of employees prior to any applicable
wage or hour laws, nor any provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") or the
10
<PAGE>
rules and regulations promulgated thereunder, nor has
the Company or any of the Subsidiaries engaged in any
unfair labor practice, which in each case might result,
singly or in the aggregate, in a Material Adverse
Effect. There is (i) no significant unfair labor
practice complaint pending against the Company or any
of the Subsidiaries or, to the best knowledge of the
Company, threatened against any of them before the
National Labor Relations Board or any state or local
labor relations board, and no significant grievance or
significant arbitration proceeding arising out of or
under any collective bargaining agreement is so pending
against the Company or any of the Subsidiaries or, to
the best knowledge of the Company, threatened against
any of them, (ii) no significant strike, labor dispute,
slowdown or stoppage pending against the Company or any
of its Subsidiaries or, to the best knowledge of the
Company, threatened against the Company or any of the
Subsidiaries and (iii) to the best knowledge of the
Company, no union representation question existing with
respect to the employees of the Company or any of the
Subsidiaries and, to the best knowledge of the company,
no union organizing activities are taking place, except
(with respect to any matter specified in clause (i),
(ii) or (iii) above, singly or in the aggregate) such
as could not have a Material Adverse Effect.
(o) Except as would not result, singly or in the
aggregate, in a Material Adverse Effect, the Company
and each of the Subsidiaries has good and marketable
title, free and clear of all Liens (except Liens for
taxes not yet due and payable), to all property and
assets reflected in the Company's consolidated
financial statements at and for the nine months ended
September 30, 1993.
(p) The firm of accountants that has certified or
shall certify the applicable consolidated financial
statements and supporting schedules of the Company and
Star Gas Corporation filed or to be filed with the
Commission as part of the Registration Statement and
the Prospectus are independent public accountants with
respect to the Company and the Subsidiaries, as
required by the Act. The consolidated historical and
pro forma financial statements, together with related
schedules and notes, set forth in the Prospectus and
the Registration statement comply as to form in all
material respects with the requirements of the Act.
Such historical financial statements fairly present the
consolidated financial position of the Company and the
Subsidiaries and Star Gas Corporation, as the case may
be, at the respective dates indicated and the results
of their operations and their cash flows for the
respective periods indicated, in accordance with
11
<PAGE>
generally accepted accounting principles ("GAAP")
consistently applied throughout such periods. Such pro
forma financial statements have been prepared on a
basis consistent with such historical statements,
except for the pro forma adjustments specified therein,
and give effect to assumptions made on a reasonable
basis and present fairly the historical and proposed
transactions contemplated by the Prospectus and this
Agreement. The other financial and statistical
information and data included in the Prospectus and in
the Registration Statement, historical and pro forma,
are, in all material respects, accurately presented and
prepared on a basis consistent with such financial
statements and the books and records of the Company.
(q) Subsequent to the respective dates as of which
information is given in the Registration Statement and
the Prospectus and up to the Closing Date, neither the
Company nor any of the Subsidiaries has incurred any
liabilities or obligations, direct or contingent, which
are material to the Company and the Subsidiaries taken
as a whole, nor entered into any transaction not in the
ordinary course of business and there has not been,
singly or in the aggregate, any material adverse
change, or any development which may reasonably be
expected to involve a material adverse change, in the
properties, business, results of operations, condition
(financial or otherwise), affairs or prospects of the
Company and the Subsidiaries taken as a whole (a
"Material Adverse Change").
(r) All tax returns required to be filed by the
Company or any of the Subsidiaries in any jurisdiction
have been filed, other than those filings being
contested in good faith, and all material taxes,
including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to
be due from such entities have been paid, other than
those being contested in good faith and for which
adequate reserves have been provided or those currently
payable without penalty or interest.
(s) No authorization, approval or consent or order
of, or filing with, any court or governmental body or
agency is necessary in connection with the transactions
contemplated by this Agreement, except such as may be
required by the NASD or have been obtained and made
under the Act, the TIA or state securities or Blue Sky
laws or regulations. Neither the Company nor any of
its affiliates is presently doing business with the
government or Cuba or with any person or affiliate
located in Cuba.
12
<PAGE>
(t) (i) Each of the Company and the Subsidiaries
has all certificates, consents, exemptions, orders,
permits, licenses, authorizations, or other approvals
(each, an "Authorization") of and from, and has made
all declarations and filings with, all federal, state,
local and other governmental authorities, all
self-regulatory organizations and all courts and other
tribunals, necessary or required to own, lease, license
and use its properties and assets and to conduct its
business in the manner described in the Prospectus,
except to the extent that the failure to obtain or file
would not, singly or in the aggregate, have a Material
Adverse Effect, (ii) all such Authorizations are valid
and in full force and effect and (iii) the Company and
the Subsidiaries are in compliance in all material
respects with the terms and conditions of all such
Authorizations and with the rules and regulations of
the regulatory authorities and governing bodies having
jurisdiction with respect thereto.
(u) Neither the Company nor any of the
Subsidiaries is (a) an "investment company" or a
company "controlled" by an investment company within
the meaning of the Investment Company Act of 1940, as
amended, or (b) a "holding company" or a "subsidiary
company" of a holding company, or an "affiliate"
thereof within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
(v) No holder of any security of the Company has
or will have any right to require the registration of
such security by virtue of any transaction contemplated
by this Agreement.
(w) The Company and the Subsidiaries possess all
patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or
confidential information, systems or procedures),
trademarks, service marks and trade names
(collectively, "Intellectual Property") presently
employed by them in connection with the businesses now
operated by them, and neither the Company nor any of
the Subsidiaries has received any notice of
infringement of or conflict with asserted rights of
others with respect to the foregoing. The use of such
Intellectual Property in connection with the business
and operations of the Company and the Subsidiaries does
not, to the Company's knowledge, infringe on the rights
of any person.
(x) The Company and each of the Subsidiaries
maintain a system of internal accounting controls
sufficient to provide reasonable assurance that
13
<PAGE>
(i) transactions are executed in accordance with
management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with
generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets
is permitted only in accordance with management's
general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(y) The Company has not (i) taken, directly or
indirectly, any action designed to cause or to result
in, or that has constituted or which might reasonably
be expected to constitute, the stabilization or
manipulation of the price of any security of the
Company to facilitate the sale or resale of the
Securities or (ii) since the initial filing of the
Registration Statement (A) sold, bid for, purchased, or
paid anyone any compensation for soliciting purchases
of, the Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to
purchase any other securities of the Company.
(z) The Company and each Subsidiary maintains
insurance covering their properties, operations,
personnel and businesses. Such insurance insures
against such losses and risks as are adequate in
accordance with customary industry practice to protect
the Company and its Subsidiaries and their businesses.
Neither the Company nor any Subsidiary has received
notice from any insurer or agent of such insurer that
substantial capital improvements or other expenditures
will have to be made in order to continue such
insurance. All such insurance is outstanding and duly
in force on the date hereof and will be outstanding and
duly in force on the Closing Date.
(aa) Each certificate signed by any officer of the
Company and delivered to the Underwriters or counsel
for the Underwriters shall be deemed to be a
representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold
harmless (i) each of the Underwriters, (ii) each
person, if any, who controls (within the meaning of
Section 15 of the Act or Section 20 of the Exchange
Act) any of the Underwriters (any of the persons
referred to in this clause (ii) being hereinafter
referred to as a "controlling person"), and (iii) the
14
<PAGE>
respective officers, directors, partners, employees,
representatives and agents of any of the Underwriters
or any controlling person (any person referred to in
clause (i), (ii) or (iii) may hereinafter be referred
to as an "Indemnified Person") to the fullest extent
lawful, from and against any and all losses, claims,
damages, liabilities, judgments, actions and expenses
(including without limitation and as incurred,
reimbursement of all reasonable costs of investigating,
preparing, pursuing or defending any claim or action,
or any investigation or proceeding by any governmental
agency or body, commenced or threatened, including the
reasonable fees and expenses of counsel to any Indem-
nified Person) directly or indirectly caused by,
related to, based upon, arising out of or in connection
with any untrue statement or alleged untrue statement
of a material fact contained in the Registration
Statement (or any amendment thereto) or the Prospectus
(including any amendment or supplement thereto) or any
preliminary prospectus or any omission or alleged
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in the light of
the circumstances under which they were made) not
misleading, except insofar as such losses, claims,
damages, liabilities or expenses are caused by an
untrue statement or omission or alleged untrue state-
ment or omission that is made in reliance upon and in
conformity with information relating to any of the
Underwriters furnished in writing to the Company by any
of the Underwriters expressly for use in the
Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto)
or any preliminary prospectus. The Company shall
notify you promptly of the institution, threat or
assertion of any claim, proceeding (including any
governmental investigation) or litigation in connection
with the matters addressed by this Agreement which
involves the Company or an Indemnified Person.
(b) In case any action or proceeding (including
any governmental investigation) shall be brought or
asserted against any of the Indemnified Persons with
respect to which indemnity may be sought against the
Company, such Underwriter (or the Underwriter
controlled by such controlling person) shall promptly
notify the Company in writing (provided, that the
failure to give such notice shall not relieve the
Company of its obligations pursuant to this Agreement).
Such Indemnified Person shall have the right to employ
its own counsel in any such action and the fees and
expenses of such counsel shall be paid, as incurred, by
the Company (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to
15
<PAGE>
Indemnification hereunder). The Company shall not, in
connection with any one such action or proceeding or
separate but substantially similar or related actions
or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more
than one separate firm of attorneys (in addition to any
local counsel) at any time for such Indemnified
Persons, which firm shall be designated by the
Underwriters. The Company shall be liable for any
settlement of any such action or proceeding effected
with the Company's prior written consent, which consent
will not be unreasonably withheld, and the Company
agrees to indemnify and hold harmless any Indemnified
Person from and against any loss, claim, damage,
liability or expense by reason of any settlement of any
action effected with the written consent of the
Company. The Company shall not, without the prior
written consent of each Indemnified Person, settle or
compromise or consent to the entry of Judgment in or
otherwise seek to terminate any pending or threatened
action, claim, litigation proceeding in respect of
which indemnification or contribution may be sought
hereunder (whether or not any Indemnified Person is a
party thereto), unless such settlement, compromise,
consent or termination includes an unconditional
release of each Indemnified Person from all liability
arising out of such action, claim, litigation or
proceeding.
(c) Each of the Underwriters agrees, severally and
not jointly, to indemnify and hold harmless the
Company, its directors, its officers who sign the
Registration Statement, any person controlling (within
the meaning of Section 15 of the Act or Section 20 of
the Exchange Act) the Company, and the officers,
directors, partners, employees, representatives and
agents of each such person, to the same extent as the
foregoing indemnity from the Company to each of the
Indemnified Persons, but only with respect to claims
and actions based on information relating to such
Underwriter furnished in writing by such Underwriter
expressly for use in the Registration Statement or the
Prospectus.
(d) If the indemnification provided for in this
Section 6 is unavailable to an indemnified party in
respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each indemnifying
party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims,
damages, liabilities and expenses (i) in such
proportion as is appropriate to reflect the relative
16
<PAGE>
benefits received by the indemnifying party on the one
hand and the indemnified party on the other hand from
the offering of the Securities or (ii) if the allo-
cation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the
indemnifying parties and the indemnified party, as well
as any other relevant equitable considerations. The
relative benefits received by the Company, on the one
hand, and any of the Underwriters, on the other hand,
shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting
discounts and commissions but before deducting
expenses) received by the Company bear to the total un-
derwriting discounts and commissions received by such
underwriter, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault
of the Company and the Underwriters shall be determined
by reference to, among other things whether the untrue
or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact
related to information supplied by the Company or the
Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to
correct or prevent such statement or omission. The
indemnity and contribution obligations of the Company
set forth herein shall be in addition to any liability
or obligation the Company may otherwise have to any
Indemnified Person.
The Company and the Underwriters agree that it would
not be just and equitable if contribution pursuant to
this Section 6(d) were determined by pro rata
allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of
allocation which does not take account of the equitable
considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims,
damages, liabilities or expenses referred to in the
immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding
the provisions of this Section 6, none of the
Underwriters (and its related Indemnified Persons)
shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the total
underwriting discount applicable to the Securities
purchased by such Underwriter exceeds the amount of any
damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged
17
<PAGE>
untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to
this Section 6(d) are several in proportion to the
respective principal amount of Securities purchased by
each of the Underwriters hereunder and not joint.
7. Conditions of Underwriters' Obligations. The several
---------------------------------------
obligations of the Underwriters to purchase the Securities under this
Agreement are subject to the satisfaction of each of the following
conditions:
(a) All the representations and warranties of the
Company contained in this Agreement shall be true and
correct on the Closing Date with the same force and
effect as if made on and as of the Closing Date. The
Company shall have performed or complied with all of
its obligations and agreements herein contained and
required to be performed or complied with by it at or
prior to the Closing Date.
(b) (i) The Registration Statement shall have
become effective (or, if a post-effective amendment is
required to be filed pursuant to Rule 430A promulgated
under the Act, such post-effective amendment shall have
become effective) not later than 10:00 A.M., New York
City time, on the date of this Agreement or at such
later date and time as you may approve in writing, (ii)
at the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall
have been commenced or shall be pending before or
contemplated by the Commission and every request for
additional information on the part of the Commission
shall have been complied with in all material respects
and (iii) no stop order suspending the sale of the
Securities in any jurisdiction referred to in Section
4(m) shall have been issued and no proceeding for that
purpose shall have been commenced or shall be pending
or threatened.
(c) No action shall have been taken and no
statute, rule, regulation or order shall have been
enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the
issuance of the Securities; and no injunction,
restraining order or order of any nature by a federal
or state court of competent jurisdiction shall have
been issued as of the Closing Date which would prevent
the issuance of the Securities.
18
<PAGE>
(d) (i) Since the date hereof or since the dates
as of which information is given in the Registration
Statement and the Prospectus, there shall not have been
any Material Adverse Change, (ii) since the date of the
latest balance sheet included in the Registration
Statement and the Prospectus, there shall not have been
any material change in the capital stock or long-term
debt, or material increase in short-term debt, of the
Company or any of the Subsidiaries and (iii) the
Company and the Subsidiaries shall have no liability or
obligation, direct or contingent, that is material to
the Company and the Subsidiaries taken as a whole and
is required to be disclosed on a balance sheet in
accordance with GAAP and is not disclosed on the latest
balance sheet included in the Registration Statement
and the Prospectus.
(e) You shall have received a certificate of the
Company, dated the Closing Date, executed on behalf of
the Company by the President or any Vice President and
a principal financial or accounting officer of the
Company confirming, as of the Closing Date, the matters
set forth in paragraphs (a), (b), (c) and (d) of this
Section 7.
(f) On the Closing Date, you shall have received:
(1) an opinion (satisfactory to you and your counsel),
dated the Closing Date, of Phillips, Nizer, Benjamin, Krim &
Ballon, counsel for the Company, to the effect that:
(i) the Company and each of the Subsidiaries
is a duly organized and validly existing
corporation in good standing under the laws of
its jurisdiction of incorporation, has the
requisite corporate power and authority to own,
lease and operate its properties and to conduct
its business as described in the Registration
Statement and the Prospectus, and is duly
qualified as a foreign corporation and in good
standing in each jurisdiction where the own-
ership, leasing or operation of property or the
conduct of its business requires such
qualification, except where the failure to be so
qualified would not, singly or in the aggregate,
have a Material Adverse Effect;
(ii) the Company has full power and authority
to execute, deliver and perform this Agreement
and to authorize, issue, sell and deliver the
Securities as contemplated by this Agreement;
(iii) each of this Agreement, the Securities,
the Indenture and the Engagement Letter have been
19
<PAGE>
duly authorized, executed and delivered by the
Company;
(iv) when authenticated in accordance with
the terms of the Indenture and delivered to and
paid for by you in accordance with the terms of
this Agreement, the Securities will constitute
valid and legally binding obligations of the
Company, enforceable against the Company in
accordance with their terms and entitled to the
benefits of the Indenture, subject to applicable
bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws
affecting creditors' rights and remedies
generally and to general principles of equity
(regardless of whether enforcement is sought in a
proceeding at law or in equity);
(v) the Indenture, assuming due
authorization, execution and delivery thereof by
the Trustee, constitutes a valid and legally
binding agreement of the Company, enforceable
against the Company in accordance with its terms,
subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium
and similar laws affecting creditors' rights and
remedies generally and to general principles of
equity (regardless of whether enforcement is
sought in a proceeding at law or in equity);
(vi) The Engagement Letter constitutes a
valid and legally binding agreement of the
Company, enforceable against the Company in
accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws
affecting creditors' rights and remedies
generally and to general principles of equity
(regardless of whether enforcement is sought in a
proceeding at law or in equity).
(vii) the Securities and the Indenture conform
in all material respects to the descriptions
thereof contained in the Prospectus;
(viii) all of the issued and outstanding shares
of capital stock of, or other ownership interests
in, each Subsidiary have been duly and validly
authorized and issued, and the shares of capital
stock of, or other ownership interests in, each
Subsidiary are owned, directly or through Subsid-
iaries, by the Company, are fully paid and
nonassessable, and are owned free and clear of
any Lien;
20
<PAGE>
(ix) there are no outstanding subscriptions,
rights, warrants, options, calls, convertible
securities, commitments of sale or Liens related
to or entitling any person to purchase or
otherwise to acquire any shares of the capital
stock of, or other ownership interest in, any
Subsidiary;
(x) neither the Company nor any of the
Subsidiaries is (a) an "investment company" or a
company "controlled" by an investment company
within the meaning of the Investment Company Act
of 1940, as amended, or (b) a "holding company"
or a "subsidiary company" of a holding company,
or an "affiliate" thereof within the meaning of
the Public Utility Holding Company Act of 1935,
as amended.
(xi) the descriptions in the Registration
Statement and the Prospectus of statutes, legal
and governmental proceedings and contracts and
other documents are accurate in all material
respects and fairly present the information
required to be shown; and such counsel does not
know of any legal or governmental proceedings
required to be described in the Registration
Statement or Prospectus which are not described
as required or of any contracts or documents of a
character required to be described in the
Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement
which are not described and filed as required; it
being understood that such counsel need express
no opinion as to the financial statements, notes
or schedules or other financial data included
therein or that part of the Registration
Statement that constitutes the Statement of
Eligibility and qualification of the Trustee on
Form T-1 (the "Form T-1");
(xii) the Registration Statement has become
effective under the Act; any required filing of
the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) has been made in the
manner and within the time period required by
Rule 424(b); and to the knowledge of such counsel
(after due inquiry) no stop order suspending the
effectiveness of the Registration Statement or
any part thereof has been issued and no
proceedings therefor have been instituted or are
pending or contemplated under the Act;
(xiii) the Indenture has been duly qualified
under the TIA;
21
<PAGE>
(xiv) no authorization, approval, consent or
order of, or filing with, any court or
governmental body or agency is required for the
consummation by the Company of the transactions
contemplated by this Agreement, except such as
have been obtained and made under the Act, the
TIA, state securities or Blue Sky laws or
regulations or such as may be required by the
NASD; the execution and delivery of this
Agreement and the Indenture, the issuance and
sale of the Securities, the performance of this
Agreement and the Indenture and the consummation
of the transactions contemplated by this
Agreement and the Indenture will not result in a
breach or violation of any of the respective
charters or bylaws of the Company or any of the
Subsidiaries or the terms or provisions of, or
constitute a default under, any statute, rule or
regulation or to the knowledge of such counsel
(after due inquiry) any agreement or instrument
to which the Company or any of the Subsidiaries
is a party or by which any of them is bound, or
to which any of the properties of the Company or
any of the Subsidiaries is subject, or to the
knowledge of such counsel (after due inquiry) any
order of any court or governmental agency or body
having jurisdiction over the Company or any of
the Subsidiaries or any of their properties;
(xv) at the time it became effective and on
the Closing Date, the Registration Statement
(except for financial statements, the notes
thereto and related schedules and other financial
data included therein and the Form T-1, as to
which no opinion need be expressed) complied as
to form in all material respects with the Act and
the TIA;
(xvi) to the knowledge of such counsel (after
due inquiry), neither the Company nor any of the
subsidiaries is in violation of its respective
charter or bylaws or in default in the perfor-
mance of any bond, debenture, note or any other
evidence of indebtedness or any indenture,
mortgage, deed of trust or other contract, lease
or other instrument to which the Company or any
of the Subsidiaries is a party or by which any of
them is bound, or to which any of the property or
assets of the Company or any of the Subsidiaries
is subject; and
(xvii) the execution and delivery of this
Agreement, the Indenture and the Engagement
Letter by the Company, the issuance and sale of
22
<PAGE>
the Securities, the performance of this
Agreement, the Indenture and the Engagement
Letter and the consummation of the transactions
contemplated by this Agreement, the Indenture and
the Engagement Letter will not conflict with or
result in a breach or violation of any of the
respective charters or bylaws of the Company or
any of the Subsidiaries or any of the terms or
provisions of, or constitute a default or cause
an acceleration of any obligation under or result
in the imposition or creation of (or the
obligation to create or impose) a Lien with
respect to, any bond, note, debenture or other
evidence of indebtedness or any indenture,
mortgage, deed of trust or other agreement or
instrument to which the Company or any of the
Subsidiaries is a party or by which it or any of
them is bound, or to which any properties of the
Company or any of the Subsidiaries is or may be
subject, or contravene any order of any court or
governmental agency or body having jurisdiction
over the Company or any of the Subsidiaries or
any of their properties, or violate or conflict
with any statute, rule or regulation or admin-
istrative or court decree applicable to the
Company or any of the Subsidiaries, or any of
their respective properties.
