<PAGE>
Pursuant to Rule 424(b)(4)
Reg. No. 33-57059
PROSPECTUS [LOGO]
FEBRUARY 2, 1995
$125,000,000
PETROLEUM HEAT AND POWER CO., INC.
12 1/4% SUBORDINATED DEBENTURES DUE 2005
The 12 1/4% Subordinated Debentures due 2005 (the "Debentures") are being
offered (the "Debenture Offering") by Petroleum Heat and Power Co., Inc. (the
"Company"). Concurrent with the Debenture Offering, the Company is offering
2,500,000 shares of the Company's Class A Common Stock (the "Class A Common
Stock") to the public (the "Common Stock Offering" and, together with the
Debenture Offering, the "Offerings"). See "Common Stock Offering."
Interest on the Debentures is payable semi-annually on February 1 and August
1 of each year, commencing August 1, 1995. The Debentures are not redeemable
prior to February 1, 2000. Thereafter, the Debentures are redeemable, 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 February 1, 1998, the Company may redeem
Debentures with the net proceeds of a public offering of Capital Stock (as
defined) of the Company, of Star Gas Corporation ("Star Gas") or of a subsidiary
of Star Gas, at a redemption price of 111% of the principal amount thereof,
together with accrued and unpaid interest to the date of redemption, provided
that at least 65% in principal amount of the Debentures issued under the
Indenture (as defined) 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, 1994, after giving effect to the
Pro Forma Adjustments described in the Pro Forma Financial Statements contained
elsewhere herein, the Debentures would have been subordinated in right of
payment to approximately $48.6 million of Senior Debt, and pari passu in right
of payment with approximately $161.3 million of other subordinated indebtedness.
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, 1994, after giving effect to the Pro Forma Adjustments, would have
totalled approximately $11.4 million, consisting primarily of trade payables.
See "Capitalization."
There is no existing market for the Debentures and the Company does not
intend to list the Debentures on any securities exchange. See "Risk
Factors--Absence of Public Market."
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING
TO THE DISCOUNTS AND PROCEEDS TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture.......................... 100.0% 3.0% 97.0%
Total.................................. $125,000,000 $3,750,000 $121,250,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
(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 $650,000.
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 certain
prior conditions, including the right of the Underwriters to reject any order in
whole or part. It is expected that delivery of the Debentures will be made in
New York, New York on or about February 9, 1995.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE DEBENTURES AND
OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
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. The Company's
Class A Common Stock is listed on the Nasdaq National Market, and such reports,
proxy statements and other information concerning the Company may be inspected
and copied at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
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.
CERTAIN DEFINITIONS
As used in this Prospectus:
"EBITDA" means operating income before depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the Company,
non-cash charges associated with deferred compensation plans and other non-cash
charges of a similar nature, if any. This definition of EBITDA is not identical
to the definition of EBITDA in the Indenture; however, the historical and pro
forma EBITDA throughout the Prospectus are the same whether calculated under
either definition. The differences between the two definitions are that the
definition in the Indenture (i) excludes the results of a subsidiary subject to
restrictions on payment of dividends and other distributions and (ii) reduces
EBITDA by an amount equal to the Company's equity in the deficit of Subsidiary
Cash Flow of any such excluded subsidiary. See "Description of
Debentures--Certain Definitions."
"NIDA" means net income (loss), plus depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the Company,
non-cash charges associated with deferred compensation plans and other non-cash
charges of a similar nature, if any, 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.
"Star Gas Acquisition" refers to the acquisition by the Company of all
outstanding voting securities of Star Gas not owned by the Company in December
1994. Unless the context otherwise requires, all references to Star Gas,
including Star Gas' financial position and results of operations (but not
including the Consolidated Financial Statements of Star Gas included elsewhere
herein), give pro forma effect to the acquisition of two propane businesses and
the disposition of certain non-core assets by Star Gas since December 1993 and
prior to the date of the Star Gas Acquisition. See "Prospectus
Summary--Acquisition of Star Gas Corporation."
"Pro Forma Adjustments" refer to the Heating Oil Acquisitions, the Star Gas
Transactions, the Prior Note Offerings and the Offerings, in each case as
described in the Pro Forma Financial Statements contained elsewhere herein.
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.
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 and,
with the Star Gas Acquisition, is the tenth largest retail distributor of
propane in the United States. The Company's home heating oil division had total
sales of $546.4 million for the twelve months ended September 30, 1994 and
currently serves approximately 417,000 customers in 28 markets in the Northeast,
including the metropolitan areas of Boston, Providence, New York City, Baltimore
and Washington, D.C. Star Gas had total sales of $101.4 million for the twelve
months ended September 30, 1994 and currently serves more than 145,000 customers
in 63 locations in the Midwest and Northeast.
The home heating oil industry is large, highly fragmented and undergoing
consolidation, with approximately 3,700 independently owned and operated home
heating oil distributors in the Northeast. Petro is the principal acquiror in
this industry and since 1979, when current management assumed control, has
acquired 154 retail heating oil distributors. As a result, volumes sold
increased from 59.4 million gallons in 1980 to 458.6 million gallons for the
twelve months ended September 30, 1994, a compound annual growth rate of 16.0%.
The Company is uniquely positioned to continue its strategy given the Company's
acquisition expertise, reputation, access to capital, and the absence of
competitors within the industry with a comparable combination of these
attributes. Despite the Company's size, Petro estimates that its customer base
represents only approximately 5% of the residential home heating oil customers
in the Northeast.
Petro acquires distributors in both new and existing markets, which
distributors are integrated into the Company's branch system. Economies of scale
are realized from these purchases through the centralization of accounting, data
processing, fuel oil purchasing, credit and marketing functions. Due to its
acquisition history, the Company is well known in the heating oil industry and
is regularly contacted by potential sellers. In addition, the Company has become
more proactive in identifying and contacting potential acquisition candidates.
Petro has recently adopted an operating strategy to capitalize upon its size and
upon developments in technology to increase operational efficiency and to
improve customer retention.
The Company believes that the propane industry is an attractive complement
to its heating oil business and that it possesses many similar industry and
operating characteristics. Like the home heating oil industry, the propane
industry is highly fragmented, consisting of over 2,600 independently owned and
operated distributors. The Company intends to apply the acquisition and
operating techniques it has successfully applied in the home heating oil
industry to its propane operations.
The Company's business, the sale of home heating oil and retail propane
principally to residential customers, has been relatively stable primarily due
to the following fundamental industry characteristics: (i) residential demand
for heating oil and propane has been relatively unaffected by general economic
conditions due to the non-discretionary nature of heating oil and propane
purchases, (ii) homeowners have tended to remain with their traditional
distributors of both products and (iii) loss of customers to other energy
sources, primarily natural gas, has been low due to either the high cost of
conversion from home heating oil or lack of availability of natural gas. While
over short periods of time weather may cause 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
3
<PAGE>
warmer winter temperatures. The Company historically has been able to pass
through wholesale price increases in the cost of fuel oil 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.
As a result of the successful implementation of the Company's strategy,
revenues increased from $84.6 million in 1980 to $538.5 million in 1993. While
net income decreased from $1.4 million in 1980 to a net loss of $8.4 million in
1993, EBITDA increased during such period from $3.6 million to $48.4 million and
NIDA increased during such period from $2.9 million to $23.2 million. Net cash
provided by operating activities increased from $26.3 million in 1988 to $36.6
million in 1993. Net cash used in investing activities was $38.9 million and
$34.7 million in 1988 and 1993, respectively. Net cash provided by financing
activities decreased from $11.7 million in 1988 to a use of $1.1 million in
1993. While EBITDA and NIDA should not be considered substitutes for net income
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 evaluates its financial performance. EBITDA is a
component of the ratio of EBITDA to interest expense, net. This is a significant
ratio in that the Company's ability to incur additional debt under various
lending arrangements, including the Indenture, is dependent upon achieving at
least a 2.0 to 1 EBITDA to interest expense, net ratio. NIDA is the principal
basis upon which the Company compensates executives and establishes dividends.
The Company's Chief Executive Officer is compensated pursuant to a plan adopted
by the shareholders of the Company, the principal component of which is NIDA.
The Company's announced dividend policy is to pay annual dividends equal to at
least 30% of NIDA.
ACQUISITION OF STAR GAS CORPORATION
In December 1993, the Company purchased a 29.5% equity interest in Star Gas
for $16.0 million and acquired options to purchase the remaining equity
interest. In connection with this investment, the Company entered into a
management agreement with Star Gas wherein the Company agreed to provide Star
Gas with executive, financial and managerial oversight services. This structure
allowed the Company to limit its financial exposure until Star Gas was
operationally restructured. In December 1994, the Company completed the
acquisition of Star Gas for approximately $25.9 million, consisting of $3.8
million in cash and 2.5 million shares of the Company's Class A Common Stock.
In connection with its initial investment in Star Gas, William Powers, a
Vice President of Petro, became President of Star Gas. With the assistance of
the Company's management, during the past year Star Gas restructured its
operations through the sale of various non-core assets, including a trucking
operation in Texas and underperforming propane operations in Texas and Georgia.
Star Gas realized net proceeds of approximately $23.4 million from the sale of
such assets, which assets generated EBITDA of $0.4 million for the year ended
September 30, 1993. In addition, Star Gas began implementing its propane
acquisition strategy with the purchase of two propane distributors with
aggregate annual volume of 1.2 million gallons.
Petro's net purchase price for Star Gas was $123.9 million, including Star
Gas' debt and preferred stock. For the year ended September 30, 1994, Star Gas
had a net loss of $1.3 million and EBITDA of $20.0 million.
RECENT DEVELOPMENTS
Based upon preliminary unaudited results for the year ended December 31,
1994, Petro expects to report sales of approximately $546.7 million compared to
$538.5 million in 1993. The $8.2 million increase was due to the Star Gas
Acquisition which increased sales by $11.1 million, offset by a decline of $2.9
million in sales in the heating oil division due to lower heating oil selling
prices. The estimated volume of home heating oil and retail propane sold in 1994
increased to 456.7 million gallons from 443.5 million gallons in 1993. This
increase was due primarily to acquisitions of heating oil companies and the Star
Gas Acquisition, partially offset by warmer temperatures and account attrition.
4
<PAGE>
Gross profit for 1994 is expected to range from $183.2 million to $184.2
million compared to $171.7 million in 1993. This $12.0 million increase in gross
profit (based on the mid-point estimate of $183.7 million) was attributable to
the $5.7 million of gross profit realized by Star Gas (acquired in December
1994) and to a $6.3 million increase in gross profit in the heating oil
division. The increase of $6.3 million or 3.7% in the heating oil division from
$171.7 million (38.7 cents per gallon) in 1993 to an estimated $178.0 million
(39.8 cents per gallon) in 1994 was attributable to an increase in volume ($1.6
million) and to improved home heating oil margins ($7.2 million), as selling
prices were reduced more slowly than the decline in wholesale product costs.
This increase in gross profit in the heating oil division was primarily offset
by the higher cost of providing heating equipment repair and maintenance
services to heating oil customers and the additional costs associated with the
severe winter weather experienced during the first quarter of 1994 totalling
approximately $2.4 million.
The net loss for 1994 is estimated to range from $4.0 million to $5.0
million, compared to a loss of $8.4 million in 1993. This $3.9 million reduction
in net loss (based upon the mid-point estimate of $4.5 million) was primarily
due to an increase in gross profit and to lower customer list and deferred
charge amortization expense (approximately $2.9 million) in the heating oil
division as certain customer lists and deferred charges became fully amortized.
Partially offsetting the increase in gross profit and the lower customer list
and deferred charge amortization expense were increases in operating expenses
and interest expense. For 1994, EBITDA and NIDA are expected to range from $54.7
million to $55.7 million and $26.3 million to $27.3 million, respectively,
compared to 1993 EBITDA and NIDA of $48.4 million and $23.2 million,
respectively. For the same period cash flows from operating activities are
expected to range from $25.2 million to $28.2 million compared to cash flows
provided by operating activities of $36.6 million in 1993. Despite 1994 being
approximately 1.5% warmer than 1993 (measured on a degree-day basis),
attributable largely to the fourth quarter of 1994, EBITDA increased
approximately 14.0% (based on the mid-point estimate) over 1993 due to higher
home heating oil gross profit margins, volume expansion associated with the
Company's acquisition program and its operating cost control program.
Temperatures for the month of January 1995 were approximately 18.6% warmer
than normal (measured on a degree-day basis) which is expected to have an
adverse impact on first quarter results.
5
<PAGE>
THE DEBENTURE OFFERING
<TABLE>
<S> <C>
Securities Offered........... $125 million principal amount of 12 1/4% Subordinated
Debentures due 2005 (the "Debentures").
Maturity Date................ February 1, 2005.
Interest Payment Dates....... February 1 and August 1 of each year, commencing August 1,
1995.
Optional Redemption.......... The Debentures will be redeemable at the option of the
Company, in whole or in part, at any time on or after
February 1, 2000, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption.
In addition, at any time prior to February 1, 1998, the
Company may redeem Debentures with the net proceeds of a
public offering of Capital Stock of the Company, of Star Gas
or of a subsidiary of Star Gas, at a redemption price of
111% of principal amount, together with accrued and unpaid
interest to the date of redemption, provided that at least
65% in principal amount of the Debentures issued under the
Indenture 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 general unsecured obligations of the
Company, subordinated in right of payment to all existing
and future Senior Debt of the Company. As of September 30,
1994, after giving effect to the Pro Forma Adjustments
described in the Pro Forma Financial Statements contained
elsewhere herein, the Debentures would have been
subordinated in right of payment to approximately $48.6
million of Senior Debt, and pari passu in right of payment
with approximately $161.3 million of other subordinated
indebtedness. 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, 1994, after giving effect to the
Pro Forma Adjustments, would have totalled approximately
$11.4 million, consisting primarily of trade payables.
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.
Common Stock Offering........ Concurrent with the Debenture Offering, the Company is
offering 2,500,000 shares of Class A Common Stock to the
public. See "Common Stock Offering."
</TABLE>
6
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<TABLE>
<S> <C>
Use of Proceeds.............. The net proceeds to the Company from the Debenture Offering
and the Common Stock Offering are estimated to be $120.6
million and $16.2 million, respectively. The Company intends
to use approximately (i) $98.6 million of such proceeds to
purchase $65.4 million of long-term debt of Star Gas, all
outstanding shares of preferred stock of Star Gas not owned
by Petro and 1,521,316 shares of the Company's Class A
Common Stock which were issued to a third party in the Star
Gas Acquisition, (ii) $4.0 million of such proceeds to repay
working capital borrowings of Star Gas and (iii) $14.3
million of such proceeds to redeem $12.8 million principal
amount of notes of the Company. The balance of the net
proceeds, approximately $19.9 million, will be used for
general corporate purposes and, until applied, will be used
to reduce the amounts outstanding under the Company's
acquisition and working capital facilities. See "Use of
Proceeds."
</TABLE>
7
<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 substitutes 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. The ratio of EBITDA to interest
expense, net is a significant ratio in that the Company's ability to incur
additional debt under various lending arrangements, including the Indenture, is
dependent upon achieving at least a 2.0 to 1 EBITDA to interest expense, net
ratio. This definition of EBITDA is not identical to the definition of EBITDA in
the Indenture; however, the historical and pro forma EBITDA throughout the
Prospectus are the same whether calculated under either definition. The
differences between the two definitions are that the definition in the Indenture
(i) excludes the results of a subsidiary subject to restrictions on payment of
dividends and other distributions and (ii) reduces EBITDA by an amount equal to
the Company's equity in the deficit of Subsidiary Cash Flow of any such excluded
subsidiary. See "Description of Debentures--Certain Definitions." For additional
information as to liquidity, see the Consolidated Statements of Cash Flows
included elsewhere in this Prospectus.
OPERATING DATA:
<TABLE>
<CAPTION>
RATIO OF
DEPRECIATION INTEREST NET EARNINGS TO
NET GROSS AND EXPENSE, INCOME FIXED
YEAR ENDED DECEMBER 31, SALES PROFIT AMORTIZATION(1) NET (LOSS) 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)
1993............................... 538,526 171,717 34,664 20,508 (8,431) -- (3)
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
<S> <C> <C> <C> <C> <C> <C>
Actual(4).......................... 546,434 184,752 31,696 22,082 2,128 1.2x
Pro Forma(4)(5).................... 696,223 256,302 43,611 38,603 2,703 1.1x
</TABLE>
SUMMARY CASH FLOW DATA:
<TABLE>
<CAPTION>
NET CASH
NET CASH PROVIDED BY (USED IN) NET CASH PROVIDED BY
YEAR ENDED DECEMBER 31, (USED IN) OPERATING ACTIVITIES INVESTING ACTIVITIES (USED IN) FINANCING ACTIVITIES
<S> <C> <C> <C>
1988........................... $ 26,268 $(38,938) $ 11,741
1989........................... (19,168) (40,294) 59,864
1990........................... 24,392 (33,329) 11,256
1991........................... 39,616 (16,583) (25,654)
1992........................... 26,713 (49,143) 23,381
1993........................... 36,637 (34,737) (1,146)
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
<S> <C> <C> <C>
Actual(4)...................... 37,344 (44,862) (17,136)
Pro Forma(4)(6)................ 48,590
</TABLE>
8
<PAGE>
OTHER DATA:
<TABLE>
<CAPTION>
GALLONS OF HOME HEATING RATIO OF EBITDA TO
OIL AND INTEREST
YEAR ENDED DECEMBER 31, RETAIL PROPANE SOLD EBITDA(7) NIDA(8) EXPENSE, NET(9)
<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
1993............................. 443,487 48,437 23,176 2.4x
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
<S> <C> <C> <C> <C>
Actual(4)........................ 458,563 58,745 32,031 2.7x
Pro Forma(4)(5).................. 584,807 86,897 43,277 2.3x
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AT SEPTEMBER 30, 1994
---------------------------
ACTUAL AS ADJUSTED(10)
<S> <C> <C>
Cash................................................................ $ 17,055 $ 35,180
Working capital..................................................... 8,357 29,291
Total assets........................................................ 234,138 384,486
Total long-term debt................................................ 219,084 334,034
Redeemable preferred stock (excluding current maturities)........... 16,666 16,666
Stockholders' equity (deficiency)................................... (84,568) (61,392)
</TABLE>
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(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 discount 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 $7.2 million for the years ended
December 31, 1989, 1990, 1991, 1992 and 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 and
$27.8 million, respectively, for such periods.
(4) Temperatures for the twelve months ended September 30, 1994 were
approximately 3.0% colder than normal (on a degree-day basis).
(5) The pro forma operating and other data for the twelve months ended
September 30, 1994 represent the historical financial data derived from the
Company's financial statements for the twelve months ended September 30,
1994, adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions, the Prior Note
Offerings and the Offerings. See the Pro Forma Financial Statements
contained elsewhere herein for more detailed information.
(6) Pro forma cash flow from operations for the twelve months ended September
30, 1994 have been derived from information used in the preparation of the
Pro Forma Statement of Operations for such period, adjusted to give effect
to the Pro Forma Adjustments.
(7) "EBITDA" means operating income before depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the
Company, non-cash charges associated with deferred compensation plans and
other non-cash charges of a similar nature, if any. EBITDA is a component
of the ratio of EBITDA to interest expense, net. This is a significant
ratio in that the
9
<PAGE>
Company's ability to incur additional debt under various lending
arrangements, including the Indenture, is dependent upon achieving at least
a 2.0 to 1 EBITDA to interest expense, net ratio.
(8) "NIDA" means net income (loss), plus depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the
Company, non-cash charges associated with deferred compensation plans and
other non-cash charges of a similar nature, if any, 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. NIDA is the principal basis upon which
the Company compensates executives and establishes dividends. The Company's
Chief Executive Officer is compensated pursuant to a plan adopted by the
shareholders of the Company, the principal component of which is NIDA. The
Company's announced dividend policy is to pay annual dividends equal to at
least 30% of NIDA. To the extent dividends exceed net income they will
increase the Company's stockholders' deficit.
(9) The ratio of EBITDA to interest expense, net is a significant ratio in that
the Company's ability to incur additional debt under various lending
arrangements, including the Indenture, is dependent upon achieving at least
a 2.0 to 1 ratio.
(10) As adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions and the Offerings;
provided, however, that the as adjusted data include approximately $19.9
million of cash, working capital and total assets provided by the Offerings
that is not required for the stated uses. See the Pro Forma Financial
Statements contained elsewhere herein for more detailed information.
10
<PAGE>
THE COMPANY
Petroleum Heat and Power Co., Inc. is the largest retail distributor of home
heating oil (#2 fuel oil) in the United States and, with the Star Gas
Acquisition, is the tenth largest retail distributor of propane in the United
States. The Company's home heating oil division had total sales of $546.4
million for the twelve months ended September 30, 1994 and currently serves
approximately 417,000 customers in 28 markets in the Northeast, including the
metropolitan areas of Boston, Providence, New York City, Baltimore and
Washington, D.C. Star Gas had total sales of $101.4 million for the twelve
months ended September 30, 1994 and currently serves more than 145,000 customers
in 63 locations in the Midwest and Northeast.
The home heating oil industry is large, highly fragmented and undergoing
consolidation, with approximately 3,700 independently owned and operated home
heating oil distributors in the Northeast. Petro is the principal acquiror in
this industry and since 1979, when current management assumed control, has
acquired 154 retail heating oil distributors. As a result, volumes sold
increased from 59.4 million gallons in 1980 to 458.6 million gallons for the
twelve months ended September 30, 1994, a compound annual growth rate of 16.0%.
The Company is uniquely positioned to continue its strategy given the Company's
acquisition expertise, reputation, access to capital, and the absence of
competitors within the industry with a comparable combination of these
attributes. Despite the Company's size, Petro estimates that its customer base
represents only approximately 5% of the residential home heating oil customers
in the Northeast.
Petro acquires distributors in both new and existing markets, which
distributors are integrated into the Company's branch system. Economies of scale
are realized from these purchases through the centralization of accounting, data
processing, fuel oil purchasing, credit and marketing functions. Due to its
acquisition history, the Company is well known in the heating oil industry and
is regularly contacted by potential sellers. In addition, the Company has become
more proactive in identifying and contacting potential acquisition candidates.
Petro has recently adopted an operating strategy to capitalize upon its size and
upon developments in technology to increase operational efficiency and to
improve customer retention.
The Company believes that the propane industry is an attractive complement
to its heating oil business and that it possesses many of the same industry and
operating characteristics. Like the home heating oil industry, the propane
industry is highly fragmented, consisting of over 2,600 independently owned and
operated distributors. The Company intends to apply the acquisition and
operating techniques it has successfully applied in the home heating oil
industry to its propane operations.
The Company's business, the sale of home heating oil and retail propane
principally to residential customers, has been relatively stable primarily due
to the following fundamental industry characteristics: (i) residential demand
for heating oil and propane has been relatively unaffected by general economic
conditions due to the non-discretionary nature of heating oil and propane
purchases, (ii) homeowners have tended to remain with their traditional
distributors of both products and (iii) loss of customers to other energy
sources, primarily natural gas, has been low due to either the high cost of
conversion from home heating oil or lack of availability of natural gas. While
over short periods of time weather may cause 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 in the cost of fuel oil 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.
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 fifteen states and the District of Columbia.
11
<PAGE>
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, 1994 (after giving effect to the Pro Forma Adjustments),
the Company would have had outstanding an aggregate of $334.0 million of
long-term debt and stockholders' deficiency of $61.4 million. Of such long-term
debt, $3.1 million, $3.0 million and $2.9 million in principal amount will
mature in 1995, 1996 and 1997, respectively. In addition, approximately $4.2
million of the Company's 1989 Cumulative Redeemable Exchangeable Preferred Stock
(the "Redeemable Preferred Stock") is subject to mandatory redemption each year
through 1999. 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 in general. 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, $7.2 million, $16.3 million
and $4.5 million for the years ended December 31, 1989, 1990, 1991, 1992 and
1993, and the nine months ended September 30, 1993 and 1994, respectively. On a
pro forma basis, earnings were insufficient to cover fixed charges by $45.0
million and $6.7 million for the year ended December 31, 1993 and the nine
months ended September 30, 1994, 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, $27.8 million, $10.7 million, $18.3
million, $37.7 million and $25.9 million, respectively, for such periods. See
"--Recent Net Losses."
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 and propane. Although temperature levels for the heating
season have been relatively stable over time, variations can occur from time to
time, and warmer than normal weather will adversely affect the Company's
results, while colder than normal weather will favorably affect the Company's
results. For the twelve months ended September 30, 1994, temperatures were
approximately 3.0% colder (on a degree-day basis) than normal, while for the
year ended December 31, 1994, temperatures were approximately 3.2% warmer (on a
degree-day basis) than normal. Degree days measure the amount by which the
average of the high and low temperatures on a given day is below 65 degrees
Fahrenheit. There can be no assurance that average temperatures in future years
will not be above the historical average.
12
<PAGE>
The seasonal nature of the Company's business results in the sale by the
Company of approximately 50% of its volume of home heating oil in the first
quarter and 30% of its volume of home heating oil in the fourth quarter of each
year. Similarly, the Company sells approximately 35% of its annual volume of
propane in each of the first and fourth calendar quarters. The Company generally
realizes positive NIDA and net income in both of these quarters and negative
NIDA and net losses 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, conversions by the Company's home heating oil customers from
fuel oil to other sources, primarily natural gas, have 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 home heating oil customers converted to gas at
approximately a 2% annual rate as oil prices increased relative to the price of
natural gas. However, beginning in the spring of 1991 through September 1994,
gas conversions by the Company's home heating oil customers returned to their
approximate 1% historical annual rate as the prices for the two products
returned to parity. As fuel oil and propane are less expensive heating sources
than electricity, the Company believes that an insignificant number of its
customers switch to electric heat from oil heat or propane. See "Business--
Fundamental Characteristics."
Because of the significant cost advantage of natural gas over propane,
propane is generally not competitive with natural gas in those areas where
natural gas is readily available. The expansion of the nation's natural gas
distribution systems has resulted in the availability of natural gas in areas
that previously depended upon propane. Propane is generally less expensive to
use than electricity for space heating, water heating and cooking and therefore
competes effectively with electricity. Although propane and fuel oil have
similar applications, propane and fuel oil have generally developed distinct
markets. Given the cost of conversion from propane to home heating oil,
consumers will only convert their heating systems when there is a significant
price advantage of home heating oil as compared to propane. See
"Business--Fundamental Characteristics."
COMPETITION FOR NEW RETAIL CUSTOMERS
The Company's businesses are highly competitive. The Company's fuel oil
division 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. Long-standing customer relationships are also
typical to the retail propane industry. Retail propane customers generally lease
their storage tanks from their suppliers. The lease terms and, in most states,
certain fire safety regulations restrict the refilling of a leased tank solely
to the propane supplier that owns the tank. The inconvenience of switching tanks
minimizes a customer's tendency to switch among suppliers of propane on the
basis of minor variations in price.