The opinion of Phillips, Nizer, Benjamin, Krim & Ballon
shall be rendered to you at the request of the Company
and shall so state therein. Phillips, Nizer, Benjamin,
Krim & Ballon may rely on the opinion of Dorsey &
Whitney as to certain matters of Minnesota law.
(2) In giving their opinion required by subsection (f)(1)
of this Section 7, Phillips, Nizer, Benjamin, Krim & Ballon
shall additionally state that such counsel has participated in
conferences with officers and other representatives of the
Company, representatives of the independent public accountants
for the Company, your representatives and your counsel in
connection with the preparation of the Registration Statement
and Prospectus and has considered the matters required to be
stated therein and the statements contained therein, although
such counsel has not independently verified the accuracy,
completeness or fairness of such statements (except as
indicated above); and such counsel advises you that, on the
basis of the foregoing, no facts came to such counsel's
attention that caused such counsel to believe that the
Registration Statement (as amended or supplemented, if
applicable), at the time such Registration Statement or any
post-effective amendment became effective, contained an untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading (other than information
23
<PAGE>
omitted therefrom in reliance on Rule 430A under the Act), or
the Prospectus (as amended or supplemented), as of its date
and the Closing Date, contained an untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) You shall have received an opinion, dated the
Closing Data, of Latham & Watkins, counsel for the
Underwriters, in form and substance reasonably
satisfactory to you. Latham & Watkins may rely on the
opinion of Dorsey & Whitney as to certain matters of
Minnesota law.
(h) You shall have received letters on and as of the date
hereof and as on and as of the Closing Date (in the latter case
constituting an affirmation of the statements set forth in the
former), in form and substance satisfactory to you, from KPMG
Peat Marwick, independent auditors, with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus.
(i) Latham & Watkins shall have been furnished
with such documents and opinions, in addition to those
set forth above, as they may reasonably require for the
purpose of enabling them to review or pass upon the
matters referred to in this Section 7 and in order to
evidence the accuracy, completeness or satisfaction in
all material respects of any of the representations,
warranties or conditions herein contained.
(j) Prior to the Closing Date, the Company shall
have furnished to you such further information,
certificates and documents as you may reasonably
request.
8. Defaults. If on the Closing Date, any of the Underwriters
--------
shall fail or refuse to purchase Securities which it has agreed to purchase
hereunder on such date, and the aggregate principal amount of such Securi-
ties that such defaulting Underwriter(s) agreed but failed or refused to
purchase does not exceed 10% of the total principal amount of such
Securities that all of the Underwriters are obligated to purchase on such
Closing Date, each non-defaulting Underwriter shall be obligated to
purchase the amount of the Securities that such defaulting Underwriter(s)
agreed but failed or refused to purchase on such date. If, on the Closing
Date, any of the Underwriters shall fail or refuse to purchase Securities
in an aggregate principal amount that exceeds 10% of such total principal
amount of the Securities and arrangements satisfactory to the other
Underwriter(s) and the Company for the purchase of such Securities are not
made within 48 hours after such default, this Agreement shall terminate
without liability on the part of the non-defaulting Underwriter(s) or the
Company, except as otherwise provided in Section 9. In any such case that
does not result in termination of this Agreement, the Underwriters or the
Company may postpone the Closing Date for not longer than seven days, in
24
<PAGE>
order that the required changes, if any, in the Registration Statement and
the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve a defaulting
underwriter from liability in respect of any default by any such
Underwriter under this Agreement.
9. Effective Date of Agreement and Termination.
-------------------------------------------
(a) This Agreement shall become effective upon the later of
(i) the execution and delivery of this Agreement by the parties hereto,
(ii) the effectiveness of the Registration Statement and (iii) if a
post-effective amendment is required to be filed pursuant to Rule 430A
under the Act, the effectiveness of such post-effective amendment.
(b) This Agreement may be terminated at any time on or prior
to the Closing Date by you by notice to the Company if any of the following
has occurred: (i) subsequent to the date the Registration Statement is
declared effective or the date of this Agreement, any Material Adverse
Change which, in the judgment of any Underwriter, materially impairs the
investment quality of the Securities; (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or
material adverse change in the financial markets of the United States or
elsewhere, or any other substantial national or international calamity or
emergency if the effect of such outbreak, escalation, calamity, crisis or
emergency would, in the judgment of any Underwriter, make it impracticable
or inadvisable to market the Securities or to enforce contracts for the
sale of the Securities; (iii) any suspension or limitation of trading
generally in securities on the New York Stock Exchange or in the over-the-
counter markets or any setting of minimum prices for trading on such
exchange or markets; (iv) any declaration of a general banking moratorium
by either federal or New York authorities; (v) the taking of any action by
any federal, state or local government or agency in respect of its monetary
or fiscal affairs that in your judgment has a material adverse effect on
the financial markets in the United States and would, in your judgment,
make it impracticable or inadvisable to market the Securities or to enforce
contracts for the sale of the Securities; (vi) the enactment, publication,
decree, or other promulgation of any federal or state statute, regulation,
rule or order of any court or other governmental authority which, in your
judgment, materially and adversely affect the business or operations of the
Company or any Subsidiary; or (vii) any securities of the Company or any of
the Subsidiaries shall have been downgraded or placed on any "watch list"
for possible downgrading by any nationally statistical rating organization,
provided, that in the case of such "watch list" placement, termination
shall be permitted only if such placement would, in the judgment of any
Underwriter, make it impracticable or inadvisable to market the Securities
or to enforce contracts for the sale of the Securities or materially impair
the investment quality of the Securities.
(c) The indemnities and contribution provisions and other
agreements, representations and warranties of the Company, its officers and
directors and of the Underwriters set forth in or made pursuant to this
Agreement shall remain operative and in full force and effect, and will
survive delivery of and payment for the Securities, regardless, of (i) any
investigation, or statement as to the results thereof, made by or an behalf
25
<PAGE>
of any of the Underwriters or by or on behalf of the Company, the officers
or directors of the Company or any controlling person of the Company, (ii)
acceptance of the Securities and payment for them hereunder and (iii)
termination of this Agreement.
(d) If this Agreement shall be terminated by the
Underwriters pursuant to clauses (i) or (vii) of paragraph (b) of this
Section 9 or because of the failure or refusal on the part of the Company
to comply with the terms or to fulfill any of the conditions of this
Agreement, the Company agrees to reimburse you for all out-of-pocket
expenses (including the fees and disbursements of counsel) incurred by you.
Notwithstanding any termination of this Agreement, the Company shall be
liable for all expenses which it has agreed to pay pursuant to Section 4(i)
hereof.
(e) Except as otherwise provided, this Agreement has been
and is made solely for the benefit of and shall be binding upon the
Company, the Underwriters, any Indemnified Person referred to herein and
their respective successors and assigns, all as and to the extent provided
in this Agreement, and no other person shall acquire or have any right
under or by virtue of this Agreement. The terms "successors and assigns"
shall not include a purchaser of any of the Securities from any of the
Underwriters merely because of such purchase.
10. Notices. Notices given pursuant to any provision of
-------
this Agreement shall be addressed as follows: (a) if to the Company, to
Petroleum Heat and Power Co., Inc., 2187 Atlantic Street, Stamford,
Connecticut 06904, Attention: Irik P. Sevin, with a copy to Phillips,
Nizer, Benjamin, Krim & Ballon, 31 West 52nd Street, New York, New York
10019, Attention: Alan Shapiro, and (b) if to any Underwriter, to it c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 140 Broadway, New
York, New York 10005, Attention: Syndicate Department, with a copy to
Latham & Watkins, 885 Third Avenue, New York, New York 10022, Attention:
Beth R. Neckman, or in any case to such other address as the person to be
notified may have requested in writing.
11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS
APPLIED TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW
YORK.
12. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto and their respective successors and
the officers and directors and other persons referred to in Section 6, and
no other person will have any right or obligation hereunder.
26
<PAGE>
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument. Please confirm that
the foregoing correctly sets forth the agreement among the Company and you.
Very truly yours,
PETROLEUM HEAT AND POWER CO., INC.
By:
--------------------------------
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------
Name:
Title:
KIDDER, PEABODY & CO. INCORPORATED
By:
---------------------------
Name:
Title:
CHEMICAL SECURITIES INC.
By:
---------------------------
Name:
Title:
MORGAN SCHIFF & CO., INC.
By:
---------------------------
Name:
Title:
27
<PAGE>
SCHEDULE A
Principal
Underwriter Amount
----------- ------
Donaldson, Lufkin & Jenrette
Securities Corporation . . . . . . . . . . . . . . . . . . . . $
Kidder, Peabody & Co. Incorporated . . . . . . . . . . . . . . .
Chemical Securities Inc. . . . . . . . . . . . . . . . . . . . .
Morgan Schiff & Co., Inc. . . . . . . . . . . . . . . . . . . .
--------
-
Total . . . . . . . . . . . . . . . . . . . . . . . . $
========
=
28
EXHIBIT 4.6
L&W DRAFT OF 01/11/94
PETROLEUM HEAT AND POWER CO., INC.
_____% Subordinated Debentures Due 2006
INDENTURE
Dated as of _______, 1994
CHEMICAL BANK,
Trustee
<PAGE>
Page
----
TABLE OF CONTENTS
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Other Definitions . . . . . . . . . . . . . . . . . 11
SECTION 1.03. Incorporation by Reference of Trust Indenture Act . 12
SECTION 1.04. Rules of Construction . . . . . . . . . . . . . . . 12
ARTICLE 2
The Debentures
SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . 13
SECTION 2.02. Execution and Authentication . . . . . . . . . . . 13
SECTION 2.03. Registrar and Paying Agent . . . . . . . . . . . . 13
SECTION 2.04. Paying Agent To Hold Money in Trust . . . . . . . . 14
SECTION 2.05. Debentureholder Lists . . . . . . . . . . . . . . . 14
SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . 14
SECTION 2.07. Replacement Debentures . . . . . . . . . . . . . . 15
SECTION 2.08. Outstanding Debentures . . . . . . . . . . . . . . 15
SECTION 2.09. Temporary Debentures . . . . . . . . . . . . . . . 15
SECTION 2.10. Cancellation . . . . . . . . . . . . . . . . . . . 16
SECTION 2.11. Defaulted Interest . . . . . . . . . . . . . . . . 16
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee . . . . . . . . . . . . . . . . 16
SECTION 3.02. Selection of Debentures To Be Redeemed . . . . . . 16
SECTION 3.03. Notice of Redemption . . . . . . . . . . . . . . . 17
SECTION 3.04. Effect of Notice of Redemption . . . . . . . . . . 17
SECTION 3.05. Deposit of Redemption Price . . . . . . . . . . . . 17
SECTION 3.06. Debentures Redeemed in Part . . . . . . . . . . . . 17
ARTICLE 4
Covenants
SECTION 4.01. Payment of Debentures . . . . . . . . . . . . . . . 18
SECTION 4.02. SEC Reports . . . . . . . . . . . . . . . . . . . . 18
SECTION 4.03. Limitation on Funded Debt . . . . . . . . . . . . . 18
SECTION 4.04. Limitation on Indebtedness and Preferred Stock of
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.05. Limitation on Restricted Payments . . . . . . . . . 20
SECTION 4.06. Limitation on Restrictions on Distributions from
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.07. Limitation on Transactions with Affiliates . . . . 22
SECTION 4.08. Change of Control . . . . . . . . . . . . . . . . . 22
SECTION 4.09. Limitation on Liens on Subsidiary Stock . . . . . . 24
SECTION 4.10. Compliance Certificate . . . . . . . . . . . . . . 24
<PAGE>
SECTION 4.11. Further Instruments and Acts . . . . . . . . . . . 24
ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets . . . . 24
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . 25
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . 26
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . 27
SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . 27
SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . 27
SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . 27
SECTION 6.07. Rights of Holders To Receive Payment . . . . . . . 28
SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . 28
SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . 28
SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . 28
SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . 28
SECTION 6.12. Waiver of Stay or Extension Laws . . . . . . . . . 29
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . 29
SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . 30
SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . 30
SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . 30
SECTION 7.05. Notice of Defaults . . . . . . . . . . . . . . . . 31
SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . 31
SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . 31
SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . 31
SECTION 7.09. Successor Trustee by Merger . . . . . . . . . . . . 32
SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . 32
SECTION 7.11. Preferential Collection of Claims Against Company . 33
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Debentures; Defeasance . 33
SECTION 8.02. Conditions to Defeasance . . . . . . . . . . . . . 34
SECTION 8.03. Application of Trust Money . . . . . . . . . . . . 35
SECTION 8.04. Repayment to Company . . . . . . . . . . . . . . . 35
SECTION 8.05. Indemnity for Government Obligations . . . . . . . 35
SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . 35
ARTICLE 9
Amendments
<PAGE>
SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . 36
SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . 36
SECTION 9.03. Compliance with Trust Indenture Act . . . . . . . . 37
SECTION 9.04. Revocation and Effect of Consents and Waivers . . . 37
SECTION 9.05. Notation on or Exchange of Debentures . . . . . . . 38
SECTION 9.06. Trustee to Sign Amendments . . . . . . . . . . . . 38
SECTION 9.07. Payment for Consent . . . . . . . . . . . . . . . . 38
ARTICLE 10
Subordination
SECTION 10.01. Agreement To Subordinate . . . . . . . . . . . . . 38
SECTION 10.02. Liquidation, Dissolution, Bankruptcy . . . . . . . 38
SECTION 10.03. Default on Senior Debt . . . . . . . . . . . . . . 39
SECTION 10.04. Acceleration of Payment of Debentures . . . . . . 40
SECTION 10.05. When Distribution Must Be Paid Over . . . . . . . 40
SECTION 10.06. Subrogation . . . . . . . . . . . . . . . . . . . 40
SECTION 10.07. Relative Rights . . . . . . . . . . . . . . . . . 40
SECTION 10.08. Subordination May Not Be Impaired by Company . . . 40
SECTION 10.09. Rights of Trustee and Paying Agent . . . . . . . . 40
SECTION 10.10. Distribution or Notice to Representative . . . . . 41
SECTION 10.11. Article 10 Not To Prevent Events of Default or
Limit Right To Accelerate . . . . . . . . . 41
SECTION 10.12. Trust Moneys Not Subordinated . . . . . . . . . . 41
SECTION 10.13. Trustee Entitled To Rely . . . . . . . . . . . . . 41
SECTION 10.14. Trustee To Effectuate Subordination . . . . . . . 41
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt . 41
SECTION 10.16. Reliance by Holders of Senior Debt on
Subordination Provisions . . . . 42
ARTICLE 11
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls . . . . . . . . . . . 42
SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . . . . 42
SECTION 11.03. Communication by Holders with Other Holders . . . 43
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 11.05. Statements Required in Certificate or Opinion . . 43
SECTION 11.06. When Debentures Disregarded . . . . . . . . . . . 43
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar . . . 43
SECTION 11.08. Governing Law . . . . . . . . . . . . . . . . . . 43
SECTION 11.09. No Recourse Against Others . . . . . . . . . . . . 44
SECTION 11.10. Successors . . . . . . . . . . . . . . . . . . . . 44
SECTION 11.11. Multiple Originals . . . . . . . . . . . . . . . . 44
SECTION 11.12. Table of Contents; Headings . . . . . . . . . . . 44
Exhibit A - Form of Debenture
<PAGE>
INDENTURE dated as of _______ ,1994 between PETROLEUM HEAT AND
POWER CO., INC., a Minnesota corporation (the "Company"), and CHEMICAL
BANK, a New York corporation (the "Trustee").
Each party agrees as follows for the benefit of the other party
and for the equal and ratable benefit of the Holders of the Company's __%
Subordinated Debentures Due 2006 (the "Debentures"):
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions.
-----------
"Affiliate" of any Person specified means (i) any Person directly
or indirectly controlling or under direct or indirect common control with
such specified Person; (ii) any spouse, immediate family member or other
relative who has the same principal residence as any Person described in
clause (i) above; (iii) any trust in which any Persons described in clause
(i) or (ii) above has a beneficial interest and (iv) in the case of the
Company, any Unrestricted Subsidiary of the Company. For the purposes of
this definition, "control" when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, a contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions)
of shares of Capital Stock of a Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the
purposes of this definition as a "disposition") by the Company or any of
its Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Subsidiary to the Company or by the Company or a Subsidiary to a Wholly
Owned Subsidiary, (ii) a disposition of property or assets at fair market
value in the ordinary course of business or (iii) a disposition of obsolete
assets in the ordinary course of business.
"Attributable Indebtedness" in respect of a Sale/Leaseback
Transaction means, as of the time of determination, the present value
(discounted at the interest rate borne by the Debentures, compounded
annually) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the numbers of years from the date
of determination to the dates of each successive scheduled principal
payment of such Indebtedness or redemption or similar payment with respect
<PAGE>
to such Preferred Stock multiplied by the amount of such payment by
(ii) the sum of all such payments.
"Bank Debt" means any and all amounts payable under or in respect
of the Credit Agreement, as amended from time to time, any Refinancing
Agreement, any Working Capital Financing Agreement or any other loan
agreement with a bank, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company to the extent a
claim for post-filing interest is allowed in such proceedings), fees,
charges, expenses, reimbursement obligations, guarantees and all other
amounts payable thereunder or in respect thereof.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company
or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" of a Person means any obligation
which is required to be classified and accounted for as a capital lease on
the face of a balance sheet of such Person prepared in accordance with
generally accepted accounting principles; the amount of such obligation
shall be the capitalized amount thereof, determined in accordance with
generally accepted accounting principles; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under
such lease prior to the first date upon which such lease may be terminated
by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities
convertible into or exchangeable for such equity.
"Cash Flow" for a Person for any fiscal year, means the sum of
(i) the Consolidated Net Income of such Person for such fiscal year, plus
(ii) to the extent deducted in the calculation of such Consolidated Net
Income, the amortization of customer lists and other deferred charges and
the amortization and depreciation of capital assets, plus (iii) to the
extent not included in Consolidated Net Income, the amount of all dividends
or other distributions received in cash by the Company or any of its Wholly
Owned Subsidiaries from, and the amount of any Net Cash Proceeds to the
Company or any of its Wholly Owned Subsidiaries from the sale of Capital
Stock of, an Unrestricted Subsidiary of the Company; provided, however,
that any amounts included in clause (v)(C) of the second paragraph under
"Limitations on Restricted Payments" shall be excluded from Cash Flow of
the Company.
"Class B Cash Flow" for any fiscal year means the sum of (i) net
income of the Company and its consolidated subsidiaries for such fiscal
year determined in accordance with generally accepted accounting
principles, plus (ii) depreciation and amortization of plant and equipment
2
<PAGE>
and amortization of customer lists and restrictive covenants of the Company
and its consolidated subsidiaries for such fiscal year determined in
accordance with generally accepted accounting principles; provided,
however, that (a) the net income of any Person other than a consolidated
subsidiary in which the Company or any subsidiary has an interest shall be
included only to the extent of the amount of dividends or other
distributions paid to the Company or a consolidated subsidiary, (b) the net
income of any Person acquired in a pooling transaction shall be excluded
for any period prior to the date of acquisition and (c) Class B Cash Flow
with respect to a fiscal year shall never be less than zero.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for
purposes of any provision contained herein and required by the TIA, each
other obligor on the indenture securities.
"Consolidated EBITDA Coverage Ratio" as of any date of
determination means the ratio of (i) the aggregate amount of EBITDA for the
period of the most recent four consecutive fiscal quarters ending at least
45 days prior to the date of such determination to (ii) Consolidated
Interest Expense for such four fiscal quarters; provided, however, that (1)
if the Company or any Subsidiary has incurred any Indebtedness since the
beginning of such period that remains outstanding or if the transaction
giving rise to the need to calculate the Consolidated EBITDA Coverage Ratio
is an incurrence of Indebtedness, or both, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro
forma basis to (A) such Indebtedness as if such Indebtedness had been
incurred on the first day of such period, (B) the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the
first day of such period and (C) the interest income realized by the
Company and its Subsidiaries on the proceeds of such Indebtedness, to the
extent not yet applied at the date of determination, assuming such proceeds
earned interest at the Treasury Rate from the date such proceeds were
received through such date of determination, (2) if since the beginning of
such period the Company or any Subsidiary shall have made any Asset
Disposition, EBITDA for such period shall be reduced by an amount equal to
EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an
amount equal to EBITDA (if negative), directly attributable thereto for
such period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Company
and its continuing Subsidiaries in connection with such Asset Dispositions
for such period (or, if the Capital Stock of any Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable for the
Indebtedness of such Subsidiary to the extent the Company and its
continuing Subsidiaries are no longer liable for such Indebtedness after
such sale) and (3) if since the beginning of such period the Company or any
Subsidiary (by merger or otherwise) shall have made an Investment in any
Subsidiary (or any Person which becomes a Subsidiary) or an acquisition of
3
<PAGE>
assets, including any acquisition of assets occurring in connection with a
transaction causing a calculation to be made hereunder, which constitutes
all or substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first
day of such period. For purposes of this definition, whenever pro forma
effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto, and the amount of Consolidated Interest Expense
associated with any Indebtedness incurred in connection therewith, the pro
forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company; provided, however, that
such Officer shall assume (i) the historical sales and gross profit margins
associated with such assets for any consecutive 12-month period ended prior
to the date of purchase (provided that the first month of such period shall
be no more than 18 months prior to such date of purchase), less estimated
post-acquisition loss of customers (not to be less than 3%) and (ii) other
expenses as if such assets had been owned by the Company since the first
day of such period. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the date of determination
had been the applicable rate for the entire period.
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its Subsidiaries, determined on a
consolidated basis, including (i) interest expense attributable to capital
leases, (ii) amortization of debt discount, (iii) capitalized interest,
(iv) non-cash interest expense, (v) commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) interest actually paid by the Company or any such
Subsidiary under any guarantee of Indebtedness or other obligation of any
other Person, (vii) net costs associated with Hedging Obligations
(including amortization of fees), (viii) Preferred Stock dividends in
respect of all Preferred Stock of Subsidiaries held by Persons other than
the Company or a Wholly Owned Subsidiary, (ix) the cash contributions to
any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with loans incurred by such
plan or trust to purchase newly issued or treasury shares of the Company
(but excluding interest expense associated with the accretion of principal
on a non-interest bearing or other discount securities) and (x) to the
extent not already included in Consolidated Interest Expense, the interest
expense attributable to Indebtedness of another Person that is guaranteed
by the Company or any of its Subsidiaries, less interest income (exclusive
of deferred financing fees) of the Company and its Subsidiaries determined
on a consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Net Income" of a Person, for any period, means the
aggregate of the Net Income of such Person and its Subsidiaries for such
period, determined on a consolidated basis in accordance with generally
accepted accounting principles, provided that:
4
<PAGE>
(i) the Net Income of any other Person (other than a Subsidiary)
in which such Person has an interest shall be included only to the
extent of the amount of dividends or distributions paid to such
Person,
(ii) the Net Income of any Person acquired by such Person in a
pooling of interests transaction for any period prior to the date of
such acquisition shall be excluded,
(iii) any Net Income of any Subsidiary shall be excluded if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such
Subsidiary, directly or indirectly, to such Person, except that (A)
such Person's equity in the Net Income of any such Subsidiary for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Subsidiary
during such period to such Person as a dividend or other distribution
(subject, in the case of a dividend or other distribution to another
Subsidiary, to the limitation contained in this clause) and (B) such
Person's equity in a net loss of any such Subsidiary for such period
shall be included in determining such Consolidated Net Income, and
(iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Credit Agreement" means the Second Amended and Restated Credit
Agreement dated as of December 31, 1992, between the Company and Chemical
Bank, as agent, as amended from time to time.
"Debentures" means the Debentures issued under this Indenture.
"Default" means any event which is, or after notice or passage of
time or both would be, an Event of Default.
"Designated Senior Debt" means (i) the Bank Debt and (ii) any
other Senior Debt which, at the date of determination, has an aggregate
principal amount outstanding of, or commitments to lend up to, at least $10
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Debt as "Designated Senior Debt" for
purposes of this Indenture.
"EBITDA" for any period means the Consolidated Net Income for
such period (but without giving effect to adjustments, accruals, deductions
or entries resulting from purchase accounting, extraordinary losses or
gains and any gains or losses from any Asset Dispositions), plus the
following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii)
depreciation expense, (iv) amortization expense and (v) all other non-cash
expenses.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
5
<PAGE>
"Exchangeable Stock" means any Capital Stock which is
exchangeable or convertible into another security (other than Capital Stock
of the Company which is neither Exchangeable Stock nor Redeemable Stock).
"Funded Debt" as applied to any Person means, without
duplication, (a) any Indebtedness with a Stated Maturity of more than one
year from the date of incurrence, (b) any Indebtedness, regardless of its
term, if such Indebtedness is renewable or extendable at the option of the
obligor of such Indebtedness pursuant to the terms thereof to a date more
than one year from the date of incurrence; and (c) any Indebtedness,
regardless of its term, that by its terms or by the terms of the agreement
pursuant to which it is issued, may be paid with the proceeds of other
Indebtedness that may be incurred pursuant to the terms of such
first-mentioned Indebtedness or by the terms of such agreement, which other
Indebtedness has a Stated Maturity of more than one year from the date of
incurrence of such first-mentioned Indebtedness; provided, however, that
Working Capital Borrowings shall be excluded from Funded Debt except to the
extent that Working Capital Borrowings exceed an amount equal to (i) 100%
of the current assets (excluding cash) of such Person and its Subsidiaries
less (ii) the excess, if any, of current liabilities over current assets of
such Person and its Subsidiaries, in each case determined on a consolidated
basis in accordance with generally accepted accounting principles.
"guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (i) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Indebtedness or other
obligation of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in
any other manner the obligee of such Indebtedness or other obligation of
the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term "guarantee"
shall not include endorsements for collection or deposit in the ordinary
course of business. The term "guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any interest rate swap agreement, foreign currency
exchange agreement, interest rate collar agreement, option or futures
contract or other similar agreement or arrangement designed to protect such
Person against changes in interest rates or foreign exchange rates.
"Holder" or "Debentureholder" means the Person in whose name a
Debenture is registered on the Registrar's books.
"Indebtedness" of any Person means, without duplication,
(i)
(i) the principal of (A) Indebtedness of such Person for money
borrowed and (B) Indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable;
6
<PAGE>
(ii) all Capital Lease Obligations of such Person and all
Attributable Indebtedness in respect of Sale/Leaseback Transactions
entered into by such Person;
(iii) all obligations of such Person incurred or assumed as
the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under
any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than
the third Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i)
through (iv) of other Persons and all dividends of other Persons for
the payment of which, in either case, such Person is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise,
including any guarantees of such obligations and dividends, including
by means of any agreement which has the economic effect of a
guarantee; and
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the
obligation so secured.
"Indenture" means this Indenture, as amended or supplemented from
time to time.
"Investment" in any Person means any loan or advance to, any
guarantee of, any acquisition of any Capital Stock, equity interest,
obligation or other security of, or capital contribution or other
investment in, such Person. Investments shall exclude advances to
customers and suppliers in the ordinary course of business.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in The City of New York or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a
payment date is a Legal Holiday at a place of payment, payment may be made
at that place on the next succeeding day that is not a Legal Holiday, and
no interest shall accrue for the intervening period.
"Lien" means any mortgage, pledge, security interest, conditional
sale or other title retention agreement or other similar lien.
7
<PAGE>
"Net Cash Proceeds," with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Net Income" of any Person means the net income (loss) of such
Person, determined in accordance with generally accepted accounting
principles; excluding, however, from the determination of Net Income any
gain (but not loss) realized upon the sale or other disposition (including,
without limitation, dispositions pursuant to leaseback transactions) of any
real property or equipment of such Person, which is not sold or otherwise
disposed of in the ordinary course of business, or of any Capital Stock of
the Company or a Subsidiary owned by such Person.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible
common stock of such corporation; provided, however, that Non-Convertible
Capital Stock shall not include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, the Treasurer or the Secretary
of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Opinion of Counsel" means a written opinion from legal counsel
who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Liens" means (i) Liens existing on the date of this
Indenture and renewals, extensions and refinancings thereof; (ii) rights of
banks to set off deposits against debts owed to said banks; (iii) Purchase
Money Indebtedness; (iv) Liens on the property of any entity existing at
the time such property is acquired by the Company or any of its
Subsidiaries and renewals, extensions and refinancings thereof, whether by
merger, consolidation, purchase of assets or otherwise; provided, however,
that in the case of this clause (iv) that such Liens (x) are not created,
incurred or assumed in contemplation of such assets being acquired by the
Company and (y) do not extend to any other assets of the Company or any of
its Subsidiaries; and (v) Liens for taxes not yet due.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or
any other entity.
"Preferred Stock," as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
8
<PAGE>
dissolution of such corporation, over shares of Capital Stock of any other
class of such corporation; provided, however, that Preferred Stock shall
not include the Company's Class B Common Stock.
"Purchase Money Indebtedness" means Indebtedness (i) consisting
of the deferred purchase price of property, conditional sale obligations,
obligations under any title retention agreement and other purchase money
obligations, in each case where the maturity of such Indebtedness does not
exceed the anticipated useful life of the asset being financed, and (ii)
incurred to finance the acquisition by the Company or a Subsidiary of such
asset, including additions and improvements; provided, however, that any
Lien arising in connection with any such Indebtedness shall be limited to
the specified asset being financed or, in the case of real property or
fixtures, including additions and improvements, the real property on which
such asset is attached.
"principal" of a Debenture means the principal of the Debenture
plus the premium, if any, payable on the Debenture which is due or overdue
or is to become due at the relevant time.
"Redeemable Stock" means any Capital Stock that by its terms or
otherwise is required to be redeemed on or prior to the first anniversary
of the Stated Maturity of the Debentures or is redeemable at the option of
the Holder thereof at any time on or prior to the first anniversary of the
Stated Maturity of the Debentures.
"Refinancing Agreement" means any credit agreement or other
agreement between the Company and bank lenders pursuant to which the
Company refinances borrowings under the Credit Agreement or another
Refinancing Agreement.
"Representative" means the holder, trustee, agent or
representative (if any) for an issue of Senior Debt.
"Restricted Investment" means any Investment in an Unrestricted
Subsidiary. At the time any Subsidiary of the Company is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary, the
Company shall be deemed to have made a Restricted Investment in an amount
equal to the fair market value as of such time of the Company's interest in
such Unrestricted Subsidiary, as determined in good faith by the Board of
Directors and set forth in a Board Resolution.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a
Subsidiary transfers such property to a Person and the Company or a
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Debt" means the following obligations, whether
outstanding on the date of this Indenture or thereafter issued:
(i) all obligations consisting of the Bank Debt;
9
<PAGE>
(ii) all obligations consisting of the principal of and premium,
if any, and accrued and unpaid interest (including interest accruing
on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company to the extent post-filing
interest is allowed in such proceeding) in respect of (A) Indebtedness
of the Company for money borrowed and (B) Indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment
of which the Company is responsible or liable;
(iii) all Capital Lease Obligations of the Company;
(iv) all obligations of the Company (A) for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction, (B) under interest rate swaps, caps, collars,
options and similar arrangements and foreign currency hedges entered
into in respect of any obligations described in clauses (i), (ii) and
(iii) or (C) issued or assumed as the deferred purchase price of
property and all conditional sale obligations of the Company and all
obligations of the Company under any title retention agreement;
(v) all obligations of other Persons of the type referred to in
clauses (ii), (iii) and (iv) and all dividends of other Persons for
the payment of which, in any case, the Company is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise,
including guarantees of such obligations and dividends; and
(vi) all obligations of the Company consisting of modifications,
renewals, extensions, replacements and refundings of any obligations
described in clauses (i), (ii), (iii), (iv) or (v);
unless, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is provided that such obligations, are
not superior in right of payment to the Debentures; provided, however, that
Senior Debt shall not include (1) any obligation of the Company to any
Subsidiary or other Affiliate of the Company, (2) any liability for
federal, state, local or other taxes owed or owing by the Company, (3) any
accounts payable or other liability to trade creditors arising in the
ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities) or (4) that portion of any Indebtedness that
was incurred in violation of this Indenture.
"Sevin Group" means the Estate of Malvin P. Sevin and trusts
created thereunder, Audrey L. Sevin, Irik P. Sevin, Thomas J. Edelman,
Margot Gordon and Phillip Ean Cohen and any trust over which such Persons
have sole voting power.
"Sevin Note" means the promissory note, dated December 31, 1992,
of Irik P. Sevin to the Company in a principal amount of $1,499,378 and due
on December 31, 1993, as the same may be extended (but not otherwise
amended) on a year-by-year basis in accordance with the Company's past
practices and the principal amount of which may not be increased in any one
year by more than the amount of accrued and unpaid interest during the
immediately preceding year.
10
<PAGE>
"Significant Subsidiary" means (i) any Subsidiary of the Company
which at the time of determination either (A) had assets which, as of the
date of the Company's most recent quarterly consolidated balance sheet,
constituted at least 3% of the Company's total assets on a consolidated
basis as of such date, or (B) had revenues for the 12-month period ending
on the date of the Company's most recent quarterly consolidated statement
of income which constituted at least 3% of the Company's total revenues on
a consolidated basis for such period, or (ii) any Subsidiary of the Company
which, if merged with all Defaulting Subsidiaries of the Company, would at
the time of determination either (A) have had assets which, as of the date
of the Company's most recent quarterly consolidated balance sheet, would
have constituted at least 10% of the Company's total assets on a
consolidated basis as of such date or (B) have had revenues for the
12-month period ending on the date of the Company's most recent quarterly
consolidated statement of income which would have constituted at least 10%
of the Company's total revenues on a consolidated basis for such period
(each such determination being made in accordance with generally accepted
accounting principles). "Defaulting Subsidiary" means any Subsidiary of
the Company with respect to which an event described under clause (4), (5),
(6) or (7) of Section 6.01 has occurred and is continuing.
"Stated Maturity" means, with respect to any Indebtedness, the
date specified in such Indebtedness, or in any agreement pursuant to which
such Indebtedness was incurred, as the fixed date on which the principal of
such Indebtedness is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the
repurchase of such Indebtedness at the option of the holder thereof upon
the happening of any contingency unless such contingency has occurred).
"Subordinated Obligations" means any Indebtedness of the Company
(whether outstanding on the date hereof or hereafter incurred) which is
subordinate or junior in right of payment to the Debentures.
"Subsidiary" means a corporation of which a majority of the
Capital Stock having voting power under ordinary circumstances to elect a
majority of the board of directors is owned by (i) the Company, (ii) the
Company and one or more Subsidiaries or (iii) one or more Subsidiaries;
provided, however, that an Unrestricted Subsidiary shall be deemed not to
be a Subsidiary (except as used in the definition thereof).
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec.Sec.
77aaa-77bbbb) as amended and in effect on the date of this Indenture.
"Traber Group" means (i) all the holders of Class C Common Stock
as of the date of this Indenture who are not members of the Sevin Group,
(ii) any Person who receives shares from Persons described in clause (i)
without such transfer of shares being subject to the first refusal right
referred to in the shareholders agreement among the holders of Class C
Common Stock, dated November 25, 1986, as amended through the date of this
Indenture, and (iii) any trust over which Persons described in clause (i)
or (ii) have sole voting power.
"Treasury Rate" as of any date of determination means the yield
to maturity at the time of computation of United States Treasury securities
11
<PAGE>
with a constant maturity (as compiled and published in the most recent
Federal Reserve Statistical Release H.15(519) which has become publicly
available at least two Business Days prior to such date of determination
(or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) of five years.
"Trust Officer" means the Chairman of the Board, the President,
or any other officer or assistant officer of the Trustee assigned by the
Trustee to administer its corporate trust matters.
"Unrestricted Subsidiary" means a Subsidiary of the Company, and
each Subsidiary of such Subsidiary, designated by the Board of Directors of
the Company as an Unrestricted Subsidiary pursuant to a Board Resolution
set forth in an Officers' Certificate and delivered to the Trustee, (a) no
portion of the Indebtedness or any other obligations (contingent or
otherwise) of which (i) is guaranteed by the Company or any other
Subsidiary of the Company, (ii) is recourse to or obligates the Company or
any other Subsidiary of the Company in any way or (iii) subjects any
property or assets of the Company or any other Subsidiary of the Company,
directly or indirectly, contingently or otherwise, to the satisfaction
thereof and (b) with which neither the Company nor any other Subsidiary of
the Company has any obligation (i) to subscribe for additional shares of
Capital Stock or other equity interests therein or (ii) to maintain or
preserve such Subsidiary's financial condition or to cause such Subsidiary
to achieve certain levels of operating results. An Unrestricted Subsidiary
may be designated a Subsidiary, provided that (A) no Default or Event of
Default shall have occurred and be continuing and (B) immediately after
giving effect to such designation, the Company would be able to issue an
additional $1.00 of Funded Debt pursuant to the first paragraph of
"Limitation on Funded Debt."
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof)
for the payment of which the full faith and credit of the United States of
America is pledged and which are not callable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital
Stock of such corporation then outstanding and normally entitled to vote in
the election of directors.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company or another Wholly Owned Subsidiary.
"Working Capital Borrowings" means, on any date of determination,
all Indebtedness of the Company and its Subsidiaries on a consolidated
basis incurred to finance current assets.
"Working Capital Financing Agreement" means any agreement entered
into after the date of this Indenture by the Company and bank lenders
pursuant to which the Company issues Working Capital Borrowings.
12
<PAGE>
"1989 Preferred Stock" means the preference stock of the Company
designated as "1989 Preferred Stock, Par Value $.10."
SECTION 1.02. Other Definitions.
-----------------
Defined in
Term Section
---- ----------
"Affiliate Transaction" . . . . . . . . . . . . . . . . 4.07
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . 6.01
"Change of Control" . . . . . . . . . . . . . . . . . . 4.08
"covenant defeasance option" . . . . . . . . . . . . . 8.01(b)
"Custodian" . . . . . . . . . . . . . . . . . . . . . . 6.01
"Event of Default" . . . . . . . . . . . . . . . . . . 6.01
"fair value" . . . . . . . . . . . . . . . . . . . . . 10.02
"incur" . . . . . . . . . . . . . . . . . . . . . . . . 4.03
"legal defeasance option" . . . . . . . . . . . . . . . 8.01(b)
"pay the Debentures" . . . . . . . . . . . . . . . . . 10.03
"Paying Agent" . . . . . . . . . . . . . . . . . . . . 2.03
"Payment Blockage Period" . . . . . . . . . . . . . . . 10.03
"Payment in Full" . . . . . . . . . . . . . . . . . . . 10.02
"Payment Notice" . . . . . . . . . . . . . . . . . . . 10.03
"Registrar" . . . . . . . . . . . . . . . . . . . . . . 2.03
"Restricted Payment" . . . . . . . . . . . . . . . . . 4.05
SECTION 1.03. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Debentures.
"indenture security holder" means a Debentureholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any
other obligor on the Debentures.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule
have the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context
---------------------
otherwise requires:
(1) a term has the meaning assigned to it;
13
<PAGE>
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as in effect on the date of this Indenture and all
accounting calculations shall be determined in accordance with such
principles;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the
plural include the singular;
(6) unsecured debt shall not be deemed to be subordinate or
junior to secured debt merely by virtue of its nature as unsecured
debt;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with generally accepted accounting principles
and accretion of principal on such security shall be deemed to be the
incurrence of Indebtedness; and
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to
such Preferred Stock, whichever is greater.
ARTICLE 2
The Debentures
--------------
SECTION 2.01. Form and Dating. The Debentures and the Trustee's
---------------
certificate of authentication shall be substantially in the form of Exhibit
A, which is hereby incorporated in and expressly made a part of this
Indenture. The Debentures may have notations, legends or endorsements
required by law, stock exchange rule, agreements to which the Company is
subject, if any, or usage (provided that any such notation, legend or
endorsement is in a form acceptable to the Company). Each Debenture shall
be dated the date of its authentication. The terms of the Debentures set
forth in Exhibit A are part of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall
----------------------------
sign the Debentures for the Company by manual or facsimile signature. The
Company's seal shall be impressed, affixed, imprinted or reproduced on the
Debentures and may be in facsimile form.
If an Officer whose signature is on a Debenture no longer holds
that office at the time the Trustee authenticates the Debenture, the
Debenture shall be valid nevertheless.
14
<PAGE>
A Debenture shall not be valid until an authorized officer of the
Trustee manually signs the certificate of authentication on the Debenture.
The signature shall be conclusive evidence that the Debenture has been
authenticated under this Indenture.