As a result of, among others, the factors noted above, the Company's fuel
oil and propane divisions may experience difficulty in acquiring new retail
customers due to existing relationships between potential customers and other
home heating oil or propane distributors. In addition, in certain instances,
homeowners have formed buying cooperatives which seek to purchase fuel oil from
distributors at a
13
<PAGE>
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 fuel oil
operations.
GROWTH DEPENDENT UPON ACQUISITIONS
In recent years, demand for home heating fuel 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.
The Company loses approximately 90% of home heating oil customers acquired
in an acquisition within the first six years following an acquisition; however,
approximately 35% of the Company's customer losses are as a result of homeowners
moving. The Company, through its marketing program, is able to retain
approximately 60% of such homes. As a result, the Company's actual net loss of
home heating oil customers has averaged approximately 4% 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 home
heating oil customer attrition rate in the future.
The retail propane industry is mature with only limited growth in total
demand for the product foreseen. Based on information available from the Energy
Information Administration, the Company believes the overall demand for propane
has remained relatively constant over the past several years, with year-to-year
industry volumes being impacted primarily by weather patterns. Therefore, the
ability of the Company's propane division to grow will be heavily dependent on
its ability to acquire other distributors. Unlike the home heating oil industry,
where the Company believes it has an advantage over other potential buyers and
has established a reputation for making acquisitions, the Company has only
limited experience in the propane industry and, in making acquisitions, will
have to compete with other larger, well-financed companies.
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. The Company is subject to certain debt incurrence
covenants in the Indenture and in certain agreements governing other borrowings
that might restrict the Company's ability to incur indebtedness to finance
acquisitions. In addition, 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.
RECENT NET LOSSES
The Company incurred net losses of $16.6 million, $4.4 million, $8.4 million
and $6.8 million for the years ended December 31, 1991, 1992 and 1993 and the
nine months ended September 30, 1994, respectively. Based upon preliminary
unaudited results, the Company expects to report a net loss ranging from $4.0
million to $5.0 million for the year ended December 31, 1994. On a pro forma
basis after giving effect to the Pro Forma Adjustments, the Company would have
incurred net losses of $45.6 million and $7.4 million for the year ended
December 31, 1993 and for the nine months ended September 30, 1994,
respectively. These net losses were primarily a result of the amortization
expense associated with the numerous acquisitions consummated since 1980 and, in
the case of the pro forma year ended December 31, 1993, a $33.9 million non-cash
asset impairment recorded by Star Gas in calendar 1993. In connection with each
acquisition of a home heating oil distributor, the Company has amortized 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 1991, 1992 and 1993 amounted to $35.6
million, $34.4 million and $34.7 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
14
<PAGE>
adversely affect the Company. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Overview" and the Pro Forma
Financial Statements included elsewhere in this Prospectus.
SUPPLY OF HOME HEATING OIL AND PROPANE
Home heating oil and propane are available from numerous sources, including
integrated international oil companies, independent refiners and independent
wholesalers. The Company purchases home heating oil and propane 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 home heating oil business, past disruptions have
affected the price, but not the availability, of home heating oil to the
Company. Substantially all of the propane purchased by the Company is produced
domestically. Accordingly, the Company's propane division is not subject to
material risks of disruption in foreign supply. The Company's heating oil
division historically has been able to pass through wholesale price increases to
its customers and has minimized inventory risk 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. The Company
intends to minimize inventory risk in its propane division by adopting inventory
policies similar to those in its heating oil division. See
"Business--Fundamental Characteristics--Insulation from Oil and Propane Price
Volatility."
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 and has slowed the growth of demand for
propane by retail customers. Although the Company believes that current oil
prices have resulted in decreased incentive to conserve and that most
conservation efforts have already been implemented, the Company 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.
OPERATING RISKS OF PROPANE BUSINESS
In its propane division, the Company is subject to operating risks
incidental to handling, storing and transporting propane, which is a highly
explosive liquid. The Company maintains insurance which it believes is adequate
to protect it from potential future claims for personal injury and property
damage, subject to deductibles which the Company believes are reasonable and
prudent. However, there can be no assurance that such insurance will be adequate
to protect the Company from all material expenses related to potential future
claims for personal and property damage or that such levels of insurance will be
available in the future at economical prices. The Company believes that there
are no known contingent claims or uninsured claims that are likely to have a
material adverse effect on the results of operations or financial condition of
the Company. The occurrence of an event not fully covered by insurance could
have a material adverse effect on the results of operations and financial
position of the Company.
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. In addition, the directors own 29.8% of the Class A Common
Stock (after giving effect to the Common Stock Offering). 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,
53.6% of the voting
15
<PAGE>
power of all of the outstanding shares of Common Stock (after giving effect to
the Common Stock Offering). 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 market 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. The Underwriters 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.
COMMON STOCK OFFERING
Concurrent with the Debenture Offering, the Company is offering 2,500,000
shares of Class A Common Stock to the public. In addition, the Company has
granted the Underwriters an option to purchase up to 375,000 additional shares
of Class A Common Stock to cover over-allotments.
USE OF PROCEEDS
The net proceeds from the sale of the Debentures are estimated to be $120.6
million, after deducting underwriting discounts and commissions and estimated
offering expenses. The net proceeds to the Company of the Common Stock Offering
are estimated to be $16.2 million ($18.7 million if the Underwriters'
over-allotment option in connection with the Common Stock Offering is exercised
in full), after deducting underwriting discounts and commissions and estimated
offering expenses. The Company intends to use approximately (i) $98.6 million of
such proceeds to purchase $65.4 million of long-term debt of Star Gas, all
outstanding shares of preferred stock of Star Gas not owned by Petro and
1,521,316 shares of the Company's Class A Common Stock which were issued to a
third party in the Star Gas Acquisition, (ii) $4.0 million of such proceeds to
repay working capital borrowings of Star Gas and (iii) $14.3 million of such
proceeds to redeem $12.8 million principal amount of notes of the Company. The
balance of the net proceeds, approximately $19.9 million, will be available to
the Company for general corporate purposes and, until applied, will be used to
reduce the amounts outstanding under the Company's acquisition and working
capital facilities.
The Star Gas long-term debt to be purchased has a weighted average interest
rate of 10.3%, a weighted average maturity of 4.6 years at September 30, 1994
and a final maturity of August 28, 2001. The notes of the Company to be redeemed
bear interest at a floating rate equal to LIBOR plus 9.28% (15.34% at January 1,
1995) and mature on March 1, 2000. The Star Gas working capital borrowings bore
interest at a rate of 8.75% as of January 31, 1995.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1994, as adjusted to give effect to the Star Gas Acquisition and
the Heating Oil Acquisitions (as defined in the Pro Forma Financial Statements),
and as further adjusted to give effect to the Offerings and the use of proceeds
therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
------------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term obligations:
Working capital borrowings(1)....................... $ -- $ 4,000 $ --
Current maturities of long-term debt................ 33 800 800
Current maturities of redeemable preferred
stock(2).............................................. 4,167 4,167 4,167
--------- ----------- ----------
Total short-term obligations.................... $ 4,200 $ 8,967 $ 4,967
--------- ----------- ----------
--------- ----------- ----------
Long-term debt:
Senior notes........................................ $ 42,632 $ 42,632 $ 36,250
Other senior long-term debt(1)...................... 8,820 11,533 11,533
12 1/4% Subordinated Debentures..................... -- -- 125,000
Subordinated notes.................................. 42,632 42,632 36,251
10 1/8% Subordinated Notes.......................... 50,000 50,000 50,000
9 3/8% Subordinated Debentures...................... 75,000 75,000 75,000
Debt of Star Gas(3)................................. -- 65,350 --
--------- ----------- ----------
Total long-term debt............................ 219,084 287,147 334,034
Redeemable preferred stock:
Cumulative Redeemable Exchangeable Preferred Stock,
409,722 shares authorized, 208,332 shares
outstanding, of which 41,667 are reflected as
current(2)............................................ 16,666 16,666 16,666
Preferred stock of Star Gas........................... -- 19,722 --
Stockholders' equity (deficiency):
Preferred stock, 5,000,000 shares authorized, none
outstanding........................................... -- -- --
Class A Common Stock, 40,000,000 shares authorized,
18,992,579, 21,482,205 and 22,460,889 shares
outstanding(4)........................................ 1,899 2,148 2,246
Class B Common Stock, 6,500,000 shares authorized,
25,963 shares outstanding............................. 3 3 3
Class C Common Stock, 5,000,000 shares authorized,
2,545,139 shares outstanding(4)....................... 255 255 255
Additional paid-in capital.......................... 51,094 72,941 75,503
Deficit(5).......................................... (132,005) (132,005) (133,585)
Note receivable from stockholder.................... (1,280) (1,280) (1,280)
Minimum pension liability adjustment................ (4,534) (4,534) (4,534)
--------- ----------- ----------
Total stockholders' equity (deficiency)......... (84,568) (62,472) (61,392)
--------- ----------- ----------
Total capitalization.......................... $ 151,182 $ 261,063 $ 289,308
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
(Footnotes on following page)
17
<PAGE>
(Footnotes for preceding page)
- ---------------------
(1) The Company has available under an amended and restated credit agreement
dated as of August 1, 1994 (the "Credit Agreement") a $140 million credit
facility, consisting of a $75 million working capital commitment, a $50
million revolving credit facility which is available for acquisitions and a
$15 million letter of credit facility primarily for insurance purposes. No
borrowings were outstanding under the Credit Agreement at September 30,
1994. At January 26, 1995, $24.0 million was outstanding under the
acquisition facility of the Credit Agreement.
(2) 41,667 shares of Redeemable Preferred Stock are subject to mandatory
redemption in each of 1995 through 1999. 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.
(3) Consists of the debt to be purchased with the proceeds of the Offerings: the
11.56% Senior Notes, the 12.625% Senior Subordinated Notes, the Senior Reset
Term Notes and borrowings under a term loan agreement.
(4) Does not include 19,208 shares of Class A Common Stock or 52,380 shares of
Class C Common Stock issued on November 30, 1994 as the result of an
exercise of stock options held by the estate of Malvin P. Sevin.
(5) The Company will record an extraordinary loss upon early retirement of the
debt to be purchased with the proceeds of the Offerings. If the Offerings
had occurred on September 30, 1994, the Company would have recorded an
approximate $1.6 million extraordinary loss.
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<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, 1993 are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The financial data at September 30, 1994 and for the nine month
periods ended September 30, 1993 and September 30, 1994 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, 1993 and for the nine months
ended September 30, 1994 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 substitutes 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. The ratio of EBITDA to
interest expense, net is a significant ratio in that the Company's ability to
incur additional debt under various lending arrangements, including the
Indenture, is dependent upon achieving at least a 2.0 to 1 EBITDA to interest
expense, net ratio. This definition of EBITDA is not identical to the definition
of EBITDA in the Indenture; however, the historical and pro forma EBITDA
throughout the Prospectus are the same whether calculated under either
definition. The differences between the two definitions are that the definition
in the Indenture (i) excludes the results of a subsidiary subject to
restrictions on payment of dividends and other distributions and (ii) reduces
EBITDA by an amount equal to the Company's equity in the deficit of Subsidiary
Cash Flow of any such excluded subsidiary. See "Description of
Debentures--Certain Definitions." For additional information as to liquidity,
see the Consolidated Statements of Cash Flows included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and the Pro Forma Financial Statements included
elsewhere in this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- ----------------------------------
PRO FORMA(1) PRO FORMA(1)
1989 1990 1991 1992 1993 1993 1993 1994 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales............ $541,521 $567,414 $523,243 $512,430 $538,526 $716,072 $377,384 $385,291 $486,790
Cost of sales........ 402,178 435,031 378,772 350,941 366,809 465,295 262,368 257,240 309,501
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Gross profit..... 139,343 132,383 144,471 161,489 171,717 250,777 115,016 128,051 177,289
Operating expenses... 99,267 106,076 104,435 110,165 123,280 173,777 89,180 91,907 123,293
Amortization of
customer lists and
deferred charges... 26,966 30,517 30,025 28,859 28,731 35,440 22,373 19,467 23,009
Depreciation and
amortization of
plant and
equipment............. 5,127 5,796 5,550 5,534 5,933 13,142 4,368 4,308 9,375
Impairment of
long-lived
assets................ -- -- -- -- -- 33,913 -- -- --
Provision for
supplemental
benefit............... -- -- -- 1,974 264 264 193 210 209
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Operating income
(loss)................ 7,983 (10,006) 4,461 14,957 13,509 (5,759) (1,098) 12,159 21,403
Interest
expense--net.......... 17,915 20,900 20,728 18,622 20,508 39,110 15,147 16,721 28,337
Other income
(expense)-- net.... 2,568 (228) (45) (324) (165) (165) (29) 84 209
Share of loss of Star
Gas................... -- -- -- -- -- -- -- (1,243) --
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Income (loss) before
income taxes and
extraordinary item.... (7,364) (31,134) (16,312) (3,989) (7,164) (45,034) (16,274) (5,721) (6,725)
Income taxes
(benefit)............. (3,077) (1,867) 250 400 400 580 218 425 643
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Income (loss) before
extraordinary item.... (4,287) (29,267) (16,562) (4,389) (7,564) (45,614) (16,492) (6,146) (7,368)
Extraordinary item... -- -- -- -- (867) -- (867) (654) --
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Net income
(loss)................ $ (4,287) $(29,267) $(16,562) $ (4,389) $ (8,431) $(45,614) $(17,359) $ (6,800) $ (7,368)
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Ratio of earnings to
fixed charges(2)... -- -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- --------------------------------
PRO FORMA(3) PRO FORMA(3)
1989 1990 1991 1992 1993 1993 1993 1994 1994
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY CASH FLOW DATA:
Net Cash provided by
(used in) operating
activities................ $(19,168) $24,392 $39,616 $26,713 $36,637 $ 47,285 $47,176 $47,883 $ 54,682
Net Cash (used in)
investing activities... (40,294) (33,329) (16,583) (49,143) (34,737) -- (17,427) (27,552) --
Net Cash provided by
(used in) financing
activities................ 59,864 11,256 (25,654) 23,381 (1,146) -- (26,171) (7,890) --
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- --------------------------------
PRO FORMA(1) PRO FORMA(1)
1989 1990 1991 1992 1993 1993 1993 1994 1994
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)................. $40,076 $26,307 $40,036 $51,325 $48,437 $77,000 $25,836 $36,144 $53,996
Interest expense, net..... 17,915 20,900 20,728 18,622 20,508 39,110 15,147 16,721 28,337
NIDA(5)................... 27,573 4,639 15,744 27,721 23,176 33,824 7,025 15,880 22,679
Ratio of EBITDA to
interest expense,
net(6)..................... 2.2x 1.3x 1.9x 2.8x 2.4x 2.0x 1.7x 2.2x 1.9x
Gallons of home heating
oil and retail propane
sold....................... 449,040 398,989 385,557 423,354 443,487 579,221 307,247 322,323 417,142
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
AT DECEMBER 31, ----------------------
---------------------------------------------------- AS
1989 1990 1991 1992 1993 ACTUAL ADJUSTED(7)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................. $ 3,210 $ 5,529 $ 2,907 $ 3,860 $ 24,614 $ 17,055 $ 35,180
Working capital (deficiency).......... 13,544 (5,520) (12,038) (6,744) 16,694 8,357 29,291
Total assets.......................... 286,435 260,665 220,010 252,783 256,589 234,138 384,486
Total long-term debt.................. 143,988 146,193 141,830 135,058 185,311 219,084 334,034
Redeemable preferred stock (excluding
current maturities).................... 10,000 25,000 30,023 37,718 20,883 16,666 16,666
Stockholders' equity (deficiency)..... (3,287) (40,087) (61,444) (33,917) (61,964) (84,568) (61,392)
</TABLE>
- ------------------------
(1) The pro forma statement of operations and other data represent the
historical data derived from the Company's financial statements, adjusted to
give effect to the Pro Forma Adjustments, including the Heating Oil
Acquisitions, the Star Gas Transactions, the Prior Note Offerings and the
Offerings. See the Pro Forma Financial Statements contained elsewhere herein
for more detailed information.