The Trustee shall authenticate and deliver Debentures for
original issue in an aggregate principal amount of up to $75,000,000, upon
a written order of the Company signed by up to two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company. Such order shall specify the amount of the Debentures to be
authenticated and the date on which the original issue of Debentures is to
be authenticated. The aggregate principal amount of Debentures outstanding
at any time may not exceed that amount except as provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Debentures. Unless limited
by the terms of such appointment, an authenticating agent may authenticate
Debentures whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as any Registrar,
Paying Agent or agent for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The Company shall
--------------------------
maintain an office or Agency in the Borough of Manhattan, City of New York
where Securities may be presented for registration of transfer or for
exchange (the "Registrar") and an office or agency where Securities may be
presented for payment (the "Paying Agent"). The Registrar and Paying Agent
initially shall be the Trustee. The Company may change the Registrar or
Paying Agent without prior notice to Holders and the Company or any
Subsidiary may act in such capacity. The Registrar shall keep a register
of the Securities and of their transfer and exchange. The Company may have
one or more co-Registrars and one or more additional Paying Agents. The
term "Paying Agent" includes any additional Paying Agent.
The Company shall enter into an appropriate agency agreement with
any Registrar, Paying Agent or co-registrar not a party to this Indenture,
which shall incorporate the terms of the TIA. The agreement shall
implement the provisions of this Indenture that relate to such agent. The
Company shall notify the Trustee of the name and address of any such agent.
If the Company fails to maintain a Registrar or Paying Agent, the Trustee
shall act as such and shall be entitled to appropriate compensation
therefor pursuant to Section 7.07. The Company or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar,
co-registrar or transfer agent.
SECTION 2.04. Paying Agent To Hold Money in Trust. On or prior
-----------------------------------
to each due date of the principal and interest on any Debenture, the
Company shall deposit with the Paying Agent a sum sufficient to pay such
principal and interest when so becoming due. The Company shall require
each Paying Agent (other than the Trustee) to agree in writing that the
Paying Agent shall hold in trust for the benefit of Debentureholders or the
Trustee all money held by the Paying Agent for the payment of principal of
or interest on the Debentures and shall notify the Trustee of any default
by the Company in making any such payment. If the Company or a Subsidiary
15
<PAGE>
acts as Paying Agent, it shall segregate the money held by it as Paying
Agent and hold it as a separate trust fund. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and to
account for any funds disbursed by the Paying Agent. Upon complying with
this Section, the Paying Agent shall have no further liability for the
money delivered to the Trustee.
SECTION 2.05. Debentureholder Lists. The Trustee shall preserve
---------------------
in as current a form as is reasonably practicable the most recent list
available to it of the names and addresses of Debentureholders. If the
Trustee is not the Registrar, the Company shall furnish to the Trustee, in
writing at least five Business Days before each interest payment date and
at such other times as the Trustee may request in writing, a list in such
form and as of such date as the Trustee may reasonably require of the names
and addresses of Debentureholders.
SECTION 2.06. Transfer and Exchange. The Debentures shall be
---------------------
issued in registered form and shall be transferable only upon the surrender
of a Debenture for registration of transfer. When a Debenture is presented
to the Registrar or a co-registrar with a request to register a transfer,
the Registrar shall register the transfer as requested if the requirements
of Section 8-401(1) of the Uniform Commercial Code are met. When
Debentures are presented to the Registrar or a co-registrar with a request
to exchange them for an equal principal amount of Debentures of other
denominations, the Registrar shall make the exchange as requested if the
same requirements are met. To permit registration of transfers and
exchanges, the Company shall execute and the Trustee shall authenticate
Debentures at the Registrar's or co-registrar's request. The Company may
require payment of a sum sufficient to pay all taxes, assessments or other
governmental charges in connection with any transfer or exchange pursuant
to this Section. The Company shall not be required to make and the
Registrar need not register transfers or exchanges of Debentures selected
for redemption (except, in the case of Debentures to be redeemed in part,
the portion thereof not to be redeemed) or any Debentures for a period of
15 days before a selection of Debentures to be redeemed or 15 days before
an interest payment date.
Prior to the due presentation for registration of transfer of any
Debenture, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the Person in whose name a Debenture is
registered as the absolute owner of such Debenture for the purpose of
receiving payment of principal of and interest on such Debenture and for
all other purposes whatsoever, whether or not such Debenture is overdue,
and none of the Company, the Trustee, the Paying Agent, the Registrar or
any co-registrar shall be affected by notice to the contrary.
All Debentures issued upon any transfer or exchange pursuant to
the terms of this Indenture shall evidence the same debt and shall be
entitled to the same benefits under this Indenture as the Debentures
surrendered upon such transfer or exchange.
SECTION 2.07. Replacement Debentures. If a mutilated Debenture
----------------------
is surrendered to the Registrar or if the Holder of a Debenture claims that
the Debenture has been lost, destroyed or wrongfully taken, the Company
16
<PAGE>
shall issue and the Trustee shall authenticate a replacement Debenture if
the requirements of Section 8-405 of the Uniform Commercial Code are met
and the Holder satisfies any other reasonable requirements of the Trustee.
If required by the Trustee or the Company, such Holder shall furnish an
indemnity bond sufficient in the judgment of the Company and the Trustee to
protect the Company, the Trustee, the Paying Agent, the Registrar and any
co-registrar from any loss which any of them may suffer if a Debenture is
replaced. The Company and the Trustee may charge the Holder for their
expenses in replacing a Debenture.
Every replacement Debenture is an additional obligation of the
Company.
SECTION 2.08. Outstanding Debentures. Debentures outstanding at
----------------------
any time are all Debentures authenticated and delivered by the Trustee
except for those canceled by it, those delivered to it for cancellation and
those described in this Section as not outstanding. A Debenture does not
cease to be outstanding because the Company or an Affiliate of the Company
holds the Debenture.
If a Debenture is replaced pursuant to Section 2.07, it ceases to
be outstanding unless the Trustee and the Company receive proof
satisfactory to them that the replaced Debenture is held by a bona fide
purchaser.
If the Paying Agent segregates and holds in trust, in accordance
with this Indenture, on a redemption date or maturity date money sufficient
to pay all principal and interest payable on that date with respect to the
Debentures (or portions thereof) to be redeemed or maturing, as the case
may be, and the Paying Agent is not prohibited from paying such money to
the Debentureholders on that date pursuant to the terms of this Indenture,
then on and after that date such Debentures (or portions thereof) cease to
be outstanding and interest on them ceases to accrue provided that if the
Debentures are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture, or provision thereof satisfactory to the
Trustee has been made.
SECTION 2.09. Temporary Debentures. Until definitive Debentures
--------------------
are ready for delivery, the Company may prepare and the Trustee shall
authenticate temporary Debentures. Temporary Debentures shall be
substantially in the form of definitive Debentures but may have variations
that the Company considers appropriate for temporary Debentures. Without
unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Debentures and deliver them in exchange for
temporary Debentures.
SECTION 2.10. Cancellation. The Company at any time may deliver
------------
Debentures to the Trustee for cancellation. The Registrar and the Paying
Agent shall forward to the Trustee any Debentures surrendered to them for
registration of transfer, exchange or payment. The Trustee and no one else
shall cancel and destroy (subject to the record retention requirements of
the Exchange Act) all Debentures surrendered for registration of transfer,
exchange, payment or cancellation and deliver a certificate of such
destruction to the Company unless the Company directs the Trustee to
17
<PAGE>
deliver canceled Debentures to the Company. The Company may not issue new
Debentures to replace Debentures it has redeemed, paid or delivered to the
Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
------------------
payment of interest on the Debentures, the Company shall pay defaulted
interest (plus interest on such defaulted interest to the extent lawful) in
any lawful manner. The Company may pay the defaulted interest to the
Persons who are Debentureholders on a subsequent special record date, which
date shall be at least five Business Days prior to the payment date. The
Company shall fix or cause to be fixed any such special record date and
payment date, and, at least 15 days before any such special record date,
the Company shall mail to each Debentureholder a notice that states the
special record date, the payment date and the amount of defaulted interest
to be paid.
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee. If the Company elects to
------------------
redeem Debentures pursuant to paragraph 5 of the Debentures, it shall
notify the Trustee in writing of the redemption date, the principal amount
of Debentures to be redeemed and the paragraph of the Debentures pursuant
to which the redemption will occur.
The Company shall give each notice to the Trustee provided for in
this Section at least 60 days before the redemption date unless the Trustee
consents to a shorter period. Such notice shall be accompanied by an
Officers' Certificate and an Opinion of Counsel from the Company to the
effect that such redemption will comply with the conditions herein. If
fewer than all the Debentures are to be redeemed, the record date relating
to such redemption shall be selected by the Company and given to the
Trustee, which record date shall be not less than 15 days after the date of
notice to the Trustee.
SECTION 3.02. Selection of Debentures To Be Redeemed. If fewer
--------------------------------------
than all the Debentures are to be redeemed, the Trustee shall select the
Debentures to be redeemed pro rata or by lot or by a method that complies
with applicable legal and securities exchange requirements, if any, and
that the Trustee considers fair and appropriate and in accordance with
methods generally used at the time of selection by fiduciaries in similar
circumstances. The Trustee shall make the selection from outstanding
Debentures not previously called for redemption. The Trustee may select
for redemption portions of the principal of Debentures that have
denominations larger than $1,000. Debentures and portions of them the
Trustee selects shall be in amounts of $1,000 or a whole multiple of
$1,000. Provisions of this Indenture that apply to Debentures called for
redemption also apply to portions of Debentures called for redemption. The
Trustee shall notify the Company promptly of the Debentures or portions of
Debentures to be redeemed.
18
<PAGE>
SECTION 3.03. Notice of Redemption. At least 30 days but not
--------------------
more than 60 days before a date for redemption of Debentures, the Company
shall mail a notice of redemption by first-class mail to each Holder of
Debentures to be redeemed.
The notice shall identify the Debentures to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Debentures called for redemption must be surrendered to
the Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Debentures are to be
redeemed, the identification and principal amounts of the particular
Debentures to be redeemed;
(6) that, unless the Company defaults in making such redemption
payment or the Paying Agent is prohibited from making such payment
pursuant to the terms of this Indenture, interest on Debentures (or
portion thereof) called for redemption ceases to accrue on and after
the redemption date;
(7) the paragraph of the Debentures pursuant to which the
Debentures called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Debentures.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such
event, the Company shall provide the Trustee with the information required
by this Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
------------------------------
redemption is mailed, Debentures called for redemption become due and
payable on the redemption date and at the redemption price stated in the
notice. Upon surrender to the Paying Agent, such Debentures shall be paid
at the redemption price stated in the notice, plus accrued interest to the
redemption date. Failure to give notice or any defect in the notice to any
Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to the
---------------------------
redemption date, the Company shall deposit with the Paying Agent (or, if
the Company or a Subsidiary is the Paying Agent, shall segregate and hold
in trust) money sufficient to pay the redemption price of and accrued
interest on all Debentures to be redeemed on that date other than
Debentures or portions of Debentures called for redemption which have been
delivered by the Company to the Trustee for cancellation.
19
<PAGE>
SECTION 3.06. Debentures Redeemed in Part. Upon surrender of a
---------------------------
Debenture that is redeemed in part, the Company shall execute and the
Trustee shall authenticate for the Holder (at the Company's expense) a new
Debenture equal in principal amount to the unredeemed portion of the Deben-
ture surrendered.
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Debentures. The Company shall promptly
---------------------
pay the principal of and interest on the Debentures on the dates and in the
manner provided in the Debentures and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the
Trustee or the Paying Agent holds in accordance with this Indenture money
sufficient to pay all principal and interest then due and the Trustee or
the Paying Agent, as the case may be, is not prohibited from paying such
money to the Debentureholders on that date pursuant to the terms of this
Indenture.
The Company shall pay interest on overdue principal at the rate
specified therefor in the Debentures, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. SEC Reports Whether or not required by the rules
-----------
and regulations of the SEC, so long as any Debentures are outstanding, the
Company shall furnish to the Holders of Debentures all quarterly and annual
financial information that would be required to be contained in a filing
with the SEC on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants. In addition, whether or not required by the rules and
regulations of the SEC, the Company shall file a copy of all such
information with the SEC for public availability and make such information
available to investors who request it in writing. The Company also shall
comply with the provisions of Sec. 314(a) of the TIA.
SECTION 4.03. Limitation on Funded Debt. (a) The Company shall
-------------------------
not, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable with respect to
(collectively, "incur") any Funded Debt unless, after giving effect
thereto, the Company's Consolidated EBITDA Coverage Ratio exceeds 2.0 to 1.
(b) Notwithstanding Section 4.03(a), the Company may incur the
following Funded Debt: (i) Funded Debt owed to and held by a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such Funded
Debt (other than to a Wholly Owned Subsidiary) shall be deemed, in each
case, to constitute the incurrence of such Funded Debt by the Company; (ii)
the Debentures and Funded Debt issued in exchange for, or the proceeds of
20
<PAGE>
which are used to refund or refinance, any Funded Debt permitted by this
clause (ii); provided, however, that (1) the principal amount of the Funded
Debt so incurred shall not exceed the principal amount of the Funded Debt
so exchanged, refunded or refinanced and (2) the Funded Debt so incurred
(A) shall not mature prior to the Stated Maturity of the Funded Debt so
exchanged, refunded or refinanced and (B) shall have an Average Life equal
to or greater than the remaining Average Life of the Funded Debt so
exchanged, refunded or refinanced; (iii) Funded Debt (other than Funded
Debt described in clause (i) or (ii) of this paragraph) outstanding on the
date hereof and Funded Debt issued in exchange for, or the proceeds of
which are used to refund or refinance, any Funded Debt permitted by this
clause (iii) or by Section 4.03(a); provided, however, that (1) the
principal amount of the Funded Debt so incurred shall not exceed the
principal amount of the Funded Debt so exchanged, refunded or refinanced,
(2) the Funded Debt so incurred (A) shall not mature prior to the Stated
Maturity of the Funded Debt so exchanged, refunded or refinanced and (B)
shall have an Average Life equal to or greater than the remaining Average
Life of the Funded Debt so exchanged, refunded or refinanced and (3) if the
Funded Debt so exchanged, refunded or refinanced is a Subordinated
Obligation, the Funded Debt so incurred shall be subordinated to the
Debentures; and (iv) additional Funded Debt in an aggregate amount not to
exceed $50 million at any one time outstanding.
(c) The Company shall not create, incur, assume or permit to
exist any Lien (other than Permitted Liens) upon or with respect to any of
the property of the Company or any Subsidiary to secure Funded Debt that is
not Senior Debt unless contemporaneously therewith effective provision is
made to secure the Debentures equally and ratably with such Funded Debt for
so long as such Funded Debt is secured by a Lien.
SECTION 4.04. Limitation on Indebtedness and Preferred Stock of
-------------------------------------------------
Subsidiaries. The Company shall not permit any Subsidiary to incur any
- ------------
Indebtedness or issue any Preferred Stock except: (i) Indebtedness or
Preferred Stock issued to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness or Preferred Stock (other than to the Company or a Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the
incurrence of such Indebtedness or the issuance of such Preferred Stock, as
the case may be, by the issuer thereof; (ii) Indebtedness incurred or
Preferred Stock of a Subsidiary issued and outstanding on or prior to the
date on which such Subsidiary was acquired by the Company (other than
Indebtedness incurred or Preferred Stock issued in contemplation of, as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company), provided that at the time such Subsidiary is
acquired by the Company, after giving effect to such Indebtedness or
Preferred Stock of such Subsidiary, the Company's Consolidated EBITDA
Coverage Ratio exceeds 2.0 to 1; (iii) Indebtedness or Preferred Stock
(other than Indebtedness or Preferred Stock described in clause (i), (ii),
(iv) or (vi) of this Section 4.04) incurred or issued and outstanding on or
prior to the date of this Indenture; (iv) Indebtedness of a Subsidiary
21
<PAGE>
consisting of guarantees issued by such Subsidiary and outstanding on the
date of this Indenture and Indebtedness of a Subsidiary consisting of
guarantees issued subsequent to the date of this Indenture, in each case,
to the extent such guarantee guarantees Bank Debt; (v) Indebtedness of a
Subsidiary (other than Indebtedness described in clause (iv) above)
consisting of guarantees of Funded Debt of the Company permitted by Section
4.03(a), provided that contemporaneously with the incurrence of such
Indebtedness by such Subsidiary, such Subsidiary issues a guarantee for the
pro rata benefit of the Holders of the Debentures that is subordinated to
such Indebtedness of such Subsidiary to the same extent as the Debentures
are subordinated to such Funded Debt of the Company; and (vi) Indebtedness
or Preferred Stock issued in exchange for, or the proceeds of which are
used to refund or refinance, Indebtedness or Preferred Stock referred to
in the foregoing clause (ii) or (iii); provided, however, that (1) the
principal amount of such Indebtedness or Preferred Stock so incurred or
issued shall not exceed the principal amount of the Indebtedness or
Preferred Stock so exchanged or refinanced and (2) the Indebtedness or
Preferred Stock so incurred or issued shall (A) have a Stated Maturity
later than the Stated Maturity of the Indebtedness or Preferred Stock being
exchanged or refinanced and (B) shall have an Average Life equal to or
greater than the remaining Average Life of the Indebtedness or Preferred
Stock so exchanged, refunded or refinanced.
SECTION 4.05. Limitation on Restricted Payments. (a) The
---------------------------------
Company shall not, and shall not permit any Subsidiary, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on
or in respect of its Capital Stock (including any payment in connection
with any merger or consolidation involving the Company) or to the direct or
indirect holders of its Capital Stock (except (x) dividends or
distributions payable solely in its Non-Convertible Capital Stock or in
options, warrants or other rights to purchase its Non-Convertible Capital
Stock and (y) dividends or distributions payable to the Company or a
Subsidiary, and, if a Subsidiary is not wholly owned, to the other
shareholders of such Subsidiary on a pro rata basis in accordance with
their ownership interest in such Subsidiary), (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company or
of any direct or indirect parent of the Company, (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior
to scheduled maturity, scheduled repayment or scheduled sinking fund
payment, any Subordinated Obligations (other than the purchase, repurchase
or other acquisition of Subordinated Obligations purchased in anticipation
of satisfying a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition) or
(iv) make any Restricted Investment (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition or
retirement, or any such Restricted Investment, being herein referred to as
a "Restricted Payment") if at the time the Company or such Subsidiary makes
such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); or (2) the aggregate amount of such
Restricted Payment and all other Restricted Payments subsequent to December
31, 1993 would exceed the sum of: (A) 50% of the Cash Flow of the Company
and its Subsidiaries accrued during the period (treated as one accounting
period) subsequent to December 31, 1993, to the end of the most recent
fiscal quarter ending at least 45 days prior to the date of such Restricted
22
<PAGE>
Payment (or, in case such Cash Flow shall be a deficit, minus 100% of such
deficit); (B) the aggregate Net Cash Proceeds received by the Company from
the issue or sale of its Capital Stock subsequent to December 31, 1993
(other than an issuance or sale to a Subsidiary or Unrestricted Subsidiary
of the Company or an employee stock ownership plan or other trust
established by the Company or any Subsidiary or Unrestricted Subsidiary of
the Company); (C) the amount by which Indebtedness of the Company is
reduced on the Company's balance sheet upon the conversion or exchange
(other than by a Subsidiary) subsequent to December 31, 1993, of any
Indebtedness of the Company convertible or exchangeable for Capital Stock
of the Company (less the amount of any cash, or other property, distributed
by the Company upon such conversion or exchange); and (D) $20 million.
(b) The provisions of Section 4.05(a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of
the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other than
Capital Stock issued or sold to a Subsidiary or an employee stock ownership
plan or other trust established by the Company or any Subsidiary);
provided, however, that (A) such purchase or redemption shall be excluded
in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (2)(B) of
Section 4.05(a); (ii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this Section 4.05; provided, however, that at the time of
payment of such dividend, no other Default shall have occurred and be
continuing (or result therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of Restricted
Payments; (iii) dividends declared and paid in respect of the Company's
Class B Common Stock outstanding on the date of this Indenture in an amount
in respect of any fiscal year not to exceed 1.5% of the Company's Class B
Cash Flow for the immediately preceding fiscal year (provided that no
dividend shall theretofore have been declared on the Class A Common Stock
or Class C Common Stock in the same fiscal year); provided, however, that
at the time of such dividend, redemption or exchange, no Default shall have
occurred or be continuing; provided further, however, that any such
dividends, redemptions and exchanges shall be included in the calculation
of Restricted Payments; (iv) dividends on, and mandatory redemptions and
exchanges of, the 1989 Preferred Stock outstanding on the date of this
Indenture; provided, however, that at the time of such dividend, redemption
or exchange, no Default shall have occurred or be continuing; provided
further, however, that any such dividends, redemptions and exchanges shall
be excluded in the calculation of Restricted Payments; or (v) Restricted
Investments in an aggregate amount not to exceed the sum of (A) $25
million, plus (B) $5 million on each anniversary of the date of this
Indenture, plus (C) the amount of all dividends or other distributions
received in cash by the Company or any of its Wholly Owned Subsidiaries
from, and the amount of any Net Cash Proceeds to the Company or any of its
Wholly Owned Subsidiaries from the sale of Capital Stock (other than a sale
of Capital Stock to the Company, a Subsidiary or Unrestricted Subsidiary of
the Company or an employee stock ownership plan or other trust established
by the Company or any Subsidiary or Unrestricted Subsidiary of the Company)
of, an Unrestricted Subsidiary of the Company, to the extent that the
aggregate amount of such dividends or other distributions, together with
23
<PAGE>
the aggregate amount of any such Net Cash Proceeds, do not exceed the
aggregate amount of Restricted Investments made by the Company in such
Unrestricted Subsidiary since the date of this Indenture; provided,
however, that Restricted Investments permitted by this clause (v) shall be
excluded in the calculation of the amount of Restricted Payments.