(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 discount and the interest factor in
rental expense. Earnings were insufficient to cover fixed charges by $7.4
million, $31.1 million, $16.3 million, $4.0 million, $7.2 million, $16.3
million and $4.5 million for the years ended December 31, 1989, 1990, 1991,
1992 and 1993, and the nine months ended September 30, 1993 and 1994,
respectively. On a pro forma basis, earnings were insufficient to cover
fixed charges by $45.0 million and $6.7 millon for the year ended December
31, 1993 and the nine months ended September 30, 1994, 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,
$27.8 million, $10.7 million, $18.3 million $37.7 million and $25.9 million,
respectively, for such periods.
(3) Pro forma cash flow from operations for the year ended December 31, 1993 and
for the nine months ended September 30, 1994 have been derived from
information used in the preparation of the Pro Forma Statements of
Operations for such periods, adjusted to give effect to the Pro Forma
Adjustments.
(4) "EBITDA" means operating income before depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the Company,
non-cash charges associated with deferred compensation plans and other
non-cash charges of a similar nature, if any. EBITDA is a component of the
ratio of EBITDA to interest expense, net. This is a significant ratio in
that the Company's ability to incur additional debt under various lending
arrangements, including the Indenture, is dependent upon achieving at least
a 2.0 to 1 EBITDA to interest expense, net ratio.
(5) "NIDA" means net income (loss), plus depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the Company,
non-cash charges associated with deferred compensation plans and other
non-cash charges of a similar nature, if any, 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. NIDA is the principal basis upon which
the Company compensates executives and establishes dividends. The Company's
Chief Executive Officer is compensated pursuant to a plan adopted by the
shareholders of the Company, the principal component of which is NIDA. The
Company's announced dividend policy is to pay annual dividends equal to at
least 30% of NIDA. To the extent dividends exceed net income they will
increase the Company's stockholders' deficit.
(6) The ratio of EBITDA to interest expense, net is a significant ratio in that
the Company's ability to incur additional debt under various lending
arrangements, including the Indenture, is dependent upon achieving at least
a 2.0 to 1 ratio.
(7) As adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions and the Offerings;
provided, however, that the as adjusted data include approximately $19.9
million of cash, working capital and total assets provided by the Offerings
that is not required for the stated uses. See the Pro Forma Financial
Statements contained elsewhere herein for more detailed information.
21
<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 heating oil acquisitions, the seasonal nature of the demand for
residential heating and the general ability of heating oil and propane
distributors to pass on variations in wholesale costs to their customers. The
following enumerates certain factors that investors should consider.
First, the financial results of a given year do not reflect the full impact
of that year's acquisitions. Historically, most acquisitions have been 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, substantially all purchased intangibles have been 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 fuel
oil customer attrition rates, customer lists are amortized 90% over a six-year
period and the balance over a 25-year period. However, the Company's net loss of
heating oil customers has only averaged approximately 4% per annum over the past
five years, as the loss of purchased accounts has been partially offset by new
customers obtained through internal marketing. The covenants not to compete are
amortized over the lives of the covenants, which generally range from five to
seven years.
Third, the seasonal nature of the Company's business results in the sale by
the Company of approximately 50% of its annual volume of fuel oil in the first
quarter and 30% in the fourth quarter of each year and 35% of its annual volume
of propane in each of the first and fourth quarters of each calendar year. As a
result, acquisitions made during the spring and summer months generally have a
negative effect on earnings 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 or net income. Since the Company historically has added a
per gallon margin onto its wholesale costs, variability in supply prices has
affected net sales but generally has not affected net income. 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 net income.
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.
RESULTS OF OPERATIONS AND OTHER DATA
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September
30, 1993
Net sales increased for the first nine months of 1994 to $385.3 million from
$377.4 million for the same period in 1993. The $7.9 million increase was
attributable to growth in volume and related service
22
<PAGE>
revenue associated with acquisitions ($15.5 million or 4.1%) and to colder
weather ($22.1 million or 5.9%), partially offset by the Company's efficiency
program ($4.8 million or 1.3%) which shifts summertime deliveries to the fall
and winter months, and allows the Company to lower its summertime operating
expenses. Also offsetting the effects of acquisitions and colder weather were
attrition in the Company's customer base ($16.5 million or 4.4%), especially in
the low margin and commercial segments of the Company's business, and lower
selling prices ($8.4 million or 2.2%) which resulted from the pass through of
lower wholesale product costs.
During the first nine months of 1994, home heating oil volume increased to
322.3 million gallons, 4.9% greater than the number of gallons delivered in the
nine months ended September 30, 1993, due to 7.3% colder temperatures (on a
degree-day basis) for the first nine months of 1994 compared to the prior period
and the impact of the nine acquisitions (with annual volumes of 25.8 million
gallons) completed in 1993 whose entire nine month volume is first reflected in
1994. The Company's volume during the first nine months of 1994 was not
significantly affected by the seven 1994 acquisitions (with annual volumes of
43.3 million gallons) since the majority of these acquisitions were completed
after the heating season. The acquisition growth and the increase in volume due
to colder temperatures were partially offset by the Company's delivery
efficiency program and attrition in the Company's customer base.
Gross profit increased $13.0 million (11.3%) from $115.0 million (37.4 cents
per gallon) for the nine months ended September 30, 1993 to $128.0 million (39.7
cents per gallon) for the nine months ended September 30, 1994. This increase in
gross profit was attributable to the increase in volume ($6.5 million) and
improved home heating oil margins ($8.5 million) as selling prices were reduced
more slowly than the decline in wholesale product costs. The increase in gross
profit was offset by the higher cost of providing heating equipment repair and
maintenance services to customers and the additional costs associated with the
severe Northeast winter weather experienced during the first quarter of 1994
totalling approximately $2.0 million.
Direct delivery expense increased $2.4 million from $20.9 million for the
first nine months of 1993 to $23.3 million for the first nine months of 1994.
This increase of 11.6% was due primarily to the additional costs of
approximately $1.5 million associated with temporary delivery inefficiencies
experienced during the first quarter of 1994 created by the severe winter
weather conditions and expenses relating to the 4.9% increase in volume. The
first quarter increase in delivery expense was partially offset by a reduction
in summertime deliveries pursuant to the Company's delivery efficiency program.
Selling, general and administrative expenses increased slightly from $68.3
million in the first nine months of 1993 to $68.6 million for the first nine
months of 1994. On a per gallon basis, these expenses declined by 4.3% from 22.2
cents to 21.3 cents due to economies of scale associated with acquisitions, a
reduction in marketing expenses of $1.1 million, the Company's ongoing
commitment to monitoring its operating expenses and the weather related volume
increase.
Amortization of customer lists and deferred charges decreased 13.0%, or $2.9
million, to $19.5 million. These non-cash expenses declined as certain customer
lists and deferred charges became fully amortized. Depreciation and amortization
of plant and equipment decreased 1.4%, or $0.1 million, to $4.3 million for the
nine months ended September 30, 1994 due to certain fixed assets that became
fully depreciated.
Operating income increased to $12.2 million for the first nine months of
1994 compared with a loss of $1.1 million for the first nine months of 1993.
This significant improvement was due to the volume growth and to improved home
heating oil margins which were partially offset by weather related increases in
service, delivery and operating expenses. The decline in depreciation and
amortization expense also contributed to the increase in operating income.
EBITDA increased 39.9% to $36.1 million in 1994 from $25.8 million in 1993.
This improvement was due to an increase in home heating oil volume and gross
profit margins, and a reduction in
23
<PAGE>
marketing expenses partially offset by weather related increases in service,
delivery and operating expenses.
Net interest expense increased by $1.6 million to $16.7 million for the nine
months ended September 30, 1994. A reduction in the average borrowing rate from
11.4% to 10.9% was offset by a $32.4 million increase in average long-term
borrowings from $177.5 million to $209.9 million. Average long-term borrowings
increased due to the issuance in April 1993 of $50 million of 10 1/8%
Subordinated Notes due 2003 (the "10 1/8% Notes") and the issuance in February
1994 of $75 million of 9 3/8% Subordinated Debentures due 2006 (the "9 3/8%
Debentures"). The proceeds of these issues were used to refinance $75 million in
long-term debt and to finance the Company's ongoing acquisition program.
Short-term borrowings were also reduced by $6.9 million on average as part of
the proceeds of the debt issuances were used to reduce working capital
borrowings pending application towards the Company's acquisition program.
The loss before income taxes, extraordinary items, and equity in earnings of
Star Gas was significantly reduced from $16.3 million for the first nine months
of 1993 to $4.5 million for the first nine months of 1994 as the $13.3 million
increase in operating income was reduced by the $1.6 million increase in net
interest expense.
Income taxes were approximately $0.4 million for the nine months ended
September 30, 1994 compared to $0.2 million for the first nine months of 1993.
These taxes represent certain state income taxes.
Based on Petro's ownership percentage of Star Gas at September 30, 1994,
$1.2 million was recorded as a loss under the equity method of accounting. On
December 7, 1994, Petro executed certain options to acquire the remaining common
equity of Star Gas.
The extraordinary loss of $0.7 million for the nine months ended September
30, 1994 represents the cash premium paid in connection with the refinancing in
February 1994 of $50.0 million in long-term notes scheduled to mature in June
1994 with the proceeds of the $75 million 9 3/8% Debenture issue. For the nine
months ended September 30, 1993, the Company recorded an extraordinary charge of
$0.9 million representing a cash premium of $0.4 million and the write-off of
$0.5 million in debt discount and related deferred charges when $25.0 million of
subordinated debt scheduled to mature in 1993 and 1995 was refinanced.
The net loss for the first nine months of 1994 decreased $10.6 million to
$6.8 million, due to the $13.3 million increase in operating income offset by
the $1.6 million increase in net interest expense and the $1.2 million of equity
loss in Star Gas.
1993 Compared to 1992
Net sales increased in 1993 to $538.5 million from $512.4 million in 1992.
This $26.1 million increase was attributable to volume growth and related
service revenues associated with acquisitions ($55.4 million or 10.8%), offset
by attrition in the Company's customer base ($18.6 million or 3.6%) and 2.6%
warmer weather measured on a degree-day basis ($10.9 million or 2.1%).
In 1993 home heating oil volume increased to 443.5 million gallons, 4.8%
greater than the 423.4 million gallons delivered in 1992 due to the impact of
the nine acquisitions completed in 1992 whose annual volume was fully reflected
for the first time in 1993, and to a lesser extent, the nine acquisitions
completed in 1993. The positive impact of the acquisitions was offset by the
slightly warmer weather and attrition in the Company's customer base.