SECTION 4.06. Limitation on Restrictions on Distributions from
------------------------------------------------
Subsidiaries. The Company shall not, and shall not permit any Subsidiary
- ------------
to, create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Subsidiary to:
(i) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness owed to the Company, (ii) make any loans or advances
to the Company or (iii) transfer any of its property or assets to the
Company, except: (1) any encumbrance or restriction pursuant to an
agreement in effect on the date of this Indenture; (2) any encumbrance or
restriction with respect to a Subsidiary pursuant to an agreement relating
to any Indebtedness issued by such Subsidiary on or prior to the date on
which such Subsidiary was acquired by the Company (other than Indebtedness
issued in contemplation of, as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Company) and
outstanding on such date; (3) any encumbrance or restriction pursuant to an
agreement effecting a refinancing of Indebtedness issued pursuant to an
agreement referred to in the foregoing clause (1) or (2) or contained in
any amendment to an agreement referred to in the foregoing clause (1) or
(2); provided, however, that the encumbrances and restrictions contained in
any such refinancing agreement or amendment are no less favorable to
Holders of the Debentures than the encumbrances and restrictions contained
in such agreements; (4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold interests
to the extent such provisions restrict the transfer of the lease; (5) in
the case of clause (iii) above, restrictions contained in security
agreements securing Indebtedness of a Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements; and (6) any restriction with respect to a Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary pending
the closing of such sale or disposition.
SECTION 4.07. Limitation on Transactions with Affiliates. The
------------------------------------------
Company shall not, and shall not permit any Subsidiary to, conduct any
business or enter into any transaction or series of similar transactions in
an aggregate amount in excess of $100,000 (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of the Company or any legal or beneficial owner of 5% or more of
any class of Capital Stock of the Company or with an Affiliate of any such
owner (any such business, transaction or series of similar transactions, an
"Affiliate Transaction") unless the terms of such Affiliate Transaction
are: (i) set forth in writing, (ii) fair to the Company and its
Subsidiaries from a financial point of view, (iii) in the case of any
Affiliate Transaction (other than an Affiliate Transaction with an
Unrestricted Subsidiary of the Company) in an aggregate amount in excess of
24
<PAGE>
$500,000, the disinterested members of the Board of Directors have
determined in good faith that the criteria set forth in clause (ii) are
satisfied and (iv) in the case of any Affiliate Transaction involving an
Unrestricted Subsidiary of the Company in an aggregate amount in excess of
$2.0 million, the members of the Board of Directors have determined in good
faith that the criteria set forth in clause (ii) are satisfied. This
covenant shall not prohibit: (i) any Restricted Payment permitted under
"Limitation on Restricted Payments," (ii) any issuance of securities, or
other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) loans or advances
to employees in the ordinary course of business; (iv) the payment of
reasonable fees to directors of the Company and its Subsidiaries who are
not employees of the Company or its Subsidiaries, (v) any transaction
between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries or (vi) the Investment represented by the Sevin Note.
SECTION 4.08. Change of Control. (a) Upon the occurrence of a
-----------------
Change of Control, each Holder of Debentures shall have the right to
require the Company to repurchase all or any part of such Holder's
Debentures at a repurchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase
. A "Change of Control" will be deemed to occur if (i) any "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act), other than the members of the Sevin Group and the Traber Group,
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a person shall be deemed to be the beneficial
owner of all shares that such person has the right to acquire, regardless
of whether such right is exercisable immediately or after the passage of
time), directly or indirectly, of 50% or more of the total voting power of
all classes of the Voting Stock of the Company and the members of the Sevin
Group and the Traber Group cease to have the right to appoint at least a
majority of the members of the Board of Directors of the Company, (ii) the
holders of the 10 1/8% Notes have the right to require the Company to purchase
any such 10 1/8% Notes pursuant to Section 4.08 of the Indenture, dated as of
April 1, 1993, between the Company and Chemical Bank, as trustee, relating
thereto, (iii) any holder of the 11.85% Notes, the 12.17% Notes or the
12.18% Notes exercises its right to declare any such notes to be due and
payable pursuant to Section 2.1 of the Note Agreement, dated as of
September 1, 1988, relating thereto (the "1988 Note Agreement"), (iv) any
holder of the 14.10% Notes exercises its right to declare any such notes to
be due and payable pursuant to Section 5.2(A) of the Note Agreement, dated
as of January 15, 1991, relating thereto (the "1991 Note Agreement") and
any holder of the 2000 Notes exercises its right to declare any such notes
Due March 1, 2000 to be due and payable pursuant to Section 5.2(A) of the
Purchase Agreement, dated as of September 1, 1991, relating thereto (the
"1991 Purchase Agreement") or (v) any holder of 11.85% Notes, 12.17% Notes,
12.18% Notes, 14.10% Notes or 2000 Notes shall have received any
consideration (whether in the form of cash, a change in the rate of
interest relating to such notes, a change in any other provision of the
terms of such notes, or otherwise) to amend, modify, waive or otherwise
give up its right to declare any such notes to be due and payable upon a
"Change of Ownership," as defined in the 1988 Note Agreement, the 1991 Note
Agreement or the 1991 Purchase Agreement, as the case may be; provided,
25
<PAGE>
however, that an amendment to or waiver or other modification of Section
2.1 of the 1988 Note Agreement, Section 5.2(A) of the 1991 Note Agreement
or 5.2(A) of the 2000 Purchase Agreement shall not, in the absence of any
other consideration, constitute a Change of Control under the Indenture.
(b) Within 30 days following any Change of Control, the Company
shall mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such
Holder has the right to require the Company to purchase such
Holder's Debentures at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase;
(2) the circumstances and relevant facts regarding such
Change of Control (including information with respect to pro
forma historical income, cash flow and capitalization after
giving effect to such Change of Control);
(3) the purchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed);
and
(4) the instructions determined by the Company, consistent
with this Section, that a Holder must follow in order to have its
Debentures purchased.
If, at the time of a Change of Control, the Company is prohibited by the
terms of Bank Debt from purchasing Debentures that may be tendered by
Holders at the purchase price described above as a result of such Change of
Control, then prior to the mailing of the notice to Holders described in
this paragraph but in any event within 30 days following any Change of
Control, the Company shall (i) repay in full all Bank Debt or offer to
repay in full all Bank Debt and repay the Bank Debt of each lender who has
accepted such offer or (ii) obtain the requisite consent under the Bank
Debt to permit the purchase of the Debentures as described above. The
Company shall first comply with the covenant described in the preceding
sentence before it shall be required to purchase Debentures in the event of
a Change of Control, provided that the Company's failure to comply with the
covenant described in the preceding sentence shall constitute a Default
described in clause 3 of Section 6.01.
(c) Holders electing to have a Debenture purchased shall be
required to surrender the Debenture, with an appropriate form duly
completed, to the Company at the address specified in the notice at least
10 Business Days prior to the purchase date. Holders shall be entitled to
withdraw their election if the Trustee or the Company receives not later
than three Business Days prior to the purchase date, a facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Debenture which was delivered for purchase by the Holder and
a statement that such Holder is withdrawing his election to have such
Debenture purchased.
26
<PAGE>
(d) On the purchase date, all Debentures purchased by the
Company under this Section shall be delivered by the Trustee for
cancellation, and the Company shall pay the purchase price plus accrued and
unpaid interest, if any, to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the purchase of Debentures pursuant
to this Section. To the extent that the provisions of any securities laws
or regulations conflict with provisions of this Section, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this Section by virtue
thereof.
SECTION 4.09. Limitation on Liens on Subsidiary Stock. The
---------------------------------------
Company shall not directly or indirectly create, assume or suffer to exist,
any Lien on any Capital Stock of any of its Subsidiaries.
SECTION 4.10. Compliance Certificate. The Company shall deliver
----------------------
to the Trustee within 120 days after the end of each fiscal year of the
Company an Officers' Certificate, one signer of which shall be the
principal financial officer, principal executive officer or principal
accounting officer, stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default by the Company and whether or not the signers know
of any Default that occurred during such period. If they do, the
certificate shall describe the Default, its status and what action the
Company is taking or proposes to take with respect thereto. The Company
also shall comply with TIA Sec. 314(a)(4).
SECTION 4.11. Further Instruments and Acts. Upon request of the
----------------------------
Trustee, the Company shall execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer Assets. The
-----------------------------------------
Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person,
unless:
(i) the resulting, surviving or transferee Person (if not the
Company) shall be a Person organized and existing under the laws of
the United States of America, any State thereof or the District of
Columbia and such Person shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under
the Debentures and this Indenture;
27
<PAGE>
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the
resulting, surviving or transferee Person or any Subsidiary as a
result of such transaction as having been issued by such Person or
such Subsidiary at the time of such transaction), no Default shall
have occurred and be continuing;
(iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee Person would be able to incur an
additional $1.00 of Funded Debt pursuant to Section 4.03(a); and
(iv) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture
(if any) comply with this Indenture.
The resulting, surviving or transferee Person shall be the
successor Company and shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture, but
the predecessor Company in the case of a conveyance, transfer or lease
shall not be released from the obligation to pay the principal of and
interest on the Debentures.
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default. An "Event of Default" occurs
-----------------
if:
(1) the Company defaults in any payment of interest on any
Debenture when the same becomes due and payable, whether or not such
payment shall be prohibited by Article 10, and such Default continues
for a period of 30 days;
(2) the Company (i) defaults in the payment of the principal of
any Debenture when the same becomes due and payable at its Stated
Maturity, upon redemption, upon declaration or otherwise, whether or
not such payment shall be prohibited by Article 10 or (ii) fails to
redeem or purchase Debentures when required pursuant to this Indenture
or the Debentures, whether or not such redemption or purchase shall be
prohibited by Article 10;
(3) the Company fails to comply with any of its agreements in
the Debentures or this Indenture (other than those referred to in (1)
or (2) above) and such failure continues for 30 days after the notice
specified below;
(4) Indebtedness of the Company or any Significant Subsidiary is
not paid within any applicable grace period after final maturity or is
accelerated by the Holders thereof because of a default, the total
amount of such Indebtedness unpaid or accelerated exceeds $1,000,000
or its foreign currency equivalent;
28
<PAGE>
(5) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it
in an involuntary case;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(6) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or
any Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 60 days; or
(7) any judgment or decree for the payment of money in excess of
$1,000,000 is entered against the Company or any Significant
Subsidiary and is not discharged and either (A) an enforcement
proceeding has been commenced by any creditor upon such judgment or
decree or (B) there is a period of 60 days following the entry of such
judgment or decree during which such judgment or decree is not
discharged, waived or the execution thereof stayed and, in the case of
(B), such default continues for 10 days after the notice specified
below.
The foregoing shall constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
The term "Bankruptcy Law" means Title 11, United States Code, or
------------------
any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
29
<PAGE>
The Company shall deliver to the Trustee, within 30 days after
the occurrence thereof, written notice in the form of an Officers'
Certificate of any event which with the giving of notice and the lapse of
time would become an Event of Default under clause (3) or (7), its status
and what action the Company is taking or proposes to take with respect
thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than
------------
an Event of Default specified in Section 6.01(5) or (6) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or
the Holders of at least 25% in principal amount of the Debentures by notice
to the Company and the Trustee, may declare the principal of and accrued
interest on all the Debentures to be due and payable. Upon such a
declaration, such principal and interest shall be due and payable
immediately. If an Event of Default specified in Section 6.01(5) or (6)
with respect to the Company occurs, the principal of and interest on all
the Debentures shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
Debentureholders. The Holders of a majority in principal amount of the
Debentures by notice to the Trustee may rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived
except nonpayment of principal or interest that has become due solely
because of acceleration. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs and
--------------
is continuing, the Trustee may pursue any available remedy to collect the
payment of principal of or interest on the Debentures or to enforce the
performance of any provision of the Debentures or this Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Debentures or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Debentureholder in exercising any
right or remedy accruing upon an Event of Default shall not impair the
right or remedy or constitute a waiver of or acquiescence in the Event of
Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
-----------------------
majority in principal amount of the Debentures by notice to the Trustee may
waive an existing Default and its consequences except (i) a Default in the
payment of the principal of or interest on a Debenture or (ii) a Default in
respect of a provision that under Section 9.02 cannot be amended without
the consent of each Debentureholder affected. When a Default is waived, it
is deemed cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority in
-------------------
principal amount of the Debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the
Trustee may refuse to follow any direction that conflicts with law or this
Indenture or, subject to Section 7.01, that the Trustee determines is
30
<PAGE>
unduly prejudicial to the rights of other Debentureholders or would involve
the Trustee in personal liability; provided, however, that the Trustee may
take any other action deemed proper by the Trustee that is not inconsistent
with such direction. Prior to taking any action hereunder, the Trustee
shall be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking
such action.
SECTION 6.06. Limitation on Suits. A Debentureholder may not
-------------------
pursue any remedy with respect to this Indenture or the Debentures unless:
(1) the Holder gives to the Trustee written notice stating that
an Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the
Debentures make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of security or indemnity;
and
(5) the Holders of a majority in principal amount of the
Debentures do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Debentureholder may not use this Indenture to prejudice the
rights of another Debentureholder or to obtain a preference or priority
over another Debentureholder.
SECTION 6.07. Rights of Holders To Receive Payment.
------------------------------------
Notwithstanding any other provision of this Indenture, the right of any
Holder to receive payment of principal of and interest on the Debentures
held by such Holder, on or after the respective due dates expressed in the
Debentures, or to bring suit for the enforcement of any such payment on or
after such respective dates, shall not be impaired or affected without the
consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
--------------------------
Default in payment of interest or principal specified in Section 6.01(1) or
(2) occurs and is continuing, the Trustee may recover judgment in its own
name and as trustee of an express trust against the Company for the whole
amount of principal and interest remaining unpaid (together with interest
on such unpaid interest to the extent lawful) and the amounts provided for
in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may
--------------------------------
file such proofs of claim and other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee and the
Debentureholders allowed in any judicial proceedings relative to the
Company, its creditors or its property and, unless prohibited by law or
applicable regulations, may vote on behalf of the Holders in any election
31
<PAGE>
of a trustee in bankruptcy or other Person performing similar functions,
and any Custodian in any such judicial proceeding is hereby authorized by
each Holder to make payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and its counsel, and any other amounts due the Trustee under Section
7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or
----------
property pursuant to this Article 6, it shall pay out the money or property
in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to holders of Senior Debt to the extent required by
Article 10;
THIRD: to Debentureholders for amounts due and unpaid on the
Debentures for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Debentures for principal and interest, respectively; and
FOURTH: to the Company.
The Trustee may fix a record date and payment date for any
payment to Debentureholders pursuant to this Section. At least 15 days
before such record date, the Company shall mail to each Debentureholder and
the Trustee a notice that states the record date, the payment date and
amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
---------------------
enforcement of any right or remedy under this Indenture or in any suit
against the Trustee for any action taken or omitted by it as Trustee, a
court in its discretion may require the filing by any party litigant in the
suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in the suit, having due regard to the
merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.07 or a suit by Holders of more than 10% in principal
amount of the Debentures.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to
--------------------------------
the extent it may lawfully do so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay or extension law wherever enacted, now or at any time
hereafter in force, which may affect the covenants or the performance of
this Indenture; and the Company (to the extent that it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law, and shall
not hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power
as though no such law had been enacted.
32
<PAGE>
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has
-----------------
occurred and is continuing, the Trustee shall exercise the rights and
powers vested in it by this Indenture and use the same degree of care and
skill in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b) of
this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that
33
<PAGE>
repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any
-----------------
document believed by it to be genuine and to have been signed or presented
by the proper Person. The Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate and/or an Opinion of Counsel. The Trustee
shall not be liable for any action it takes or omits to take in good faith
in reliance on the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within
its rights or powers; provided, however, that the Trustee's conduct does
not constitute wilful misconduct, negligence or bad faith.
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture
and the Debentures shall be full and complete authorization and protection
from liability in respect to any action taken, omitted or suffered by it
hereunder in good faith and in accordance with the advice or opinion of
such counsel.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
----------------------------
individual or any other capacity may become the owner or pledgee of
Debentures and may otherwise deal with the Company or its affiliates with
the same rights it would have if it were not Trustee. Any Paying Agent,
Registrar, co-registrar or co-paying agent may do the same with like
rights. However, the Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
--------------------
responsible for and makes no representation as to the validity or adequacy
of this Indenture or the Debentures, it shall not be accountable for the
Company's use of the proceeds from the Debentures, and it shall not be
responsible for any statement of the Company in the Indenture or in any
document issued in connection with the sale of the Debentures or in the
Debentures other than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
------------------
continuing and if it is known to the Trustee, the Trustee shall mail to
each Debentureholder notice of the Default within 90 days after it occurs.
Except in the case of a Default in payment of principal of or interest on
any Debenture (including payments pursuant to the mandatory redemption
provisions of such Debenture), the Trustee may withhold the notice if and
34
<PAGE>
so long as a committee of its Trust Officers in good faith determines that
withholding the notice is in the interests of Debentureholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
-----------------------------
practicable after each May 15 beginning with the May 15 following the date
of this Indenture, and in any event prior to July 15 in each year, the
Trustee shall mail to each Debentureholder a brief report dated as of May
15 that complies with TIA Sec. 313(a). The Trustee also shall comply with TIA
Sec. 313(b).
A copy of each report at the time of its mailing to
Debentureholders shall be filed with the SEC and each stock exchange (if
any) on which the Debentures are listed. The Company agrees to notify
promptly the Trustee whenever the Debentures become listed on any stock
exchange and of any delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall pay
--------------------------
to the Trustee from time to time reasonable compensation for its services.
The Trustee's compensation shall not be limited by any law on compensation
of a trustee of an express trust. The Company shall reimburse the Trustee
upon request for all reasonable out-of-pocket expenses incurred or made by
it, including costs of collection, in addition to the compensation for its
services. Such expenses shall include the reasonable compensation and
expenses, disbursements and advances of the Trustee's agents, counsel,
accountants and experts. The Company shall indemnify the Trustee against
any and all loss, liability or expense (including attorneys' fees) incurred
by it in connection with the administration of this trust and the
performance of its duties hereunder. The Trustee shall notify the Company
promptly of any claim for which it may seek indemnity. Failure by the
Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder. The Company shall defend the claim and the Trustee
may have separate counsel and the Company shall pay the fees and expenses
of such counsel. The Company need not reimburse any expense or indemnify
against any loss, liability or expense incurred by the Trustee through the
Trustee's own wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Debentures on all money or property
held or collected by the Trustee other than money or property held in trust
to pay principal of and interest on particular Debentures.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(5) or (6) with
respect to the Company, the expenses are intended to constitute expenses of
administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign at
----------------------
any time by so notifying the Company. The Holders of a majority in
principal amount of the Debentures may remove the Trustee by so notifying
the Trustee and may appoint a successor Trustee. The Company shall remove
the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
35
<PAGE>
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes
charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being
referred to herein as the retiring Trustee), the Company shall promptly
appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and
the successor Trustee shall have all the rights, powers and duties of the
Trustee under this Indenture. The successor Trustee shall mail a notice of
its succession to Debentureholders. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee,
subject to the lien provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after
the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in principal amount of the Debentures
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Debentureholder may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
---------------------------
consolidates with, merges or converts into, or transfers all or
substantially all its corporate trust business or assets to, another
corporation or banking association, the resulting, surviving or transferee
corporation without any further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts
created by this Indenture any of the Debentures shall have been
authenticated but not delivered, any such successor to the Trustee may
adopt the certificate of authentication of any predecessor Trustee, and
deliver such Debentures so authenticated; and in case at that time any of
the Debentures shall not have been authenticated, any successor to the
Trustee may authenticate such Debentures either in the name of any
predecessor hereunder or in the name of the successor to the Trustee; and
in all such cases such certificates shall have the full force which it is
anywhere in the Debentures or in this Indenture provided that the
certificate of the Trustee shall have.
36
<PAGE>
SECTION 7.10. Eligibility; Disqualification. The Trustee shall
-----------------------------
at all times satisfy the requirements of TIA Sec. 310(a). The Trustee shall
have a combined capital and surplus of at least $50,000,000 as set forth in
its most recent published annual report of condition. The Trustee shall
comply with TIA Sec. 310(b); provided, however, that there shall be excluded
from the operation of TIA Sec. 310(b)(1) any indenture or indentures under
which other Debentures or certificates of interest or participation in
other Debentures of the Company are outstanding, including but not limited
to the Indenture, dated as of July 1, 1984, between the Company and the
Trustee, as amended, relating to the Company's 11.4% Subordinated Notes due
1993 and the Indenture, dated as of October 1, 1985, between the Company
and the Trustee, as amended, relating to the Company's 14.275% Subordinated
Notes due 1995, if the requirements for such exclusion set forth in TIA
Sec. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Company.