Gross profit increased $10.2 million (6.3%), from $161.5 million (38.1 cents
per gallon) for 1992 to $171.7 million (38.7 cents per gallon) for 1993. The
increase in gross profit was attributable to volume related increases
aggregating $8.6 million and to a 2.0 cent per gallon increase in home heating
oil margins ($9.0 million) as the Company was able to maintain selling prices
despite a decline in wholesale product costs. The volume and margin increases in
gross profit were offset by the higher cost ($8.1
24
<PAGE>
million) of providing heating equipment repair and maintenance service to a
larger customer base and the utilization of that service as part of the
Company's internal marketing program.
Direct delivery expense increased $3.1 million from $26.8 million in 1992 to
$29.9 million in 1993. This increase was due primarily to the 4.8% increase in
volume and the severe weather conditions experienced in March 1993 that
temporarily increased delivery expenses.
Selling, general and administration expenses increased from $83.4 million in
1992 to $93.4 million in 1993. This $10.0 million increase was due to expansion
of the Company's marketing program ($2.4 million), selling, general and
administrative expenses associated with acquisitions ($5.9 million) and other
expenses increases ($1.7 million). On a per gallon basis, these expenses
increased 7.1% from 19.7 cents in 1992 to 21.1 cents in 1993. However, after
adjustment for the warmer weather in 1993, the increase was 4.0% per gallon
which was primarily attributable to the expansion of the Company's marketing
program.
The provision for supplemental benefits, representing the present value of
such benefits, returned to the more normal level of $0.3 million compared to the
accelerated accrual of $2.0 million in 1992.
Amortization of customer lists and deferred charges were $28.7 million,
approximately the same as in 1992. While volume increased 4.8%, these non-cash
expenses remained equal as certain customer lists and capitalized expenses
became fully amortized. Depreciation and amortization of plant and equipment
increased 7.2%, or $0.4 million, to $5.9 million for 1993 due to the
acquisitions.
Operating income was $13.5 million for 1993 compared to $15.0 million in
1992, as the 4.8% increase in volume and the increase in home heating oil
margins were offset by higher residential service related costs, increased
delivery and marketing expenses.
EBITDA was $48.4 million in 1993 compared to $51.3 million in 1992 as the
4.8% increase in volume and the increase in home heating oil margins were offset
by higher residential service related costs and increased marketing expenses.
Net interest expense increased $1.9 million, or 10.1%, to $20.5 million for
1993. A reduction in the average borrowing rate was offset by a $31.1 million
increase in long-term borrowings from $148.5 million, at an average interest
rate of 11.9%, to $179.6 million, at an average interest rate of 11.4%. This
increase in long-term borrowings 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 $50.0 million of 10 1/8% Notes. The proceeds
of this debt issuance were used to repay $25.0 million of long-term obligations
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 $17.9 million, at an average interest rate of 5.9%, to $11.2
million, at an average interest rate of 5.4%. 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 was $7.2 million in
1993, $3.2 million, or 79%, greater than in 1992, due to the reduction in
operating income and the increase in interest expense. Income taxes of $0.4
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 $4.4 million in 1992 to $8.4 million in 1993 due
to the decline in operating income, the increase in interest expense and the
extraordinary charge.
25
<PAGE>
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 423.4 million gallons, 9.8%
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 1.8% per gallon, from
$144.5 million in 1991 (37.5 cents per gallon) to $161.5 million in 1992 (38.2
cents 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.
Direct delivery expense increased $1.8 million or 7.0% from $25.0 million in
1991 to $26.8 million in 1992 due primarily to the 9.8% increase in home heating
oil volume.
Selling, general and administrative expenses increased $4.0 million or 5.0%
compared to the 9.8% increase in volume. This $4.0 million increase in operating
expenses was primarily due to acquisitions ($2.5 million). On a per gallon
basis, these expenses declined from 20.6 cents in 1991 to 19.7 cents in 1992 due
to the savings from the Company's cost reduction program which commenced 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.
EBITDA increased 28.2% to $51.3 million in 1992 from $40.0 million in 1991.
This improvement was primarily the result of the 9.8% home heating oil volume
increase and a 1.7 cents per gallon EBITDA margin improvement.
26
<PAGE>
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, increased 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.
LIQUIDITY AND FINANCIAL CONDITION
The Company has financed its growth through a combination of internally
generated capital and the issuance of common stock, redeemable preferred stock
and debt. As indicated in the table below, the Company has financed acquisitions
and other asset requirements made from January 1, 1989 to December 31, 1993, as
follows: 62.6% with internally generated cash and funds from a 1992 offering of
4.3 million shares of Class A Common Stock, 13.3% with redeemable preferred
stock and 24.1% with long-term debt and working capital. For the year ended
December 31, 1993, the ratio of EBITDA to net interest expense was 2.4x. The
ratio of EBITDA to interest expense, net is a significant ratio in that the
Company's ability to incur additional debt under various lending arrangements,
including the Indenture, is dependent upon achieving at least a 2.0 to 1 ratio.
<TABLE>
<CAPTION>
FUNDING SOURCES
------------------------------------------------------------------
ACQUISITIONS INTERNALLY
AND GENERATED FUNDS LONG-TERM DEBT
FIXED ASSET AND ADDITIONAL REDEEMABLE AND NET WORKING
YEAR PURCHASES EQUITY(1) PREFERRED STOCK CAPITAL(2)
- ------------------------ ------------ ----------------- ------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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)
1993.................... 34,654 11,461 33.1 (12,764) (36.8) 35,957 103.7
------------ -------- -------- --------
Total................... $175,508 $109,825 62.6% $ 23,325 13.3% $ 42,358 24.1%
------------ -------- -------- --------
------------ -------- -------- --------
</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 February 1994,
the Company realized net proceeds of $71.1 million from its offering of its 9
3/8% Debentures. Of such net proceeds, $50.7 million was used to repay $50.0
million of outstanding notes, including premium, and the remaining $20.4 million
of the proceeds became available to finance the Company's ongoing acquisition
program. As a result of the repayment of such outstanding notes, a
27
<PAGE>
$20.0 million cash collateral account securing these notes was released to the
Company, increasing the amount available for acquisitions to $40.4 million. As
the Company continues to expand, or the opportunity to refinance existing debt
arises, the Company will utilize both the public and private markets to raise
capital when it deems appropriate.
Net cash provided by operating activities of $47.9 million, along with the
$40.4 million of net proceeds from the issuance and refinancing of debt in
February 1994 as mentioned above, amounted to $88.3 million for the nine months
ended September 30, 1994. These funds were utilized in investing activities for
acquisitions and the purchase of fixed assets totalling $26.2 million and in
financing activities to repay $28.0 million of working capital borrowings, to
pay dividends of $12.6 million, to repurchase Redeemable Preferred Stock of $4.2
million, to repurchase Class B Common Stock for $3.3 million, for the payment of
deferred financing costs of $1.4 million and to make principal payments on other
long-term obligations of $0.2 million. In addition, the Company financed a
portion of its 1994 acquisitions with notes payable in the aggregate amount of
$8.8 million. As a result of the above activity, the Company's cash balance
increased by $12.4 million during this nine-month period.
Net cash provided by operating activities of $36.6 million for the year
ended December 31, 1993, net of repayments of working capital borrowings of $4.0
million, along with the $48.1 million of net proceeds from the April 1993 public
offering of the 10 1/8% Notes amounted to $80.7 million. These funds were
utilized in investing activities for acquisitions, purchases of fixed assets and
the investment in Star Gas, all of which totalled $34.7 million, and in
financing activities to pay dividends of $14.6 million, to repurchase
subordinated debt, including premium, of $25.4 million, to deposit $5.0 million
into a cash collateral account to partially secure certain outstanding notes,
and to make principal payments on other long-term obligations of $0.3 million.
The Company has available a $140 million credit facility under the Credit
Agreement, consisting of a $75 million working capital commitment, a $50 million
revolving credit facility which is available for acquisitions and a $15 million
letter of credit facility primarily for insurance purposes. See "Description of
Other Indebtedness and Redeemable Preferred Stock--Credit Agreement." No
borrowings were outstanding under the Credit Agreement at September 30, 1994;
however, $9.2 million of the acquisition facility was utilized to provide
letters of credit guaranteeing acquisition debt. At January 26, 1995, $24.0
million was outstanding under the acquisition facility of the Credit Agreement,
which was borrowed in December 1994 to replenish working capital for
acquisitions previously consummated and $10.0 million was utilized to provide
letters of credit guaranteeing acquisition debt. As a result, $16.0 million
remained available under the $50 million acquisition facility. At September 30,
1994 the Company had net working capital of $8.4 million.
For 1995, the Company's financing obligations include redeeming $4.2 million
of Redeemable Preferred Stock and paying $3.0 million in dividends on such
stock. In addition, the Company anticipates paying dividends on its Common
Stock. Based on the Company's current cash position, bank credit availability,
expected net cash to be provided by operating activities for 1995 and the
proceeds from the Debenture Offering, the Company expects to be able to meet all
of the above mentioned obligations in 1995, as well as meet all of its other
current obligations as they become due.
The Company had no material commitments for capital expenditures as of
September 30, 1994 and currently has no such commitments.
28
<PAGE>
BUSINESS
Petro is the largest retail distributor of home heating oil (#2 fuel oil)
and the tenth largest retail distributor of propane in the United States. The
Company's home heating oil division had total sales of $546.4 million for the
twelve months ended September 30, 1994 and currently serves approximately
417,000 customers in 28 markets in the Northeast, including the metropolitan
areas of Boston, Providence, New York City, Baltimore and Washington, D.C. The
Company's propane division (Star Gas) had total sales of $101.4 million for the
twelve months ended September 30, 1994 and currently serves more than 145,000
customers in 63 locations in the Midwest and Northeast.
In addition to sales of home heating oil and propane, the Company installs
and repairs heating equipment, rents water softeners, sells propane appliances
and, to a limited extent, markets other petroleum products to commercial
customers, including diesel fuel 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% of
the Company's net sales for the last three fiscal years. The Company considers
the provision of installation and repair 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.
Sales and installation of propane appliances to residential users are
offered to the Company's propane customers. Such items represented less than 5%
of the propane division's net sales for the twelve months ended September 30,
1994.
For the years ended December 31, 1991, 1992 and 1993, sales of home heating
oil and propane (not including related installation and service) constituted
approximately 83% of the Company's net sales, excluding sales of Star Gas.
FUNDAMENTAL CHARACTERISTICS
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles. As home
heating oil and propane for residential use are such basic necessities,
variations in the amount purchased as a result of general economic conditions
have been limited.
Customer Stability
The fuel oil division has a relatively stable customer base due to the
tendency of homeowners to remain with their traditional distributors. In
addition, a majority of home buyers tend to remain with the previous homeowner's
distributor. As a result, the Company's fuel oil customer base each year
includes approximately 90% of the prior year's customers or home buyers who have
purchased their homes from such customers. In an acquisition of a fuel oil
distributor, 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. Management believes its propane customer base to be relatively stable as
well. In excess of 95% of the Company's retail propane customers lease their
tanks from the Company. The inconvenience associated with switching tanks
greatly reduces a propane customer's tendency to change distributors.
Approximately 80% of the Company's residential customers receive their fuel
supply needs pursuant to an automatic delivery system without the customer
having to make an affirmative purchase decision. The Company delivers home
heating oil and propane to its customers an average of approximately six times
during the year, depending upon weather conditions and historical consumption
29
<PAGE>
patterns. 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.
Weather Stability
Average temperatures over time have varied to a very limited extent
notwithstanding the warm winter weather experienced in 1990 and 1991.
Nevertheless, there can be no assurance that average temperatures in future
years will not be above the historical average. 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):
AVERAGE
YEAR TEMPERATURE
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
AVERAGE
YEAR TEMPERATURE
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
AVERAGE
YEAR TEMPERATURE
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
1993............ 41.5
1994............ 41.8
- ------------------------
Source: National Oceanic and Atmospheric Administration
Insulation from Oil and Propane 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 performance of the Company's fuel oil division. 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.
To reduce its exposure to price fluctuations, the Company intends to
maintain an inventory policy with respect to propane similar to that
traditionally maintained for home heating oil. The Company intends to purchase
propane on a short-term basis so that its supply costs will fluctuate with
market price variations. Should wholesale propane prices change in the future,
the Company believes that margins on its retail propane distribution business
would also change in the short-term since retail prices tend to change less
rapidly than wholesale prices. The Company is unable to predict, however, how
and to what extent a substantial change in the wholesale cost of propane would
affect margins and profitability.
Oil and Propane Supply
Petro's policy of contracting for a majority of its home heating 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. Given the low
proportion of crude oil that is refined into home heating oil and the importance
of home heating oil during cold periods, the
30
<PAGE>
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.
The Company is not dependent upon any single propane supplier or group of
propane suppliers. To assure adequate supply, a portion of the Company's propane
inventory is purchased under supply contracts which typically have a one year
term and a fluctuating price relating to spot market prices. The balance of the
Company's propane supplies are purchased on the spot market. The Company owns a
22 million gallon propane storage facility located in Seymour, Indiana which
provides the Company certain propane supply advantages. Supplies of propane are
typically readily available and not easily subject to disruption by
international market forces. To reduce its exposure to price fluctuations, the
Company intends to maintain an inventory policy with respect to propane similar
to that maintained for home heating oil.
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 heating oil 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. Since such time, natural gas
conversions have returned to their approximate 1% historical annual rate as the
prices for the two products have been at parity.