-------------------------------------------------
The Trustee shall comply with TIA Sec. 311(a), excluding any creditor
relationship listed in TIA Sec. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Sec. 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Debentures; Defeasance.
------------------------------------------------
(a) When (i) the Company delivers to the Trustee all outstanding Debentures
(other than Debentures replaced pursuant to Section 2.07) for cancellation
or (ii) all outstanding Debentures have become due and payable and the
Company irrevocably deposits with the Trustee funds sufficient to pay at
maturity all outstanding Debentures, including interest thereon (other than
Debentures replaced pursuant to Section 2.07), and if in either case the
Company pays all other sums payable hereunder by the Company, then this
Indenture shall, subject to Sections 8.01(c) and 8.06 cease to be of
further effect. The Trustee shall acknowledge satisfaction and discharge
of this Indenture on demand of the Company accompanied by an Officers'
Certificate and an Opinion of Counsel and at the cost and expense of the
Company.
(b) Subject to Sections 8.01(c), 8.02 and 8.06, the Company at
any time may terminate (i) all its obligations under the Debentures and
this Indenture ("legal defeasance option") or (ii) its obligations under
Sections 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09 and 5.01(iii) and the
operation of Sections 6.01(3), 6.01(4), 6.01(5) and (6) (in the case of
clauses (5) and (6), only with respect to Significant Subsidiaries) and
6.01(7) ("covenant defeasance option"). The Company may exercise its legal
defeasance option notwithstanding its prior exercise of its covenant
defeasance option.
If the Company exercises its legal defeasance option, payment of
the Debentures may not be accelerated because of an Event of Default. If
the Company exercises its covenant defeasance option, payment of the
Debentures may not be accelerated because of an Event of Default specified
in 6.01(3), 6.01(4), 6.01(5) and (6) (with respect to Significant
37
<PAGE>
Subsidiaries) and 6.01(7) or because of the failure of the Company to
comply with Article 4 of this Agreement (other than Sections 4.01, 4.02,
4.10 and 4.11) or with clause (iii) of Section 5.01.
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall acknowledge in writing the
discharge of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.04,
8.05 and 8.06 shall survive until the Debentures have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. Conditions to Defeasance. The Company may
------------------------
exercise its legal defeasance option or its covenant defeasance option only
if:
(1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations for the payment of principal and
interest on the Debentures to maturity or redemption, as the case may
be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and
interest when due on all the Debentures to maturity or redemption, as
the case may be;
(3) unless a notice of redemption shall have been mailed
pursuant to Section 3.03 and other arrangements satisfactory to the
Trustee for such redemption shall have been made, 123 days pass after
the deposit is made and during the 123-day period no Default specified
in Section 6.01(5) or (6) with respect to the Company occurs which is
continuing at the end of the period;
(4) no Default has occurred and is continuing on the date of
such deposit and after giving effect thereto;
(5) the deposit does not constitute a default under any other
agreement binding on the Company and is not prohibited by Article 10;
(6) the Company delivers to the Trustee an Opinion of Counsel to
the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(7) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of this
38
<PAGE>
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 shall confirm that, the Debentureholders 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;
(8) in the case of the covenant defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel to the
effect that the Debentureholders 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; and
(9) the company delivers to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
to the defeasance and discharge of the Debentures as contemplated by
this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Debentures at a future
date in accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall
--------------------------
hold in trust money or U.S. Government Obligations deposited with it
pursuant to this Article 8. It shall apply the deposited money and the
money from U.S. Government Obligations through the Paying Agent and in
accordance with this Indenture to the payment of principal of and interest
on the Debentures. Money and Debentures so held in trust are not subject
to Article 10.
SECTION 8.04. Repayment to Company. The Trustee and the Paying
--------------------
Agent shall promptly turn over to the Company upon request any excess money
or Debentures held by them at any time.
Subject to any applicable abandoned property law, the Trustee and
the Paying Agent shall pay to the Company upon request any money held by
them for the payment of principal or interest that remains unclaimed for
two years, and, thereafter, Debentureholders entitled to the money must
look to the Company for payment as general creditors and all liability of
the Trustee or such Paying Agent with respect to such trust money, and all
liability of the Company as paying agent thereof in the event that the
Company shall at such time be serving as the paying agent, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before
being required to make such repayment, may at the expense of the Company
mail to each such Holder notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from
the date of such mailing, any unclaimed balance of such money remaining
shall be repaid to the Company.
SECTION 8.05. Indemnity for Government Obligations. The Company
------------------------------------
shall pay and shall indemnify the Trustee against any tax, fee or other
39
<PAGE>
charge imposed on or assessed against deposited U.S. Government Obligations
or the principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
-------------
unable to apply any money or U.S. Government Obligations in accordance with
this Article 8 by reason of any legal proceeding or by reason of any order
or judgment of any court or governmental authority enjoining, restraining
or otherwise prohibiting such application, the Company's obligations under
this Indenture and the Debentures shall be revived and reinstated as though
no deposit had occurred pursuant to this Article 8 until such time as the
Trustee or Paying Agent is permitted to apply all such money or U.S.
Government Obligations in accordance with this Article S; provided,
however, that, if the Company has made any payment of interest on or
principal of any Debentures because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders
of such Debentures to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders. The Company when
--------------------------
authorized by a resolution of the Board of Directors of the Company and the
Trustee may amend this Indenture or the Debentures without notice to or
consent of any Debentureholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Debentures in addition to or
in place of certificated Debentures; provided, however, that the
uncertificated Debentures are issued in registered form for purposes
of Section 163(f) of the Code or in a manner such that the
uncertificated Debentures are described in Section 163(f)(2)(B) of the
Internal Code;
(4) to make any change in Article 10 that would limit or
terminate the benefits available to any holder of Senior Debt (or
Representatives therefor) under Article 10;
(5) to add guarantees with respect to the Debentures or to
secure the Debentures;
(6) to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power herein conferred upon
the Company;
(7) to comply with any requirements of the SEC in connection
with qualifying this Indenture under the TIA; or
40
<PAGE>
(8) to make any change that does not adversely affect the rights
of any Debentureholder.
An amendment under this Section may not make any change that
adversely affects the rights under Article 10 of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such
change.
After an amendment under this Section becomes effective, the
Company shall mail to Debentureholders a notice briefly describing such
amendment. The failure to give such notice to all Debentureholders, or any
defect therein, shall not impair or affect the validity of an amendment
under this Section.
SECTION 9.02. With Consent of Holders. The Company when
-----------------------
authorized by a resolution of the Board of Directors of the Company and the
Trustee may amend this Indenture or the Debentures without notice to any
Debentureholder but with the written consent of the Holders of at least a
majority in principal amount of the Debentures; provided, however, that no
amendment may be made to Section 4.08 without the written consent of the
Holders of at least 66 2/3% in principal amount of the Debentures.
However, without the consent of each Debentureholder affected, an amendment
may not:
(1) reduce the amount of Debentures whose Holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Debenture;
(3) reduce the principal of or extend the Stated Maturity of any
Debenture;
(4) reduce the premium payable upon the redemption of any
Debenture or change the time at which any Debenture may be redeemed in
accordance with Article 3;
(5) make any Debenture payable in money other than that stated
in the Debenture;
(6) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Debentures on or after the
due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's Debentures;
(7) make any change in Article 10 that adversely affects the
rights of any Debentureholder under Article 10; or
(8) make any change in Section 6.04 or 6.07 or the second
sentence of this Section.
41
<PAGE>
It shall not be necessary for the consent of the Holders under
this Section to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent approves the substance thereof.
An amendment under this Section may not make any change that
adversely affects the rights under Article 10 of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such
change.
After an amendment under this Section becomes effective, the
Company shall mail to Debentureholders a notice briefly describing such
amendment. The failure to give such notice to all Debentureholders, or any
defect therein, shall not impair or affect the validity of an amendment
under this Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every
-----------------------------------
amendment to this Indenture or the Debentures shall comply with the TIA as
then in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A
---------------------------------------------
consent to an amendment or a waiver by a Holder of a Debenture shall bind
the Holder and every subsequent Holder of that Debenture or portion of the
Debenture that evidences the same debt as the consenting Holder's
Debenture, even if notation of the consent or waiver is not made on the
Debenture. However, any such Holder or subsequent Holder may revoke the
consent or waiver as to such Holder's Debenture or portion of the Debenture
if the Trustee receives the notice of revocation before the date the
amendment or waiver becomes effective. After an amendment or waiver
becomes effective, it shall bind every Debentureholder.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Debentureholders entitled to give their
consent or take any other action described above or required or permitted
to be taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Debentureholders at such record date (or their duly designated proxies),
and only those Persons, shall be entitled to give such consent or to revoke
any consent previously given or to take any such action, whether or not
such Persons continue to be Holders after such record date. No such
consent shall be valid or effective for more than 120 days, after such
record date.
SECTION 9.05. Notation on or Exchange of Debentures. If an
-------------------------------------
amendment changes the terms of a Debenture, the Trustee may require the
Holder of the Debenture to deliver it to the Trustee. The Trustee may
place an appropriate notation on the Debenture regarding the changed terms
and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Debenture shall issue and
the Trustee shall authenticate a new Debenture that reflects the changed
terms. Failure to make the appropriate notation or to issue a new
Debenture shall not affect the validity of such amendment.
42
<PAGE>
SECTION 9.06. Trustee to Sign Amendments. The Trustee shall
--------------------------
sign any amendment authorized pursuant to this Article 9 if the amendment
does not adversely affect the rights, duties, liabilities or immunities of
the Trustee. If it does, the Trustee may but need not sign it. In signing
such amendment the Trustee shall be entitled to receive indemnity
reasonably satisfactory to it and to receive, and (subject to Section 7.01)
shall be fully protected in relying upon, an Officers' Certificate and an
Opinion of Counsel stating that such amendment is authorized or permitted
by this Indenture.
SECTION 9.07. Payment for Consent. Neither the Company, any
-------------------
Affiliate of the Company nor any Subsidiary shall, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee
or otherwise, to any Holder for or as an inducement to any consent, waiver
or amendment of any of the terms or provisions of this Indenture or the
Debentures unless such consideration is offered to be paid or agreed to be
paid to all Holders which so consent, waive or agree to amend in the time
frame set forth in solicitation documents relating to such consent, waiver
or agreement.
ARTICLE 10
Subordination
-------------
SECTION 10.01. Agreement To Subordinate. The Company agrees,
------------------------
and each Debentureholder by accepting a Debenture agrees, that the
Indebtedness evidenced by the Debentures is subordinated in right of
payment, to the extent and in the manner provided in this Article 10, to
the prior payment of all Senior Debt and that the subordination is for the
benefit of and enforceable by the holders of Senior Debt. Only
Indebtedness of the Company which is Senior Debt shall rank senior to the
Debentures in accordance with the provisions set forth herein. All
provisions of this Article 10 shall be subject to Section 10.12.
SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon any
------------------------------------
payment or distribution of the assets of the Company to creditors upon a
total or partial liquidation or a total or partial dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property:
(1) holders of Senior Debt shall be entitled to receive payment
in full of the Senior Debt before Debentureholders shall be entitled
to receive any payment of principal of, or premium, if any, or inter-
est on the Debentures; and
(2) until the Senior Debt is paid in full, any distribution to
which Debentureholders would be entitled but for this Article 10 shall
be made to holders of Senior Debt as their interests may appear,
except that Debentureholders may receive shares of stock and any debt
securities that are subordinated to Senior Debt to at least the same
extent as the Debentures.
43
<PAGE>
For purposes of this Section "payment in full", as used with respect to
Senior Debt, means the receipt of cash or securities (taken at their fair
value at the time of receipt, determined as hereinafter provided) of the
principal amount of the Senior Debt and premium, if any, and interest
thereon to the date of such payment. "Fair value" means (a) if the
Debentures are quoted on a nationally recognized securities exchange, the
closing price on the day such Debentures are received or, if there are no
sales reported on that day, the reported closing bid price on that day, and
(b) if the Debentures are not so quoted, a price determined by a nationally
recognized investment banking house selected by the Debentureholders and
the holders of Senior Debt receiving such securities, such price to be
determined as of the date of receipt of such securities by the holders of
Senior Debt.
SECTION 10.03. Default on Senior Debt. The Company may not pay
----------------------
the principal of, premium, if any, or interest on, the Debentures or make
any deposit pursuant to Section 8.01 and may not repurchase, redeem or
otherwise retire any Debentures (collectively, "pay the Debentures") if (i)
any Designated Senior Debt is not paid when due or (ii) any other default
on Designated Senior Debt occurs and the maturity of such Designated Senior
Debt is accelerated in accordance with its terms unless, in either case,
(x) the default has been cured or waived and any such acceleration has been
rescinded or (y) such Designated Senior Debt has been paid in full;
provided, however, that the Company may pay the Debentures without regard
to the foregoing if the Company and the Trustee receive written notice
approving such payment from the Representative of each issue of Designated
Senior Debt. During the continuance of any default (other than a default
described in clause (i) or (ii) of the preceding sentence) with respect to
any Designated Senior Debt pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may
be required to effect such acceleration) or the expiration of any
applicable grace periods, the Company may not pay the Debentures for a
period (a "Payment Blockage Period") commencing upon the receipt by the
Company and the Trustee of written notice of such default from the
Representative of the Bank Debt or a Representative of the holders of any
Designated Senior Debt specifying an election to effect a Payment Blockage
Period (a "Payment Blockage Notice") and ending 179 days thereafter (or
earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Company from the Representative which gave such
Payment Blockage Notice, (ii) by repayment in full of such Designated
Senior Debt or (iii) because the default specified in such Payment Blockage
Notice is no longer continuing). Notwithstanding the provisions described
in the immediately preceding sentence (but subject to the provisions
contained in the first sentence of this Section), unless the holders of
such Designated Senior Debt or the Representative of such holders shall
have accelerated the maturity of such Designated Senior Debt, the Company
may resume payments on the Debentures after the end of such Payment
Blockage Period. Not more than one Payment Blockage Notice may be given in
any consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Debt during such period.
SECTION 10.04. Acceleration of Payment of Debentures. If
-------------------------------------
payment of the Debentures is accelerated because of an Event of Default,
44
<PAGE>
the Company or the Trustee shall promptly notify the holders of the
Designated Senior Debt or their Representatives of the acceleration.
SECTION 10.05. When Distribution Must Be Paid Over. If a
-----------------------------------
distribution is made to Debentureholders that because of this Article 10
should not have been made to them, the Debentureholders who receive the
distribution shall hold it in trust for holders of Senior Debt and pay it
over to them as their interests may appear.
SECTION 10.06. Subrogation. After all Senior Debt is paid in
-----------
full and until the Debentures are paid in full, Debentureholders shall be
subrogated to the rights of holders of Senior Debt to receive distributions
applicable to Senior Debt. A distribution made under this Article 10 to
holders of Senior Debt which otherwise would have been made to
Debentureholders is not, as between the Company and Debentureholders, a
payment by the Company on Senior Debt.
SECTION 10.07. Relative Rights. This Article 10 defines the
---------------
relative rights of Debentureholders and holders of Senior Debt. Nothing in
this Indenture shall:
(1) impair, as between the Company and Debentureholders, the
obligation of the Company, which is absolute and unconditional, to pay
principal of, premium, if any, and interest on the Debentures in
accordance with their terms; or
(2) prevent the Trustee or any Debentureholder from exercising
its available remedies upon a Default, subject to the rights of
holders of Senior Debt to receive distributions otherwise payable to
Debentureholders.
SECTION 10.08. Subordination May Not Be Impaired by Company. No
--------------------------------------------
right of any holder of Senior Debt to enforce the subordination of the
Indebtedness evidenced by the Debentures shall be impaired by any act or
failure to act by the Company or by its failure to comply with this
Indenture.
SECTION 10.09. Rights of Trustee and Paying Agent.
----------------------------------
Notwithstanding Section 10.03, the Trustee or Paying Agent may continue to
make payments on the Debentures and shall not be charged with knowledge of
the existence of facts that would prohibit the making of any such payments
unless, not less than two Business Days prior to the date of such payment,
a Trust Officer of the Trustee receives notice satisfactory to it that
payments may not be made under this Article 10. The Company, the Registrar
or co-registrar, the Paying Agent, a Representative or a holder of Senior
Debt may give the notice; provided, however, that, if an issue of Senior
Debt has a Representative, only the Representative may give the notice.
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. The
Registrar and co-registrar and the Paying Agent may do the same with like
rights. The Trustee shall be entitled to all the rights set forth in this
Article 10 with respect to any Senior Debt which may at any time be held by
it, to the same extent as any other holder of Senior Debt, and nothing in
45
<PAGE>
Article 7 shall deprive the Trustee of any of its rights as such holder.
Nothing in this Article 10 shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 7.07.
SECTION 10.10. Distribution or Notice to Representative.
----------------------------------------
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution ray be made and the notice given to their
Representative (if any).
SECTION 10.11. Article 10 Not To Prevent Events of Default or
----------------------------------------------
Limit Right To Accelerate. The failure to make a payment pursuant to the
- -------------------------
Debentures by reason of any provision in this Article 10 shall not be
construed as preventing the occurrence of a Default. Nothing in this
Article 10 shall have any effect on the right of the Debentureholders or
the Trustee to accelerate the maturity of the Debentures.
SECTION 10.12. Trust Moneys Not Subordinated. Notwithstanding
-----------------------------
anything contained herein to the contrary, payments from money or the
proceeds of U.S. Government Obligations held in trust under Article 8 by
the Trustee for the payment of principal of and interest on the Debentures
shall not be subordinated to the prior payment of any Senior Debt or
subject to the restrictions set forth in this Article 10, and none of the
Debentureholders shall be obligated to pay over any such amount to the
Company or any holder of Senior Debt of the Company or any other creditor
of the Company.
SECTION 10.13. Trustee Entitled To Rely. Upon any payment or
------------------------
distribution pursuant to this Article 10, the Trustee and the
Debentureholders shall be entitled to rely (i) upon any order or decree of
a court of competent jurisdiction in which any proceedings of the nature
referred to in Section 10.02 are pending,, (ii) upon a certificate of the
liquidating trustee or agent or other Person making such payment or
distribution to the Trustee or to the Debentureholders or (iii) upon the
Representatives for the holders of Senior Debt for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this
Article 10. In the event that the Trustee determines, in good faith, that
evidence is required with respect to the right of any Person as a holder of
Senior Debt to participate in any payment or distribution pursuant to this
Article 10, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held
by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and other facts pertinent to the rights of
such Person under this Article 10, and, if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial deter-
mination as to the right of such Person to receive such payment. The
provisions of Sections 7.01 and 7.02 shall be applicable to all actions or
omissions of actions by the Trustee pursuant to this Article 10.
SECTION 10.14. Trustee To Effectuate Subordination. Each
-----------------------------------
Debentureholder by accepting a Debenture authorizes and directs the Trustee
on his behalf to take such action as may be necessary or appropriate to
46
<PAGE>
acknowledge or effectuate the subordination between the Debentureholders
and the holders of Senior Debt as provided in this Article 10 and appoints
the Trustee as attorney-in-fact for any and all such purposes.
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt.
------------------------------------------------
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Debt and shall not be liable to any such holders if it shall
mistakenly pay over or distribute to Debentureholders or the Company or any
other Person, money or assets to which any holders of Senior Debt shall be
entitled by virtue of this Article 10 or otherwise.
SECTION 10.16. Reliance by Holders of Senior Debt on
-------------------------------------
Subordination Provisions. Each Debentureholder by accepting a Debenture
- ------------------------
acknowledges and agrees that the foregoing subordination provisions are,
and are intended to be, an inducement and a consideration to each holder of
any Senior Debt, whether such Senior Debt was created or acquired before or
after the issuance of the Debentures, to acquire and continue to hold, or
to continue to hold, such Senior Debt and such holder of Senior Debt shall
be deemed conclusively to have relied on such subordination provisions in
acquiring and continuing to hold, or in continuing to hold, such Senior
Debt.
ARTICLE 11
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls. If any provision
----------------------------
of this Indenture limits, qualifies or conflicts with another provision
which is required to be included in this Indenture by the TIA, the required
provision shall control.
SECTION 11.02. Notices. Any notice or communication shall be in
-------
writing and delivered in Person or mailed by first-class mail addressed as
follows:
if to the Company:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, CT 06902
Attention of Chief Executive Officer
if to the Trustee:
Chemical Bank
450 West 33rd Street, 15th Floor
New York, NY 10001
Attention of Corporate Trust Group
47
<PAGE>
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Debentureholder shall be
mailed to the Debentureholder at the Debentureholder's address as it
appears on the registration books of the Registrar and shall be
sufficiently given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Debentureholder or
any defect in it shall not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner
provided above, it is duly given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders.
-------------------------------------------
Debentureholders may communicate pursuant to TIA Sec.Sec. 312(b) with other
Debentureholders with respect to their rights under this Indenture or the
Debentures. The Company, the Trustee, the Registrar and anyone else shall
have the protection of TIA Sec. 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions
----------------------------------------
Precedent. Upon any request or application by the Company to the Trustee
- ---------
to take or refrain from taking any action under this Indenture, the Company
shall furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
---------------------------------------------
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has made
such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
Person, such covenant or condition has been complied with.
SECTION 11.06. When Debentures Disregarded. In determining
---------------------------
whether the Holders of the required principal amount of Debentures have
48
<PAGE>
concurred in any direction, waiver or consent, Debentures owned by the
Company or by any Person directly or indirectly controlling or controlled
by or under direct or indirect common control with the Company shall be
disregarded and deemed not to be outstanding, except that, for the purpose
of determining whether the Trustee shall be protected in relying on any
such direction, waiver or consent, only Debentures which the Trustee knows
are so owned shall be so disregarded. Also, subject to the foregoing, only
Debentures outstanding at the time shall be considered in any such
determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar.
--------------------------------------------
The Trustee may make reasonable rules for action by or a meeting of
Debentureholders. The Registrar and the Paying Agent may make reasonable
rules for their functions.
SECTION 11.08. Governing Law. This Indenture and the Debentures
-------------
shall be governed by, and construed in accordance with, the laws of the
State of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby.
SECTION 11.09. No Recourse Against Others. A director, officer,
--------------------------
employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Debentures or this
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Debenture, each
Debentureholder shall waive and release all such liability. The waiver and
release shall be part of the consideration for the issue of the Debentures.
SECTION 11.10. Successors. All agreements of the Company in
----------
this Indenture and the Debentures shall bind its successors. All
agreements of the Trustee in this Indenture shall bind its successors.
SECTION 11.11. Multiple Originals. The parties may sign any
------------------
number of copies of this Indenture. Each signed copy shall be an original,
but all of them together represent the same agreement. One signed copy is
enough to prove this Indenture.
SECTION 11.12. Table of Contents; Headings. The table of
---------------------------
contents, cross-reference sheet and headings of the Articles and Sections
of this Indenture have been inserted for convenience of reference only, are
not intended to be considered a part hereof and shall not modify or
restrict any of the terms or provisions hereof.
49
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture to be
duly executed as of the date first written above.
PETROLEUM HEAT AND POWER CO., INC.,
By: ______________________________
Name:
Title:
CHEMICAL BANK, as Trustee,
` By: ______________________________
Name:
Title:
50
<PAGE>
EXHIBIT A
(FORM OF FACE OF DEBENTURE)
No. $_________
______% Subordinated Note Due 2006
Petroleum Heat and Power Co., Inc., a Minnesota corporation,
promises to pay to or registered
assigns, the principal sum of Dollars on ,2006.
Interest Payment Dates:__________and__________.
Record Dates:______________and____________.
Additional Provisions of this Debenture are set forth on the
other side of this Debenture.
Dated:
PETROLEUM HEAT AND POWER CO., INC.,
by
---------------------------------------------
Chief Executive Officer
[Seal]
---------------------------------------------
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
CHEMICAL BANK
as Trustee, certifies that this is one of the Debentures referred to
in the within mentioned Indenture.
by
--------------------------
Authorized officer
<PAGE>
[FORM OF REVERSE SIDE OF DEBENTURE]
_______% Subordinated Note Due 2006
1. Interest
--------
Petroleum Heat and Power Co., Inc., a Minnesota corporation
(such corporation, and its successors and assigns under the Indenture
hereinafter referred to, being herein called the "Company"), promises to
pay interest on the principal amount of this Debenture at the rate per
annum shown above. The Company shall pay interest semiannually in arrears
on _______ and __________ of each year, commencing ______, 1994. Interest
on the Debentures shall accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from __________, 1994.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months. The Company shall pay interest on overdue principal at the rate
borne by the Debentures plus 1% per annum, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company shall pay interest on the Debentures (except
defaulted interest) to the Persons who are registered Holders of Debentures
at the close of business on the _____________ or ___________ next preceding
the interest payment date even if Debentures are canceled after the record
date and on or before the interest payment date. Holders must surrender
Debentures to a Paying Agent to collect principal payments. The Company
shall pay principal and interest in money of the United States that at the
time of payment is legal tender for payment of public and private debts.
However, the Company may pay principal and interest by check payable in
such money. It may mail an interest check to a Holder's registered
address.
3. Paying Agent and Registrar
--------------------------
Initially, Chemical Bank, a New York corporation ("Trustee"),
shall act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-Registrar without notice. The
Company or any of its domestically incorporated Wholly Owned Subsidiaries
may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Debentures under an Indenture dated as of
____________, 1994 ("Indenture"), between the Company and the Trustee. The
terms of the Debentures include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. Sec.Sec. 77aaa-77bbbb) as amended and in effect on the date of the
Indenture (the "Act"). Capitalized terms used herein and not defined
herein have the meanings ascribed thereto in the Indenture. The Debentures
A-2
<PAGE>
are subject to all such terms, and Debentureholders are referred to the
Indenture and the Act for a statement of those terms.
The Debentures are general unsecured obligations of the Company
limited to $75,000,000 aggregate principal amount (subject to Section 2.07
of the Indenture). The Indenture imposes certain limitations on the
issuance of debt by the Company, the issuance of debt and preferred stock
by the Subsidiaries, the creation of liens on the Capital Stock of any
Subsidiary, the payment of dividends and other distributions and
acquisitions or retirements of the Company's Capital Stock and subordinated
Indebtedness, and transactions with Affiliates. In addition, the Indenture
limits the ability of the Company and the Subsidiaries to restrict
distributions and dividends from Subsidiaries.
5. Optional Redemption
-------------------
The Debentures may not be redeemed prior to _________, 1999. On
and after that date, the Company may redeem the Debentures in whole at any
time or in part from time to time at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to
the redemption date:
If redeemed during the 12-month period beginning ___________,
Year Percentage
---- ----------
1999 . . . . . . . . . . . . . . . . . ______%
2000 . . . . . . . . . . . . . . . . . ______
2001 . . . . . . . . . . . . . . . . . ______
2002 . . . . . . . . . . . . . . . . . ______
2003 and thereafter . . . . . . . . . . 100.000
In addition, at any time prior to ____________, 1997, the Company
may redeem Debentures with the net proceeds of a public offering of Capital
Stock (other than Redeemable Stock) at a redemption price of _____% of the
principal amount thereof, plus accrued and unpaid interest thereon,
provided that at least $50,000,000 in aggregate principal amount of the
Debentures remain outstanding immediately following any such redemption.
6. Notice of Redemption
--------------------
Notice of redemption shall be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder of Debentures
to be redeemed at his registered address. Debentures in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000. If money sufficient to pay the redemption price of and accrued
interest on all Debentures (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent on or before the
redemption date and certain other conditions are satisfied, on and after
such date interest ceases to accrue on such Debentures (or such portions
thereof) called for redemption.
A-3
<PAGE>
7. Offer to Purchase Upon a Change of Control
------------------------------------------
Upon the occurrence of a Change of Control, each Holder of
Debentures shall have the right to require the Company to repurchase all or
any part of such Holder's Debentures at a repurchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to
the date of repurchase.
8. Subordination
-------------
The Debentures are subordinated to Senior Debt, as defined in the
Indenture. To the extent provided in the Indenture, Senior Debt must be
paid before the Debentures may be paid. The Company agrees, and each
Holder by accepting a Debenture agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
---------------------------------
The Debentures are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may
transfer or exchange Debentures in accordance with the Indenture. The
Registrar may require a Holder, among other things, to furnish appropriate
endorsements or transfer documents and to pay any taxes and fees required
by law or permitted by the Indenture. The Registrar need not register the
transfer of or exchange any Debentures selected for redemption (except, in
the case of a Debenture to be redeemed in part, the portion of the
Debenture not to be redeemed) or any Debentures for a period of 15 days
before a selection of Debentures to be redeemed or 15 days before an
interest payment date.
10. Persons Deemed Owners
---------------------
The registered Holder of this Debenture may be treated as the
owner of it for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money
back to the Company at its request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions, the Company at any time may
terminate some or all of its obligations under the Debentures and the
Indenture if the Company deposits with the Trustee money or U.S. Government
A-4
<PAGE>
Obligations for the payment of principal and interest on the Debentures to
redemption or maturity, as the case may be.
A-5
<PAGE>
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Debentures may be amended with the written consent of the
Holders of at least a majority in principal amount outstanding of the
Debentures and (ii) any default or noncompliance with any provision may be
waived with the written consent of the Holders of a majority in principal
amount outstanding of the Debentures. Subject to certain exceptions set
forth in the Indenture, without the consent of any Holder, the Company and
the Trustee may amend the Indenture or the Debentures to cure any
ambiguity, omission, defect or inconsistency, or to comply with Article 5
of the Indenture, or to provide for uncertificated Debentures in addition
to or in place of certificated Debentures, or to add guarantees with
respect to the Debentures or to secure the Debentures, or to add covenants
for the benefit of Holders or surrender rights and powers conferred on the
Company, or to comply with any requirements of the SEC in connection with
qualifying the Indenture under the Act, or to make certain changes in the
subordination provisions, or to make any change that does not adversely
affect the rights of any Holder.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default for
30 days in payment of interest on the Debentures; (ii) default in payment
of principal on the Debentures at maturity, upon redemption pursuant to
paragraph 5 hereof, upon declaration or otherwise, or failure by the
Company to purchase Debentures when required; (iii) failure by the Company
to comply with other agreements in the Indenture or the Debentures, in
certain cases subject to notice and lapse of time; (iv) certain
accelerations (including failure to pay within any grace period after final
maturity) of other Debt of the Company or any Significant Subsidiary if the
amount accelerated (or so unpaid) exceeds $1,000,000; (v) certain events of
bankruptcy or insolvency with respect to the Company or any Significant
Subsidiary; and (vi) certain judgments or decrees for the payment of money
in excess of $1,000,000. If an Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount of the
Debentures may declare all the Debentures to be due and payable
immediately. Certain events of bankruptcy or insolvency are Events of
Default which shall result in the Debentures being due and payable
immediately upon the occurrence of such Events of Default.
Debentureholders may not enforce the Indenture or the Debentures
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Debentures unless it receives reasonable indemnity or
Debenture. Subject to certain limitations, Holders of a majority in
principal amount of the Debentures may direct the Trustee in its exercise
of any trust or power. The Trustee may withhold from Debentureholders
notice of any continuing Default (except a Default in payment of principal
or interest) if it determines that withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
A-6
<PAGE>
Subject to certain limitations imposed by the Act, the Trustee
under the Indenture, in its individual or any other capacity, may become
the owner or pledgee of Debentures and may otherwise deal with and collect
obligations owed to it by the Company or its affiliates and may otherwise
deal with the Company or its affiliates with the same rights it would have
if it were not Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the
Company or the Trustee shall not have any liability for any obligations of
the Company under the Debentures or the Indenture or for any claim based
on, in respect of or by reason of such obligations or their creation. By
accepting a Debenture, each Debentureholder waives and releases all such
liability. The waiver and release are part of the consideration for the
issue of the Debentures.
17. Authentication
--------------
This Debenture shall not be valid until an authorized officer of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Debenture.
18. Abbreviations
-------------
Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on
Uniform Debenture Identification Procedures, the Company has caused CUSIP
numbers to be printed on the Debentures and has directed the Trustee to use
CUSIP numbers in notices of redemption as a convenience to
Debentureholders. No representation is made as to the accuracy of such
numbers either as printed on the Debentures or as contained in any notice
of redemption and reliance may be placed only on the other identification
numbers placed thereon.
The Company shall furnish to any Debentureholder upon written
request and without charge to the Debentureholder a copy of the Indenture
which has in it the text of this Debenture in larger type. Requests may be
made to:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, CT 06902
A-7
<PAGE>
Attention of:
Richard Ambury, Vice President and Assistant
Controller.
A-8
<PAGE>
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer
this Debenture on the books of the Company. The agent may substitute
another to act for him.
Date: Your Signature:
--------------- -----------------------------------
Sign exactly as your name appears on the other side of this Debenture.
A-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Debenture purchased by
the Company pursuant to Section 4.08 of the Indenture, check the box:
If you want to elect to have only part of this Debenture
purchased by the Company pursuant to Section 4.08 of the indenture, state
the amount:
$
Date: Your Signature:
-------------- ----------------------------------
(Sign exactly as your name appears on the
other side of the Debenture)
Signature Guarantee:
-------------------------------------------------------
(Signature must be guaranteed by a member firm of the
New York Stock Exchange or a commercial bank or trust
company)
A-10
EXHIBIT 4.7
CERTIFICATE OF DESIGNATION
SETTING FORTH RESOLUTION CREATING A SERIES
OF PREFERRED STOCK DESIGNATED AS
"CUMULATIVE REDEEMABLE EXCHANGEABLE 1993 PREFERRED STOCK"
ADOPTED BY THE BOARD OF DIRECTORS OF
PETROLEUM HEAT AND POWER CO,. INC.
Pursuant to the Provisions of Section 302A.401 of the
Minnesota Business Corporation Act, as amended
We, the undersigned, GEORGE LEIBOWITZ and ALAN SHAPIRO,
respectively a Senior Vice President and Assistant Secretary of Petroleum
Heat and Power Co., Inc., a Minnesota corporation (hereinafter sometimes
referred to as the "Corporation"), hereby certify as follows:
FIRST: That under the Restated and Amended Articles of
Incorporation of the Corporation ("Restated Articles") the total number of
authorized shares of Preferred Stock which the Corporation may issue is
2,000,000 and under said Restated Articles the Board of Directors of the
Corporation ("Board") is authorized to issue such shares of Preferred Stock
from time to time in one or more series and to determine in the resolution
providing for the issuance of any series of Preferred Stock the rights and
preferences of shares of such series not fixed and determined by the
Restated Articles.
SECOND: That the Board, pursuant to the authority so vested in
it by the Restated Articles and in accordance with the provisions of
Section 302A.401 of the Minnesota Business Corporation Act, as amended,
adopted the following resolution creating a series of Preferred Stock
designated as "Cumulative Redeemable Exchangeable 1991 Preferred Stock,"
which resolution has not been amended, modified, rescinded or revoked and
is in full force and effect on the Preferred Stock Closing Date.
RESOLUTIONS OF THE BOARD OF DIRECTORS TO
RESTATE THE RESTATED ARTICLES OF
PETROLEUM HEAT AND POWER CO., INC.
WHEREAS, the Restated and Amended Articles of Incorporation (the
"Restated Articles") of Petroleum Heat and Power Co., Inc., a Minnesota
corporation (the "Corporation"), authorize the issuance of 2,000,000 shares
of Preferred Stock of the Corporation; and
<PAGE>
WHEREAS, this Corporation wishes to issue up to 10,000 shares of
its Cumulative Redeemable Exchangeable 1993 Preferred Stock, $1,000 par
value;
NOW, THEREFORE, be it, and it hereby is, resolved by the Board
that a series of the Preferred Stock of the Corporation is hereby
designated Cumulative Redeemable Exchangeable 1993 Preferred Stock (the
"1993 Preferred Stock"), consisting of 10,000 shares, which shares shall be
exchangeable under certain circumstances for Subordinated Notes of the
Corporation due December 31, 2000 in accordance with paragraph 7 of this
Resolution, having the relative rights and preferences as set forth below:
1. Ranking. The shares of the 1993 Preferred Stock shall rank
-------
senior to the Corporation's Class A Common Stock and Class C Common Stock,
and junior to the Corporation's 1989 Preferred Stock and the Corporation's
Class B Common Stock, with respect to the payment of dividends and upon
liquidation, dissolution, winding-up or otherwise. Except as specified in
the preceding sentence, all other classes of Preferred Stock shall rank
senior and all other capital stock of the Corporation shall rank junior to
the 1993 Preferred Stock with respect to the payment of dividends or upon
liquidation, dissolution, winding-up or otherwise.
2. Dividends. The holders of the shares of the 1993 Preferred
---------
Stock shall be entitled to receive dividends thereon at the rate per annum
established by an investment banking firm mutually agreed upon by the
Corporation and Star Gas Holdings, Inc. such that the 1993 Preferred Stock
would have a fair market value equal to its par value to which would be
added an amount ("Gross up Amount") agreed upon between the Corporation and
Star Gas Holdings, Inc. to gross up the holders for the excess, if any, of
United States Federal income taxes payable on such dividends over the
amount of United States Federal income taxes which would be payable if such
holders had received interest instead of dividends, when and as declared by
the Board of Directors of this Corporation, out of funds legally available
therefor. The obligations of this Corporation to pay dividends on the 1993
Preferred Stock pursuant to the provisions of this paragraph 2 shall accrue
(whether or not declared) and be cumulative from and including the date on
which each such share is issued. Dividends shall be payable quarterly (each
a "Quarterly Dividend Period") on the first day of each calendar quarter
(each a "Dividend Payment Date"), commencing with the first calendar
quarter following the issuance of such shares, to the holders of record as
they shall appear on the stock register of the Corporation on the 15th day
of the preceding calendar month. All dividends shall be computed on the
basis of a 360-day year of twelve 30-day months and the actual number of
days elapsed in the period for which such dividends are payable. Unpaid
dividends for any period less than a full Quarterly Dividend Period shall
2
<PAGE>
accrue on a day-to-day basis and shall be computed on the basis of a 360-
day year.
If the full amount of dividends required to be paid as aforesaid
for any Quarterly Dividend Period shall not have been paid, whether or not
earned or declared, or a sum sufficient for the payment thereof set apart,
all of the dividends required to be so paid but not paid (the "Deficiency")
shall earn and accrue additional dividends, effective as of the date on
which such dividends were to be paid and continuing until the full amount
of the Deficiency plus all accrued but unpaid dividends thereon shall have
been paid in full, at a per annum rate equal to the per annum dividend rate
payable thereunder throughout such period with respect to the 1993
Preferred Stock plus 2%. All payments of dividends made on the 1993
----
Preferred Stock shall be applied first, to the reduction of all accrued but
unpaid interest on the Deficiency, second, to the reduction of the
Deficiency and third, to the payment of all accrued but unpaid dividends on
the 1993 Preferred Stock, other than the Deficiency. Reference to accrued
and/or cumulative dividends hereunder shall be deemed for all purposes to
include all amounts of Deficiency and all such accrued but unpaid interest
thereon.
3. Priority as to Dividends. No dividends shall be declared or
------------------------
paid or set apart for payment on the 1993 Preferred Stock for any period
unless at the time of such declaration or payment or setting apart for
payment, full cumulative dividends have been or simultaneously are declared
and paid (or declared and a sum sufficient for the payment thereof set
apart for such payment) on the 1989 Preferred Stock, on any other class of
Preferred Stock, and on the Class B Common Stock for all applicable
dividend periods terminating on or prior to the date of such declaration,
payment or setting aside with respect to the 1993 Preferred Stock.
Subject to the provisions of the following paragraph, no
dividends or other distributions (other than dividends or other
distributions payable in Class A Common Stock or in another stock ranking,
with respect to the payment of dividends and upon liquidation, dissolution,
winding-up, redemption or otherwise, junior to the 1993 Preferred Stock)
shall be declared or paid or set apart for payment on the Class A Common
Stock or stock of any other class which, in either case, ranks, as to
dividends and upon liquidation, dissolution, winding-up, redemption or
otherwise, junior to the 1993 Preferred Stock ("Junior Stock") for any
period, unless at the time of such declaration or payment or setting apart
for payment (i) full cumulative dividends have been or simultaneously are
declared and paid (or declared and a sum sufficient for the payment thereof
set apart for such payment) on the 1993 Preferred Stock for all Quarterly
Dividend Periods terminating on or prior to the date of payment of such
3
<PAGE>
dividends on Junior Stock, (ii) an amount equal to the dividends accrued on
the 1993 Preferred Stock as of the date of each proposed distribution or
payment on the Junior Stock has been declared and set apart in cash for
payment on the 1993 Preferred Stock, (iii) any redemption payment required
to be made pursuant to paragraph 4 hereof on or prior to the date of
payment of such dividends on Junior Stock shall have been paid or a sum
sufficient for the payment thereof set apart for such payment, and (iv) all
redemptions of the 1993 Preferred Stock pursuant to the issuance, in
exchange therefor, of the Notes required to be made pursuant to paragraph 7
hereof on or prior to the date of payment of such dividends on Junior Stock
shall have been made.