The following table presents the percentage of the Company's heating oil
customers that have converted to natural gas annually from 1983 through 1993:
NATURAL GAS CONVERSIONS
YEAR PERCENT
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
1993............................................................... 1.0
The rate of conversion from the use of propane to natural gas is primarily
affected by the availability of natural gas. When natural gas becomes available
to an area, residential propane customers can easily and inexpensively convert
their systems. The expansion of natural gas into rural propane markets has been
inhibited by the required capital costs to natural gas suppliers. For 1993, Star
Gas customers converted to natural gas at a rate of approximately 0.5% per
annum.
Environmental Matters
Petro has implemented environmental programs and policies designed to avoid
potential liability under applicable environmental laws. Petro has not incurred
any significant environmental compliance costs and compliance with environmental
regulations has not had a material effect on the Company's operations or
financial condition. 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. In light of the Company's general policy
regarding operations and environmental compliance, the Company does not expect
environmental compliance to have a material effect on its operations and
financial
31
<PAGE>
condition in the future. 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. There is no environmental risk associated with propane
since if it is accidentally released from a storage container it becomes a gas
and dissipates. Propane is, however, a highly explosive liquid. The Company's
policy for determining the timing and amount of any environmental cost is to
reflect an expense as and when the cost becomes probable and reasonably capable
of estimation. See "Risk Factors--Operating Risks of Propane Business" and
"--Litigation."
HOME HEATING OIL
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, residential home heating oil
consumption in the Northeast has declined from approximately 5.3 billion gallons
in 1982 to approximately 4.8 billion gallons in 1992. 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 "--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 3,700 independently owned and operated home heating oil
distributors in the Northeast at the end of 1992. Generally, these companies
were established in the late 1940s and early 1950s in response to the post-World
War II suburban housing boom. Now, approximately 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's fuel oil operations 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 its fuel
oil operations through the acquisition and integration of additional
distributors in existing and new markets.
The Company acquires two types of fuel oil 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
accounting, data processing, fuel oil purchasing, credit and marketing functions
of the acquired distributor. The second type are larger, stand-alone businesses
that cannot be integrated, but are usually in new markets. Acquisitions of these
businesses not only provide attractive investment returns, but also provide hubs
for future expansion.
32
<PAGE>
From 1979 through the date hereof, the Company made 154 acquisitions of home
heating oil distributors, of which 24 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 following table sets forth the number of home heating oil distributors
acquired by the Company during the 1979 to 1994 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
NUMBER 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
1993............................................. 9 27,652 25,805
1994............................................. 9 36,322 48,149
</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 the combination of acquisition experience, reputation and access to capital
equivalent to that of Petro. In the Northeast, there are approximately 3,700
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.
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 fuel oil
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
33
<PAGE>
appropriate return on investment. The Company seeks an annual EBITDA return of
25% to 30% on its capital investments in home heating oil acquisitions. 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.
Recognizing the service nature of the home heating oil business, 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 14 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 which
has a combination of acquisition experience, reputation and access to capital
comparable to Petro's. Petro is the only distributor operating in as many as 28
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 154 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.
There is no assurance that the Company will have the access to capital
necessary to consummate any acquisition. The Company is also subject to certain
debt incurrence covenants in the Indenture and in certain agreements governing
other borrowings that might restrict the Company's ability to incur indebtedness
to finance acquisitions.
Operating Strategy. The Company has historically achieved operating
economies of scale through the centralization of accounting, data processing,
fuel oil purchasing, credit and marketing functions. The Company has identified
the best operating practices being employed by its branches and is implementing
those procedures throughout the Company. Petro has recently adopted an operating
strategy to capitalize upon its size and upon developments in technology to
become more operationally efficient as well as to improve its customer retention
through the utilization of advanced information processing and telecommunication
systems. Such systems are currently in use by other distribution businesses, but
not generally employed by other retail heating oil companies. To accomplish this
goal, in August 1994, the Company hired Thomas M. Isola as Chief Operating
Officer.
Marketing Strategy. The Company has recently begun to refine its marketing
efforts by focusing on customer satisfaction rather than the solicitation of new
customers through the use of financial incentives. This effort, led by the
Company's new Senior Vice President of Marketing, Alex Szabo, consists of two
phases. The first phase is to implement Company-wide the best marketing
practices employed at its branches to add and retain accounts. The second phase
is designed to enhance customer satisfaction and thereby improve customer
retention by implementing its new operating procedures.
34
<PAGE>
Customers and Sales
The Company's home heating oil division currently serves approximately
417,000 customers in the following 28 markets through a sales force of 143
individuals currently based primarily in the Company's branch offices:
CONNECTICUT
Bridgeport--New Haven
Hartford (Metropolitan)
Litchfield County
Southern Fairfield County
MARYLAND/VIRGINIA/WASHINGTON, D.C.
Baltimore (Metropolitan)
Washington, D.C. (Metropolitan)
MASSACHUSETTS
Boston (Metropolitan)
Northeastern Massachusetts
(Centered in Lawrence)
Springfield
Worcester
NEW HAMPSHIRE
Milford
Portsmouth
NEW JERSEY
Camden
Neptune
Newark (Metropolitan)
North Brunswick
Rockaway
Trenton
NEW YORK
Bronx, Queens and Kings Counties
Dutchess County
Eastern Long Island
Staten Island
Western Long Island
PENNSYLVANIA
Allentown
Berks County (Centered in Reading)
Bucks County (Centered in Southampton)
Lebanon County (Centered in Palmyra)
RHODE ISLAND
Providence
Approximately 85% of the Company's fuel oil customers receive deliveries
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.
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 fuel customers, the Company utilizes a variety of
techniques such as monitoring real estate turnover among its customer base as
well as among potential customers in the markets in which it operates. The
Company has instituted an ongoing customer service training and sensitivity
program in an effort to provide superior service to its existing customers.
PROPANE
Industry Overview
Propane serves as an alternative to natural gas in rural and suburban areas
where natural gas is unavailable or portability of product is required. Propane
competes primarily with natural gas, electricity and fuel oil as an energy
source principally on the basis of price, availability and portability. The
level of consumption of propane throughout the United States has remained
relatively constant over the past ten years. Propane is generally more expensive
than natural gas in locations served by natural gas, although propane is often
sold in such areas as a standby fuel for use during peak demands and during
interruption in natural gas service. The expansion of natural gas into
traditional propane markets has historically been inhibited by the capital costs
required to expand distribution and pipeline systems. However, the extension of
natural gas pipelines tends to displace propane distribution in the
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neighborhoods affected as equipment using propane can be converted to natural
gas use at little expense. The Company believes that new opportunities for
propane sales arise as more geographically remote neighborhoods are developed.
Propane is generally less expensive to use than electricity for space heating,
water heating and cooking and therefore competes effectively with electricity.
Propane is similar to fuel oil in application; nevertheless, propane and
fuel oil have generally developed their own distinct markets. The residential
and commercial propane market is generally in rural areas and national in scope
while the market for fuel oil is principally located in the Northeast.
The propane distribution business is highly fragmented with primarily three
types of participants: large multi-state marketers with many branch locations,
smaller, local independent marketers and farm cooperatives. Based on industry
publications, the Company believes that the ten largest multi-state retail
marketers of propane, including Star Gas, account for less than 35% of the total
retail sales of propane in the United States, and that no single marketer has a
greater than 15% share of the total retail market in the United States.
Most of Star Gas' retail branch locations compete with three or more
marketers or distributors. The principal factors influencing competition with
other retail marketers are price, reliability and quality of service,
responsiveness to customer needs and safety concerns. Each branch location
operates in its own competitive environment as retail marketers are located in
close proximity to customers to lower the cost of providing service. The typical
branch location has an effective marketing radius of 25 miles.
Business Strategy
The Company believes that the propane industry is an attractive complement
to its heating oil business and possesses many of the same industry and
operating characteristics. The Company has begun to apply the acquisition and
operating techniques it has successfully applied in the heating oil industry to
its propane operations. In connection with its investment in Star Gas, William
Powers, a Vice President of Petro, became President of Star Gas. With the
assistance of the Company's management, during the past year, Star Gas
restructured its operations through the sale of various non-core assets and
consolidated various corporate functions, thereby reducing overhead. Star Gas
initiated the Company's propane acquisition strategy with the purchase of two
propane distributors with aggregate annual volume of 1.2 million gallons.
Acquisition Strategy. The Company intends to grow its propane division
through the acquisition and integration of additional distributors in existing
and new markets. The Company intends to expand its propane business primarily
through the acquisition of smaller propane distributors that can be integrated
with existing operations. The Company will also pursue acquisitions of larger
distributors which would establish new markets and broaden its geographic
coverage. However, there are a number of propane companies larger than Star Gas
actively seeking to grow through acquisitions. Although the presence of such
competitors may make it more difficult for Star Gas to acquire propane
distributors, it could also present the opportunity to grow more significantly
through the acquisition of larger entities.
Operating Strategy. Star Gas currently operates from 63 branch locations, 49
in four operating regions in the Midwestern states of Ohio, Indiana, Kentucky
and Michigan, and 14 in two operating regions in six Northeastern states. The
accounting, data processing, and financial functions are centralized, while
branch locations maintain autonomy over delivery, service and customer
relations. Star Gas emphasizes and maintains corporate oversight regarding
safety, employee training and compliance issues.
Marketing Strategy. The Company intends to grow its propane volume by
competing for new customers and by marketing incremental uses to its existing
customer base, such as offering to supply a customer who uses propane for space
heating with propane for cooking and water heating. During the fiscal year ended
September 30, 1994 ongoing Star Gas operations experienced a growth of
approximately 2% in its retail base due largely to programs designed to
introduce additional uses of
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propane to existing residential customers. The residential and commercial retail
propane distribution business is characterized by a relatively stable customer
base, primarily due to the expense of switching to alternate fuels and the
emphasis placed on customer relations and quality of service. The inconvenience
of switching tanks minimizes a customer's tendency to switch among suppliers of
propane. The cost and inconvenience of switching heating systems minimizes a
customer's tendency to switch to alternative fuels other than natural gas, if it
is available. Over 95% of the Company's residential customers lease their tanks
from the Company. Lease terms and, in most states in which the Company operates,
safety regulations prohibit any supplier, other than the lessor, from filling a
tank leased to a customer.
Customers and Sales
With the Star Gas Acquisition, the Company added over 145,000 new propane
customers which it currently serves through 63 locations in the following
markets in the Midwestern states and in the Northeast:
INDIANA
Akron
Batesville
Bluffton
Coal City
College Corner
Columbia City
Decatur
Ferdinand
Greencastle
Jeffersonville
Linton
Madison
N. Manchester
N. Vernon
New Salisbury
North Webster
Portland
Remington
Richmond
Salem
Seymour
Sulphur Springs
Versailles
Warren
Waterloo
Winamac
KENTUCKY
Glencoe
Prospect
Shelbyville
Williamstown
MAINE
Fairfield
Fryeburg
Wells
Windham
MASSACHUSETTS
Belchertown
Ludlow
Rochdale
MICHIGAN
Hillsdale
NEW JERSEY
Maple Shade
Tuckahoe
NEW YORK
Poughkeepsie
Washington
OHIO
Defiance
Deshler
Fairfield
Ft. Recovery
Hebron
Ironton
Lancaster
Lewisburg
Lynchburg
Macon
Milford
Mt. Orab
North Star
Peebles
Ripley
Sabina
Waverly
West Union
PENNSYLVANIA
Hazelton
Wind Gap
RHODE ISLAND
Davisville
Sales are primarily to residential, commercial, industrial and agricultural
users. In the residential and commercial markets propane is primarily used for
space heating, water heating, cooking and clothes drying. In the industrial
market, propane is used principally for fuel to power fork lifts and other
vehicles. In the agricultural market, propane is used primarily for crop drying
and space heating. During the fiscal year ended September 30, 1994, sales to
residential customers accounted for 64% of Star Gas' retail sales, sales to
industrial and other commercial users accounted for 25% of Star Gas' retail
sales and sales to agricultural customers accounted for 11% of Star Gas' retail
sales. Star Gas also engages in the wholesale distribution of propane to other
retail distributors. During the fiscal year ended September 30, 1994, Star Gas
sold 46.3 million gallons of propane to wholesale customers for revenues of
$17.4 million.
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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 of
its petroleum requirements with 15 different suppliers, each of which has
significant domestic sources for its 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; Exxon Company USA;
Global Petroleum Corp.; Kerr McGee Refining Corp.; Louis Dreyfus Energy Corp.;
Meico Inc.; MG Refining and Marketing Co.; Mobil Oil Corporation; Northeast
Petroleum, a division of Cargill, Inc.; Sprague Energy Group; Stuart Petroleum
Company; and Sun Oil Company. The Company's supply contracts typically have
terms of 12 months and expire in May or June of each year. Each of the supply
contracts provides for maximum quantities, but does not establish in 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 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 70 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 775 delivery trucks to its
customers.
Star Gas obtains propane from approximately 30 sources including Amoco
Canada; Ashland Petroleum Company; Enron Gas Liquids Inc.; Marathon Corp.;
Petrolane Gas Service; Shell Oil Company; Sea 3, Inc.; Sun Oil Company; Shell
Canada Limited; and Texaco Exploration and Production Inc. Star Gas owns a
storage facility in Seymour, Indiana in which it is able to store approximately
22 million gallons of propane in an underground cavern. The facility is on a
pipeline connected to Mont Belvieu, Texas, the major supply source for propane.
Propane is transported from refineries, pipeline terminals (including the
Company's own pipeline terminal and storage facility in Seymour, Indiana), and
coastal terminals to the Company's branch locations by a combination of the
Company's own highway transport trucks, common carriers and by railroad tank
cars. Star Gas distributes propane to its retail and commercial customers either
by bulk truck or by service trucks which transport portable cylinders. The
primary method of delivery to customers is by the company's fleet of 225 owned
bulk trucks, which generally are fitted with a pressurized propane vessel with
an average capacity of 2,500 gallons. The typical branch location has an
effective marketing radius of 25 miles.
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 worldwide supplies.
The Company further believes that relations with its current suppliers are
satisfactory.
COMPETITION
The home heating oil business is highly competitive. The fuel oil division
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 seven days per week, 52 weeks per year
basis, which tends to build customer loyalty.
Competition within the propane distribution industry stems from primarily
three types of participants: larger multi-state marketers, smaller, local
independent marketers and farm cooperatives.
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The Company believes that the ten largest multi-state marketers of propane
account for less than 35% of the total retail sales of propane in the United
States. In the propane industry, the principal factors of competition are price
and reputation for reliability and quality of service.
EMPLOYEES
As of September 30, 1994, the fuel oil division had 2,227 employees, of whom
751 were office, clerical and customer service personnel, 803 were heating
equipment repairmen, 331 were oil truck drivers and mechanics, 199 were
management and staff and 143 were employed in sales. Approximately 20 of those
employees are seasonal, and management expects to rehire the majority of them
for the next heating season. Approximately 700 employees are represented by 19
different local chapters of labor unions.
As of September 30, 1994, the propane division had 703 full time employees,
of which 31 were employed at the corporate office in Stamford, Connecticut and
672 were located in branch offices of which 279 were administrative, 272 were
engaged in transportation and storage and 121 were engaged in field servicing.
Approximately 50 of Star Gas' employees are represented by four different local
chapters of labor unions. Management believes that its relations with both its
union and non-union employees are satisfactory.
LITIGATION
In the ordinary course of business, the Company, including Star Gas, is
threatened with, or named in, various lawsuits. However, neither the Company nor
Star Gas is 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.
Propane is an explosive gas and serious personal injury and property damage
can occur in connection with its transportation, storage and use. A lawsuit has
been threatened against Star Gas based on a recent incident in the Midwest. The
Company believes that such lawsuit, if commenced, will not have a material
adverse effect on the Company.
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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................ 47 Chief Executive Officer, President, Chairman of the Board
and Director
Thomas M. Isola.............. 51 Chief Operating Officer
C. Justin McCarthy........... 50 Senior Vice President--Operations
Joseph P. Cavanaugh.......... 57 Senior Vice President--Administration
Audrey L. Sevin.............. 68 Secretary and Director
George Leibowitz............. 58 Senior Vice President--Finance and Corporate Development
Alex Szabo................... 41 Senior Vice President--Marketing and Sales
James J. Bottiglieri......... 38 Vice President and Controller
Matthew J. Ryan.............. 37 Vice President--Supply
Phillip Ean Cohen(1)......... 47 Director
Thomas J. Edelman............ 43 Director
Richard O'Connell(1)(2)...... 48 Director
Wolfgang Traber(1)(2)........ 50 Director
Max M. Warburg............... 46 Director
Paul Biddelman............... 46 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 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.).
Thomas M. Isola has been Chief Operating Officer of the Company since
August, 1994. Mr. Isola joined Petro in August of 1994 in the newly created role
of Chief Operating Officer. Prior to joining Petro and beginning in 1988, Mr.
Isola served as President and Chief Executive Officer of three manufacturing
converting companies owned by Butler Capital Corporation of New York. From 1972
to 1988, he was with Avery International, Inc. (now Avery-Dennison) in a variety
of marketing and operations roles before becoming Vice President-General Manager
of two Avery companies. Mr. Isola received B.A. and M.B.A. degrees from Stanford
University in 1965 and 1968, respectively. He served as a 1st Lieutenant in the
U.S. Army from 1969 to 1971.
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 was Controller of Petro, Inc. from 1973 and of the
Company since its organization until 1994. He was elected a Vice President of
the Company in October 1983 and a Senior
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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.).
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).
Alex Szabo has been Senior Vice President--Marketing and Sales since June
1994. From 1989 to 1994, prior to joining the Company, Mr. Szabo was Executive
Vice President at Whittle Communications and President of Screenvision Cinema
Network. From 1987 to 1989, Mr. Szabo was Executive Vice President--General
Manager of Benckiser Consumer Products, Inc. Prior to 1987, Mr. Szabo held
executive management positions at Ecolab, Colgate Palmolive and I.B.M. Mr. Szabo
is a graduate of Brown University (B.A. 1975) and Columbia University (M.B.A.
1980).
James J. Bottiglieri was Assistant Controller of the Company from 1985 to
1994 and was elected Vice President in December 1992. Mr. Bottiglieri was made
Controller of the Company in 1994. 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.
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 also serves as the Chairman of Lomak
Petroleum, Inc., and as a director of Wolverine Exploration Company, Enterra
Corporation and Command Petroleum Limited.
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 Chairman of
the Board of Hanseatic Corporation,
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New York, N.Y., a private investment corporation. Mr. Traber is a director of
Deltec Asset Management 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.
Paul Biddelman has been a director of the Company since October 1994. Mr.
Biddelman has been a principal of Hanseatic Corporation since 1992. Mr.
Biddelman joined Hanseatic from Clements Taee Biddelman Incorporated, a merchant
banking firm which he co-founded in 1991. From 1982 through 1991, he was a
Managing Director in Corporate Finance at Drexel Burnham Lambert Incorporated.
Mr. Biddelman also worked in corporate finance at Kuhn, Loeb & Co. from 1975 to
1979, and at Oppenheimer & Co. from 1979 to 1982. Mr. Biddelman is a director of
Celadon Group, Inc., Electronic Retailing Systems International, Inc.,
Insituform Technologies, Inc. and Premier Parks, Inc.
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 $24,000. 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 and Class C 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 eight directors serving on the Board. Of the present
directors, Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman, Phillip Ean Cohen
and Paul Biddelman 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.
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DESCRIPTION OF DEBENTURES
The Debentures will be issued pursuant to an Indenture, to be dated as of
February 9, 1995, 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
$125 million of Debentures. The Debentures will mature on February 1, 2005. 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 February 1 and August 1 in each year to the
holders of record at the close of business on the January 15 and July 15 next
preceding such interest payment date. Interest will initially accrue from the
date of issuance, and the first interest payment date will be August 1, 1995.
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 February 1, 2000 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 February 1 of
the years indicated:
YEAR PERCENTAGE
2000............................................................. 104.594%
2001............................................................. 103.063
2002............................................................. 101.531
2003 and thereafter.............................................. 100.000
In addition, at any time prior to February 1, 1998, the Company may redeem
Debentures issued under the Indenture with the net proceeds of a public offering
of Capital Stock (other than Redeemable Stock) of the Company, of Star Gas or of
a subsidiary of Star Gas, at a redemption price of 111% of the principal amount
thereof, plus accrued and unpaid interest thereon, provided that at least 65% in
aggregate principal amount of the Debentures issued under the Indenture remain
outstanding immediately following any such redemption.
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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, 1994, after
giving effect to the Pro Forma Adjustments described in the Pro Forma Financial
Statements, the Debentures would have been subordinated to approximately $48.6
million of Senior Debt. 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, 1994, after giving
effect to the Pro Forma Adjustments, such Subsidiaries would have outstanding
Indebtedness (other than guarantees of the Company's Indebtedness under the
Credit Agreement) and trade credit of approximately $11.4 million.
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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 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) 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
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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") or (v) any holder of
11.85% Notes, 12.17% Notes, 12.18% Notes or 14.10% 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 or the 1991 Note 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 or Section 5.2(A) of the 1991 Note
Agreement shall not, in the absence of any consideration, constitute a Change of
Control under the Indenture.
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Within 30 days following any Change of Control, the Company will mail a
notice to each holder with a copy to the Trustee 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 the 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 events 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.
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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; provided, however, that at any time and to the extent the Company
is permitted to incur Funded Debt pursuant to the Consolidated EBITDA Coverage
Ratio test contained in the immediately preceding paragraph, the Company may
elect that amounts of Funded Debt incurred pursuant to this clause (iv) be
deemed to have been incurred pursuant to the immediately preceding paragraph and
be deemed not to have been incurred pursuant to this clause (iv).
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.
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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 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 (the "Refinancing Indebtedness") will not
exceed the principal amount of the Indebtedness or Preferred Stock so refinanced
(the "Refinanced Indebtedness"), provided that if any such Refinanced
Indebtedness was incurred under a revolving credit or similar working capital
facility, the principal amount of the Refinancing Indebtedness may be in an
amount up to the aggregate amount available under the facility under which the
Refinanced Indebtedness was incurred (A) at the time the Subsidiary that
incurred such Indebtedness was acquired by the Company (in the case of
Indebtedness described in the foregoing clause (ii)) or (B) on the date of the
Indenture (in the case of Indebtedness described in the foregoing clause (iii)),
and (2) the Refinancing Indebtedness (other than revolving credit or similar
working capital facilities) will (A) have a Stated Maturity later than the
Stated Maturity of the Refinanced Indebtedness and (B) will have an Average Life
equal to or greater than the remaining Average Life of the Refinanced
Indebtedness.
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
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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, 1994 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,
1994, 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), minus 100% of any deficit in Subsidiary
Cash Flow for such period of any Subsidiary described in clause (b) of the
exception to the definition of Consolidated Net Income; (B) the aggregate Net
Cash Proceeds received by the Company from the issue or sale of its Capital
Stock subsequent to December 31, 1994 (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, 1994, 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) $30 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 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 (iv) Restricted Investments in an aggregate amount not
to exceed the sum of (A) $30 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, distributions and Net Cash Proceeds referred to in this
clause (C) 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 (iv)
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
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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
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 non-assignment
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 (as determined by the Board
of Directors), (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, other than Liens securing Senior Debt.
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.
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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 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
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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 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.
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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 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").
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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).
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.
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"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.
"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 period means the sum of (i) the Consolidated
Net Income of such person for such period, 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 (other than a Wholly Owned
Subsidiary described in clause (b) of the exception to the definition of
Consolidated Net Income) from, and the amount of any Net Cash Proceeds to the
Company or any of its Wholly Owned Subsidiaries (other than a Wholly Owned
Subsidiary described in clause (b) of the exception to the definition of
Consolidated Net Income) from the sale of Capital Stock of, an Unrestricted
Subsidiary of the Company, plus (iv) the amount of any cash actually distributed
by any Subsidiary described in clause (b) of the exception to the definition of
Consolidated Net Income during such period as a dividend or other distribution
to the Company or another Subsidiary of the Company (other than another
Subsidiary described in such clause (b)), plus (v) to the extent excluded in
calculating Net Income of such person and its Subsidiaries for such period, any
gain realized upon the sale or other disposition of any real property or
equipment or of any Capital Stock of the Company
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or a Subsidiary owned by such person or any of its Subsidiaries, plus (vi) to
the extent deducted in calculating Net Income of such person and its
Subsidiaries for such period, any non-cash charge relating to the grant of stock
options to executives of the Company plus (vii) to the extent deducted in
calculating Net Income of such person and its Subsidiaries for such period, any
non-cash expense associated with deferred compensation plans; provided, however,
that (a) Cash Flow shall not include the amortization of customer lists or other
deferred charges or the amortization and depreciation of capital assets of any
person or Subsidiary described in clause (b) of the exception, or clause (i) of
the proviso, to the definition of Consolidated Net Income, (b) Cash Flow for any
period shall be reduced by the amount that any liability recorded on the books
of the Company relating to any deferred compensation expense referred to in
clause (vii) above is reduced during such period and (c) any amounts included in
clause (iv)(C) of the second paragraph under "Limitations on Restricted
Payments" shall be excluded from Cash Flow of the Company.
"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 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;
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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 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 sum of (a) the
total interest expense of the Company and its Subsidiaries (other than a
Subsidiary described in clause (b) of the exception to the definition of
Consolidated Net Income), 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) 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 non-interest bearing or
other discount securities) and (ix) 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, plus (b) Preferred Stock dividends in respect of
all Preferred Stock of Subsidiaries (other than a Subsidiary described in clause
(b) of the exception to the definition of Consolidated Net Income) held by
persons other than the Company or a Wholly Owned Subsidiary (other than a
Subsidiary described in clause (b) of the exception to the definition of
Consolidated Net Income).
"Consolidated Net Income" of a person, for any period, means the aggregate
of the Net Income of such person and its Subsidiaries (other than (a) any
Subsidiary acquired by such person in a pooling of interests transaction for any
period prior to the date of acquisition and (b) any Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions to such person) 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 and (ii) the cumulative effect of a change in accounting principles will
be excluded.
"Credit Agreement" means the Third Amended and Restated Credit Agreement
dated as of August 1, 1994, 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" of a person for any period means the Consolidated Net Income of
such person 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
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(a) 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) non-cash charges relating to the
grant of stock options to executives of the Company, non-cash charges associated
with deferred compensation plans and other non-cash charges of a similar nature,
plus (b) the amount of any cash actually distributed by any Subsidiary described
in clause (b) of the exception to the definition of Consolidated Net Income
during such period as a dividend or other distribution to the Company or another
Subsidiary of the Company (other than another Subsidiary described in such
clause (b), minus (c) such person's equity in any deficit in Subsidiary Cash
Flow for such period of any Subsidiary described in clause (b) of the exception
to the definition of Consolidated Net Income; provided, however, that EBITDA
shall not include any income tax expense, interest expense, depreciation
expense, amortization expense or other non-cash expense of any person or
Subsidiary described in clause (b) of the exception, or clause (i) of the
proviso, to the definition of Consolidated Net Income.