4. Mandatory Redemption. On December 31, 2000, (the "Mandatory
--------------------
Redemption Date") the Corporation shall redeem all outstanding shares of
the 1993 Preferred Stock. The per share redemption price shall be $1000
plus all accrued and unpaid cumulative dividends thereon (whether or not
- ----
declared or earned) to the date of such redemption; provided, however, that
if such redemption price is not paid on such Mandatory Redemption Date,
such redemption price shall bear interest thereafter at a rate per annum
equal to the per annum dividend rate payable hereunder throughout such
period with respect to the 1993 Preferred Stock plus 2%, until such
----
redemption price (including such interest) shall be paid in full.
5. Optional Redemptions. In addition to the mandatory
--------------------
redemptions required by paragraph 4 hereof, the Corporation shall have the
option at any time from time to time on any Dividend Payment Date (upon
delivery of the notice and otherwise in the manner set forth in paragraph 6
hereof) to redeem shares of the 1993 Preferred Stock, either in whole or in
part (but if in part then in units of 500 shares of an integral multiple
thereof, unless less than 500 shares are then outstanding or held by any
one holder thereof), by payment of a redemption price per share of $1,000
plus (ii) all accrued and unpaid cumulative dividends thereon (whether or
- ----
not declared or earned) to the date of such redemption.
6. Manner and Effect of Redemptions.
--------------------------------
(a) Notice of any proposed redemption of shares of the 1993
Preferred Stock pursuant to the provisions of paragraph 5, shall be given
by the Corporation to each holder of the 1993 Preferred Stock by mailing a
copy of such notice not less than 30 nor more than 60 days prior to the
date fixed for such redemption to each holder of record of the outstanding
shares of the 1993 Preferred Stock at their respective addresses appearing
on the books of the Corporation. Said notice shall specify (i) the number
of shares called for redemption and (ii) the place at which and the date on
which the shares called for redemption will, upon presentation and
surrender of the certificate of stock evidencing such shares, be redeemed.
In addition, the Corporation shall mail within 5 days prior to the date
4
<PAGE>
fixed for such redemption to each holder of shares of the 1993 Preferred
Stock to be so redeemed, notice of the accrued interest payable with
respect of such redemption. Notice of redemption having been so given, the
redemption price per the number of shares specified in such notice,
together with the premium if any, and all accrued interest thereon shall be
due and payable on the date fixed for such redemption.
(b) If the funds of the Corporation legally available for
the redemption of all shares of the 1993 Preferred Stock to be redeemed
pursuant to paragraph 4 hereof, are insufficient to redeem the total number
of outstanding shares of the 1993 Preferred Stock so required to be
redeemed, such funds will be used promptly, and redemptions pursuant to
such paragraph 4, shall be made ratably among such holders, and in any
event, within 90 days after such funds become legally available, to redeem
the balance of such shares, or such portion thereof for which funds are
then legally available, on the basis set forth above.
(c) If less than all of the shares of the 1993 Preferred
Stock are to be redeemed on a given date pursuant to the provisions hereof,
the Corporation shall redeem from each holder of 1993 Preferred Stock that
number of whole shares of the 1993 Preferred Stock then held by each holder
of shares of 1993 Preferred Stock that bears the same proportion to the
total number of such shares to be redeemed as the total number of share of
the 1993 Preferred Stock then held by such holder bears to the total number
of shares of the 1993 Preferred Stock then outstanding.
(d) Notwithstanding anything herein to the contrary, the
Corporation may not at any time redeem less than all of the 1993 Preferred
Stock outstanding unless all accrued and unpaid dividends have been paid on
all then outstanding shares of the 1993 Preferred Stock.
(e) From and after the date fixed in any such notice as the
date of redemption of shares of the 1993 Preferred stock pursuant to
paragraph 4 or 5 hereof, unless default shall be made by the Corporation in
providing sufficient monies at the time and place specified for the payment
of the redemption price pursuant to said notice, dividends shall as of such
date fixed for redemption cease to accrue and all rights of the holders
thereof as stockholders of the Corporation with respect to such shares of
1993 Preferred Stock to be redeemed, except the right to receive the
redemption price thereon (including any interest thereon), shall cease and
terminate.
(f) All shares of the 1993 Preferred Stock which shall have
been redeemed, purchased or otherwise acquired by the Corporation pursuant
to the provisions hereof, shall be cancelled and shall not be reissued as
5
<PAGE>
shares of the 1993 Preferred Stock, but shall have the status of authorized
but unissued shares of Preferred Stock of the Corporation.
7. Exchange of the 1993 Preferred Stock for the Notes. So long
---------------------------------------------------
as any shares of the 1993 Preferred Stock are outstanding at the end of any
fiscal quarter, the Corporation shall, 60 days following the end of such
fiscal quarter, cause all or any part of the then outstanding shares of the
1993 Stock to be redeemed by issuing, in exchange therefor, the
Corporation's Subordinated Notes in the form annexed to the Hanseatic
Put/Call Agreement dated December 21, 1993 among the Corporation, Hanseatic
Corporation and Star Gas Holdings, Inc. (the "Notes") on the terms and
conditions set forth below:
(a) Subject only to the provisions of subparagraph (b) of
this Section 5, the Corporation shall issue such Notes in the maximum
aggregate principal amount ("Permitted Notes") which does not result in the
violation of the terms of any agreement limiting the incurrence or
maintenance of debt.
(b) Notwithstanding anything herein to the contrary, the
Corporation shall not be required to issue any Notes on any Exchange Date
that the aggregate principal amount of notes issuable on such Exchange Date
as a result of Paragraph (a) shall be less than $500,000; provided,
however, that if on any Exchange Date all other remaining outstanding
shares of the 1993 Preferred Stock are to be redeemed, and such redemption
results in less than $500,000 aggregate principal amount of Notes being
issued, or outstanding shares of the 1993 Preferred Stock shall be redeemed
and such Notes issued.
(c) The Corporation shall issue the Notes in exchange for
such shares of the 1993 Preferred Stock to be redeemed pursuant to this
Section 7 within 60 days following the end of each of fiscal quarter, as
specified by the Corporation, upon not less than 15 days nor more than 30
days prior written notice to each holder of the then outstanding shares of
the 1993 Preferred Stock (any such date, with respect to the Notes to be
issued on such day, and "Exchange Date"). The annual rate of interest on
the Notes shall be the same as the annual dividend rate on the 1993
Preferred Stock less the Gross up Amount.
(d) On or prior to 5:00 p.m. New York Time on each Exchange
Date, the Corporation shall deliver to each holder of any of the then
outstanding shares of the 1993 Preferred Stock to be redeemed pursuant to
this Section 5 on such date the following:
(i) Payment to such holder and immediately available
funds of an amount equal to all accrued and unpaid cumulative dividends on
the outstanding shares of the 1993 Preferred Stock to be so redeemed by
such holder (whether or not earned or declared) to, but not including, the
Exchange Date; and
6
<PAGE>
(ii) The Notes, dated the Exchange Date in an
aggregate principal amount equal to the aggregate par value of the 1993
Preferred Stock of such holder to be redeemed on such Exchange Date.
(e) From and after the Exchange Date (unless default shall
be made by the Corporation in providing the Notes issuable to such holder
on such date or in paying to such holder all amounts payable on such date
in respect of such shares called for redemption as required pursuant to
Section 7(d) the shares of 1993 Preferred Stock called for such redemption
on such Exchange Date shall no longer be deemed to be outstanding (without
regard to whether the certificates representing the same shall have been
surrendered by the Corporation) and shall have the status of authorized but
unissued shares of Preferred Stock, unclassified as to series; (ii) or
rights of the holders of such shares called for redemption as stockholders
of the Corporation (except the right to receive from the Corporation the
Notes issued on such Exchange Date and all amounts payable pursuant to this
Section 7) shall cease, and (iii) the person or persons entitled to receive
the Notes issuable on such Exchange Date shall be treated for all purposes
as the registered holder or holders of such Notes (without regard to
whether such Notes have actually been delivered to such holder or holders
on such Exchange Date).
(f) Dividends under 1993 Preferred Stock redeemed on any
Exchange Date shall cease to accrue on such Exchange Date and the
Corporation will pay interest on the Notes at the rate and on the date
specified herein and therein, effective as of such Exchange Date. In the
event any shares of the 1993 Preferred Stock required to be redeemed on any
Exchange Date pursuant to this Section have not been so redeemed, dividends
shall continue to accrue on such shares of the 1993 Preferred Stock.
(g) Notwithstanding the foregoing, the Corporation may on
any Exchange Date, or at its election at any time upon not less than 15
days' prior notice, redeem all of the 1993 Preferred Stock for cash price
equal to the aggregate par value of the shares of 1993 Preferred Stock to
be redeemed, plus the payment required by Section 7(d)(i).
8. Voting Rights. Except as required by the laws of the State
-------------
of Minnesota or any other applicable law, the holders of the 1993 Preferred
Stock shall not be entitled to any voting rights with respect to the 1993
Preferred Stock. On all matters upon which holders of the 1993 Preferred
Stock are entitled to vote, or given their consent, each such holder shall
be entitled to one (1) vote per each share of the 1993 Preferred Stock held
by such holder.
7
<PAGE>
9. Payments on Liquidation. In the event of any liquidation,
-----------------------
dissolution or winding-up of the affairs of the Corporation, whether
voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Corporation, the holders of shares of
the 1993 Preferred Stock shall be entitled to receive, out of the assets of
the Corporation, whether such assets are capital or surplus and whether or
not any dividends as such are declared, an amount per share of the 1993
Preferred Stock equal to the sum of the par value per such share at the
date fixed for such distribution plus all accrued and unpaid cumulative
----
dividends thereon (whether or not declared or earned) to the date of such
distribution; provided, however, that if upon any liquidation, dissolution
or winding-up of the affairs of the Corporation (whether voluntary or
involuntary) the assets of the Corporation available for distribution shall
be insufficient to pay such amount to the holders of all outstanding shares
of the 1993 Preferred Stock and to pay to the holders of all outstanding
shares of Class B Common Stock, 1989 Preferred Stock and other class of
Preferred Stock the full amounts to which they respectively are entitled
under the Restated Articles of Incorporation, the holders of shares of
Class B Common Stock, the holders of shares of 1989 Preferred Stock and
other Preferred Stock shall be entitled, prior to any distribution to any
holder or holders of the 1993 Preferred Stock, to distributions in an
amount not to exceed the amount required to be distributed to such holders
of 1989 Preferred Stock, Preferred Stock or Class B Common Stock in the
event of any such liquidation, dissolution or winding-up of the affairs of
the Corporation pursuant to the Restated Articles of Incorporation.
Except as provided above with respect to the Class B Common
Stock, the 1989 Preferred Stock and other Preferred Stock, in the event of
any liquidation, dissolution, or winding-up of the affairs of the
Corporation (whether voluntary or involuntary), payment shall be made to
the holders of the 1993 Preferred Stock in the amounts provided herein,
before any payment shall be made or any assets distributed to the holders
of any Class A Common Stock or any other Junior Stock of the Corporation.
If upon the occurrence of any liquidation, dissolution or
winding-up of the affairs of the Corporation (whether voluntary or
involuntary) the assets of the Corporation available for distribution to
the holders of the 1993 Preferred Stock shall be insufficient to pay the
holders of the 1993 Preferred Stock the full amounts to which they shall be
entitled, then the entire assets of the Corporation available for
distribution to the holders of outstanding shares of the 1993 Preferred
Stock shall be distributed among such holders ratably per share in
proportion to the preferential amount per share to which they are entitled.
Written notice of any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, stating a
payment date and the placed where the distributive amounts shall be
8
<PAGE>
payable, shall be given by mail, postage prepaid, not less than thirty (30)
days prior to the payment date stated therein, to the holders of record of
the 1993 Preferred Stock at their respective addresses as the same shall
appear on the books of the Corporation.
The voluntary sale, lease, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of
its property or assets to, or a consolidation or merger of the Corporation
with, one or more Persons shall not be deemed to be a liquidation,
dissolution or winding up of the affairs of the Corporation within the
meaning of this paragraph 7.
IN WITNESS WHEREOF, this Certificate has been signed on behalf of
Petroleum Heat and Power Co., Inc. by the undersigned, George Leibowitz,
Senior Vice President and Alan Shapiro, Assistant Secretary, this 22nd day
of December, 1993
/s/ George Leibowitz
----------------------------------
George Leibowitz
Senior Vice President
/s/ Alan Shapiro
----------------------------------
Alan Shapiro
Assistant Secretary
9
EXHIBIT 5
January , 1994
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, Connecticut 06902
Re: Registration Statement on Form S-2 (33-72354)
---------------------------------------------
Ladies and Gentlemen:
We refer to the above-captioned registration statement
(the "Registration Statement"), under the Securities Act of 1933,
as amended (the "1933 Act"), filed by Petroleum Heat and Power
Co., Inc., a Minnesota corporation (the "Company"), with the
Securities and Exchange Commission, relating to the proposed
public offering by the Company of up to $75,000,000 of Debentures
due 2006 the "Debentures"). Each term used herein that is
defined in the Registration Statement and not otherwise defined
herein shall have the meaning specified in the Registration
Statement.
We have examined copies of the Restated Articles of
Incorporation of the Company, a copy of the Amended By-Laws of
the Company, the form of Indenture between the Company and
Chemical Bank, as trustee (the "Indenture"), filed as Exhibit 4.6
to the Registration Statement and such other records and
documents as we have deemed relevant and necessary to the
opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures and the authenticity of
all documents submitted to us as certified or photostatic copies.
Based upon the foregoing and relying upon statements of
fact contained in the documents we have examined, we are of the
opinion that the issuance and sale of $75,000,000 principal
amount of Debentures have been duly authorized and, when executed
and authenticated in accordance with the Indenture and delivered
to and paid for pursuant to the Underwriting Agreement, a form of
<PAGE>
Petroleum Heat and Power Co., Inc.
January , 1994
Page 2
which was filed as Exhibit 1 to the Registration Statement, will
constitute legal, valid and binding obligations of the Company
except as may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights
generally and is subject to the general principles of equity
(regardless of whether such enforceability is considered in a
proceeding in equity or at law); and the holders of the
Debentures will be entitled to the benefits of the Indenture.
We consent to being named in the Registration Statement
and related Prospectus as counsel who are passing upon the
legality of the Debentures for the Company, and to the reference
to our name under the caption "Legal Matters" in such Prospectus.
We also consent to your filing copies of this opinion as an
exhibit to the aforesaid Registration Statement.
Very truly yours,
PHILLIPS, NIZER, BENJAMIN,
KRIM & BALLON
By: /s/ Alan Shapiro
---------------------------
Alan Shapiro, a Partner
Exhibit 7
Petroleum Heat and Power Co., Inc.
Davenport Street
P.O. Box 1457
Stamford, Connecticut 06904
Re: Liquidation Preference on Certain Capital Stocks
Gentlemen:
Pursuant to the Securities Act of 1933, Petroleum Heat and Power Co.,
Inc., a Minnesota corporation (the "Company"), has filed with the Securities
and Exchange Commission a Registration Statement (Registration No. 33-72354)
for the registration of $75,000,000 of Subordinated Debentures Due 2006. In
connection with the foregoing and as more fully set forth below, the Company
has requested our opinion as to certain matters relating to the liquidation
preferences on the Company's Class B Common Stock and its Cumulative
Redeemable Exchangeable Preferred Stock ("1989 Preferred Stock"). The Class B
Common Stock and the 1989 Preferred Stock (collectively, the "Subject Capital
Stocks") both have liquidation preferences which exceed their par value.
The Company's authorized capital stock consists of 40,000,000 shares
of Class A Common Stock, $.10 par value, 6,500,000 shares of Class B Common
Stock, 5,000,000 shares of Class C Common Stock, $.10 par value, 250,000
shares of 1989 Preferred Stock, $.10 par value, 159,722 shares of Cumulative
Redeemable Exchangeable 1991 Preferred Stock (the "1991 Preferred Stock"),
$.10 par value and 5,000,000 shares of undesignated Preferred Stock, $.10 par
value. As of September 30, 1993, there were 18,992,579 shares of Class A
Common Stock, 216,901 shares of Class B Common Stock; 2,545,139 shares of
Class C Common Stock; and 250,000 shares of 1989 Preferred Stock issued and
outstanding. No shares of 1991 Preferred Stock were outstanding.
Upon liquidation, the holders of the Class B Common Stock are entitled
to receive a preferential distribution of $5.70 per share and the holders of
the 1989 Preferred Stock are entitled to receive $100 per share plus accrued
and unpaid dividends.
With respect to the Subject Capital Stocks, you have inquired (i)
whether there are any restrictions on the Company's surplus by reason of the
<PAGE>
excess of the liquidation preference of the Subject Capital Stocks over their
par value, and (ii) if so, whether any remedies are available to security
holders before or after payment of any dividend that would reduce the
Company's surplus to an amount less than the amount of the excess of the
liquidation preference of the Subject Capital Stocks over their par value.
The Company is incorporated under Chapter 302A of the Minnesota
Statutes. Section 302A.551 of the Minnesota Statutes governs "distributions"
by a corporation, which, as defined in Section 302A.011 of the Minnesota
Statutes, includes dividends, and provides, in pertinent part, as follows:
"302A.551. Distributions.
Subdivision 1. When permitted . The Board may authorize and cause the
corporation to make a distribution only if the Board determines...that
the corporation will be able to pay its debts in the ordinary course of
business after making the distribution and the Board does not know before
the distribution is made that the determination was or has become
erroneous. The corporation may make the distribution if it is able to
pay its debts in the ordinary course of business after making the
distribution....
Subd. 2. Determination presumed proper . A determination that the
corporation be able to pay its debts in the ordinary course of business
after the distribution is presumed to be proper if the determination is
made in compliance with the standard of conduct provided in Section
302A.251 on the basis of financial information prepared in accordance with
accounting methods, or a fair valuation or other method, reasonable in the
circumstances. No liability under Section 302A.251 or 302A.559 will accrue
if the requirements of this subdivision have been met....
Subd. 4. Restrictions. (a) A distribution may be made to the holders
of a class or series of shares only if:
(1) All amounts payable to the holders of shares having a preference
for the payment of that kind of distribution...are paid; and
(2) The payment of the distribution does not reduce the remaining net
assets of the corporation below the aggregate preferential amount
payable in the event of liquidation to the holders of shares
<PAGE>
having preferential rights, unless the distribution is made to
those shareholders in the order and to the extent of their
respective priorities....
Based on a review of Section 302A.551 and such other matters as we
have deemed relevant, we advise you that, in our opinion:
1. Chapter 302A of the Minnesota Statutes was enacted in 1981, and we
are unaware of any controlling decisions under the Minnesota law relating to
the foregoing questions. Chapter 302A of the Minnesota Statutes, generally,
and Section 302A.551, in particular, do not utilize the concept of surplus
and, accordingly, do not place any restrictions on the Company's surplus by
reason of the difference between the par value of the Subject Capital Stocks
and the liquidation preference of such stocks. Section 302A.551, Subdivision
4(a)(2) does, however, provide that distributions may not be made if, as a
result, the remaining net assets of the Company would be reduced below the
aggregate liquidation preference of the Subject Capital Stocks and the
Company's net assets would, to such extent, be restricted and would not be
available for distribution.
2. In the event a distribution is made by the Company not in
compliance with the provisions of Section 302A.551, the shareholders of the
Company who received a distribution made in violation of Section 302A.551 and
the directors who failed to vote against (or consented in writing to) a
distribution made in violation of Section 302A.551 may be liable to the
Company to the extent provided by Sections 302A.557 and 302A.559 of the
Minnesota Statutes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above and to the reference to our firm
under "Legal Matters" in the Prospectus included in the Registration
Statement.
Dated: January 10, 1994
Very truly yours,
/s/ Dorsey & Whitney
Dorsey & Whitney
EXHIBIT 24.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES
The Stockholders and Board of Directors of
PETROLEUM HEAT AND POWER CO., INC.:
The audit referred to in our report dated February 26, 1993 relating to the
consolidated financial statements of Petroleum Heat and Power Co., Inc. included
the related financial statement schedules as of December 31, 1991 and 1992 and
for each of the years in the three-year period ended December 31, 1992,
incorporated by reference in the Registration Statement. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
We consent to the use of our reports relating to the consolidated financial
statements and financial statement schedules of Petroleum Heat and Power Co.,
Inc. and to the consolidated financial statements of Star Gas Corporation
included and incorporated by reference herein and to the reference to our firm
under the headings "Selected Financial and Other Data" and "Experts" in the
Prospectus.
/s/ KPMG PEAT MARWICK
KPMG PEAT MARWICK
New York, New York
January 12, 1994
EXHIBIT 24.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated December 3, 1992 except for Notes 5 and
9, as to which the date is April 1, 1993, with respect to the consolidated
financial statements of Star Gas Corporation and subsidiaries included in
the Registration Statement (Form S-2 No. 33-72354) and related Prospectus
of Petroleum Heating and Power Co., Inc. for the registration of $75,000,000
Subordinated Debentures.
/s/ ERNST & YOUNG
ERNST & YOUNG
January 12, 1994