"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 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;
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(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 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-
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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.
"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.
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"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, 1994, of Irik P.
Sevin to the Company in a principal amount of $1,640,060 and due on December 31,
1995, 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.
"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).
"Subsidiary Cash Flow" of a person for any period means the Net Income of
such person and its Subsidiaries determined on a consolidated basis for such
period, plus, to the extent deducted in determining such Net Income,
depreciation, amortization, non-cash charges relating to the grant of stock
options to executives of the Company, non-cash charges associated with deferred
compensation plans and other non-cash charges of a similar nature, less accrued
preferred stock dividends (excluding preferred stock dividends paid or payable
in additional shares of preferred stock and preferred stock dividends payable to
the Company or any of its Subsidiaries (other than a Subsidiary described in
clause (b) of the exception to the definition of Consolidated Net Income) until
actually paid), excluding Net Income derived from investments accounted for by
the equity method except to the extent of any cash dividends received by such
person and its Subsidiaries.
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"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 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 or vice-chairman of the board of
directors, the chairman or vice-chairman of the executive committee of the board
of directors, the president, any vice president, the secretary, any assistant
secretary, the treasurer, any assistant treasurer, the cashier, any assistant
cashier, any trust officer or assistant trust officer, the controller and any
assistant controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above-designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"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 $0.10."
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DESCRIPTION OF OTHER INDEBTEDNESS AND REDEEMABLE PREFERRED STOCK
CREDIT AGREEMENT
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 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, 1994 no Revolving Credit Loans were outstanding.
On August 1, 1994, the Company amended the Credit Agreement to include a $50
million two-year revolving credit acquisition facility, convertible into a
three-year self amortizing term loan. Assuming the refinancing of the Company's
11.85%, 12.17% and 12.18% Senior and Subordinated Notes due in 1998, repayments
and/or sinking fund deposits equal to one-third of the outstanding balance of
the facility on June 30, 1996 would be payable annually with the final payment
due May 30, 1999. If the assumed refinancing does not occur on or prior to June
30, 1998, the final payment due on May 30, 1999 would be accelerated to June 30,
1998.
Interest under the Credit Agreement 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 working capital loans or 25 to 75 basis
points on Alternate Base Rate Loans which are acquisition loans and 125 to 175
basis points on Eurodollar Loans which are working capital loans or 175 to 225
basis points on Eurodollar Loans which are acquisition 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 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, trade names and trademarks. The
Company has further secured its obligations under the Credit Agreement with a
lien on accounts receivable and inventories.
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
(iii) sell, transfer or convey customer lists, except, among other
exceptions, a sale 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.
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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 $27.5 million prior to March 30, 1995; $30.0 million from March
31, 1995 to March 30, 1996 and $35.0 million thereafter, provided that the
required levels of cash flow for the years 1995 and 1996 will be increased
by up to $10 million to reflect borrowings under the acquisition facility.
(iii) for any fiscal year, the 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 EBITDA to Consolidated Interest Expense
(as those terms are defined in the Credit Agreement) exceeds 2.0 to 1.0
through December 31, 1995, increasing to 2.1 to 1.0 through December 31,
1996 and 2.2 to 1.0 thereafter; 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 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.
OTHER 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. On April 6,
1993, the Company issued $50.0 million of 10 1/8% Notes. On February 3, 1994,
the Company issued $75.0 million of 9 3/8% Subordinated Debentures. The 11.85%
Notes, 12.17% Notes, 12.18% Notes, 14.10% Notes, 10 1/8% Notes and 9 3/8%
Debentures are collectively referred to herein as the "Subordinated Debt."
In January 1994, the Company solicited and received consents of the holders
of a majority of the 11.85% Notes, the 12.17% Notes, the 12.18% Notes and the
14.10% Notes to certain amendments to the respective agreements under which the
Subordinated Debt was issued. In partial consideration for the consents, the
Company caused approximately $43.6 million of the aggregate principal amount of
the Subordinated Debt to be ranked as Senior Debt.
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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 are
generally comparable to those contained in the Indenture, except that the
Consolidated EBITDA Coverage Ratio that is contained in the Subordinated Debt is
subject to increase to a maximum of 2.5 to 1.0.
REDEEMABLE PREFERRED STOCK
The Company has outstanding 208,332 shares of Redeemable Preferred Stock, of
which 41,667 shares are classified as Series A, 41,667 shares are classified as
Series B and 124,998 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 $14.00, $13.84 and $14.61 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. Commencing 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, 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.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc. and PaineWebber
Incorporated (collectively, 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:
PRINCIPAL AMOUNT OF
UNDERWRITER DEBENTURES
Donaldson, Lufkin & Jenrette Securities Corporation....... $ 68,750,000
Bear, Stearns & Co. Inc................................... 28,125,000
PaineWebber Incorporated.................................. 28,125,000
-------------------
Total............................................... $ 125,000,000
-------------------
-------------------
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 0.40% of the
principal amount. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of 0.25% 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 the
Underwriters that they currently intend to make a market in the Debentures;
however, the Underwriters 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.
In January 1994, DLJ acted as underwriter of the Company's 9 3/8%
Debentures, for which it received customary discounts and commissions, and as
advisor to the Company in connection with a consent solicitation, for which it
received customary fees. In addition, the Underwriters are acting as
underwriters in connection with the Common Stock Offering, for which they will
receive customary discounts and commissions.
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
P.L.L.P., 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.
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EXPERTS
The audited financial statements and schedules of the Company included in
this Prospectus and Registration Statement or appearing in the Company's Annual
Report on Form 10-K have been examined by KPMG Peat Marwick LLP, 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 financial statements of Star Gas Corporation and subsidiaries
included in this Prospectus and Registration Statement have been examined by
KPMG Peat Marwick LLP, independent certified public accountants, as of September
30, 1994 and 1993 and for the years then ended, and by Ernst & Young LLP,
independent auditors, for the year ended September 30, 1992, as set forth in
their respective reports thereon appearing elsewhere herein, and have been so
included in reliance upon the reports of KPMG Peat Marwick LLP and Ernst & Young
LLP given upon the authority of such firms as experts in accounting and
auditing.
The audited financial statements of Fuel Oil and Liquid Propane Divisions of
DeBlois Oil Company incorporated by reference in this Prospectus and
Registration Statement have been examined by Sansiveri, Ryan, Sullivan & Co.,
independent auditors, as of December 31, 1993, and 1992 and for the years then
ended as set forth in their report, incorporated by reference herein, and have
been so included in reliance upon such report given upon the authority of said
firm 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, 1993, its Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, June 30, and September 30, 1994 and its Current Reports on Form 8-K filed on
July 13, 1994, September 12, 1994 and December 22, 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 contained 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 George Leibowitz, Senior Vice President, Petroleum
Heat and Power Co., Inc., 2187 Atlantic Street, Stamford, CT 06902 (telephone
(203) 325-5400).
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PRO FORMA FINANCIAL STATEMENTS
The following Pro Forma Statement of Operations for the year ended December
31, 1993 is derived from the Company's audited consolidated financial statements
for the year ended December 31, 1993. The Pro Forma Balance Sheet and Statements
of Operations at and for the nine and twelve months ended September 30, 1994 are
derived from the unaudited financial statements of the Company at and for the
nine and twelve months ended September 30, 1994, 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.
The following transactions are referenced in the Pro Forma Financial
Statements (collectively, the "Pro Forma Adjustments"):
(a) the "Heating Oil Acquisitions," which consist of the acquisition by
the Company of nine individually insignificant distributorships during 1993
(the "1993 Acquisitions"), six individually insignificant and one
significant distributorships during the nine months ended September 30, 1994
(the "1994 Nine Month Acquisitions") and two individually insignificant
distributorships subsequent to September 30, 1994 (the "1994 Fourth Quarter
Acquisitions");
(b) the "Star Gas Transactions," which consist of the $16 million
investment in Star Gas made in December 1993 (the "1993 Star Gas
Investment"), the repayment of Star Gas debt with a portion of a capital
contribution and the conversion of debt and preferred stock of Star Gas to
equity of Star Gas by certain of Star Gas' investors in December 1993 (the
"Star Gas Recapitalization") and the acquisition of the remaining voting
stock of Star Gas in December 1994 (the "Star Gas Acquisition");
(c) the "Prior Note Offerings," which consist of the issuance (i) in
March 1993 of $50 million of 10 1/8% Subordinated Notes due 2003 and the use
of a portion of the proceeds therefrom to repurchase $24.9 million of
subordinated debt of the Company (the "10 1/8% Note Offering") and (ii) in
February 1994 of $75 million of 9 3/8% Subordinated Debentures due 2006, the
use of a portion of the proceeds therefrom to repurchase $50 million of
notes of the Company and the release of a $20 million collateral account
securing such notes (the "9 3/8% Note Offering").
(d) the "Offerings," which consist of the offering by the Company of
$125 million of 12 1/4% Subordinated Notes due 2005 (the "Debenture
Offering") and 2.5 million shares of Class A Common Stock at a price of
$7.00 per share (the "Common Stock Offering") and the use of the net
proceeds therefrom to (i) purchase $65.4 million of long-term debt of Star
Gas and $19.7 million of preferred stock of Star Gas (the "Star Gas
Refinancing"), (ii) redeem $12.8 million of long-term debt of the Company
(the "Note Repurchase"), (iii) repurchase 1.5 million shares of the
Company's Class A Common Stock which were issued to a third party in the
Star Gas Acquisition (the "Common Stock Repurchase") and (iv) repay $4.0
million of Star Gas working capital borrowings (collectively, the "Use of
Proceeds").
P-1
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1994
(IN THOUSANDS)
The following pro forma balance sheet at September 30, 1994 gives effect to
the 1994 Fourth Quarter Acquisitions, the Star Gas Acquisition, the Debenture
Offering, the Common Stock Offering and the Use of Proceeds, as if each such
transaction had occurred on September 30, 1994.
<TABLE>
<CAPTION>
1994
PETROLEUM HEAT FOURTH QUARTER PRO FORMA
AND POWER CO., INC. ACQUISITIONS(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 17,055 $ (2,455) $ 4,487 $ (3,827)(3)
Accounts receivable............................... 43,687 8,172
Inventories....................................... 14,198 563 3,919
Other current assets.............................. 7,676 1,734
-------- ------- ------------ -----------
Total current assets............................ 82,616 (1,892) 18,312 (3,827)
Property plant and equipment--net.................. 33,647 611 92,255 13,356(4)
Intangibles--net................................... 102,693 2,634 16,579 2,832(4)
Other assets....................................... 425
Investment in Star Gas Corporation................. 14,757 25,923(3)
(40,680)(4)
-------- ------- ------------ -----------
$ 234,138 $ 1,353 $127,146 $ (2,396)
======== ======= ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Working capital borrowings........................ $ -- $ 4,000
Current maturities of preferred stock and long 4,200 767
term debt.......................................
Accounts payable.................................. 8,551 2,876
Customer credit balances.......................... 27,091 $ 495 3,286
Unearned service contract revenue................. 13,171 108
Accrued expenses.................................. 21,246 4,047
-------- ------- ------------
Total current liabilities....................... 74,259 603 14,976
Long-term debt and notes payable................... 51,452 750 65,613 $ 1,700(4)
Subordinated notes payable......................... --
Supplemental benefits payable and other payables... 1,637 643
Pension plan obligation............................ 7,060
Subordinated notes and debentures payable.......... 167,632
-------- ------- ------------
Total liabilities............................... 302,040 1,353 81,232
-------- ------- ------------
Cumulative redeemable exchangeable preferred 16,666 8,264
stock............................................
-------- ------- ------------
Non-voting preferred stock of Star Gas............. -- 11,458(4)
-------- ------- ------------ -----------
Stockholders' equity (deficiency)
Preferred stock................................... 452 (452)(4)
Common stock...................................... 2,156 249(3)
Additional paid in capital........................ 51,095 103,293 21,847(3)
(103,293)(4)
Deficit........................................... (132,005) (66,095) 66,095(4)
Minimum pension liability adjustment.............. (4,534)
Note receivable from stockholder.................. (1,280)
-------- ------- ------------ -----------
(84,568) 37,650 (15,554)
-------- ------- ------------ -----------
$ 234,138 $ 1,353 $127,146 $ (2,396)
======== ======= ============ ===========
</TABLE>
- -----------------------
(1) Adjustment reflects the acquisition and purchase price allocation in
connection with the 1994 Fourth Quarter Acquisitions.
(2) Derived from the Star Gas consolidated September 30, 1994 balance sheet,
adjusted for the sale of certain Star Gas operations, which were sold in
November 1994, and the use of the proceeds therefrom. Also includes an
individually insignificant acquisition by Star Gas in November 1994.
(3) Reflects a cash payment of $3.8 million and the issuance of approximately
2.5 million shares of the Company's Class A Common Stock in connection with
the Star Gas Acquisition.
(4) Reflects the preliminary allocation of the excess of the purchase price over
the book value of Star Gas in connection with the Star Gas Acquisition. The
acquisition price of Star Gas was determined pursuant to a formula based
upon a multiple of Star Gas' earnings before interest, taxes, depreciation
and amortization as called for in the options Petro had obtained at the time
of the Star Gas Investment. The Class A Common Stock issued in connection
with the Star Gas Acquisition was valued at the average market price of such
stock for the ten day period prior to issuance in accordance with the option
agreement. The preliminary allocation of the purchase price was based on the
results of a preliminary appraisal of the assets and business acquired. The
primary specific intangibles recorded at acquisition date include goodwill,
customer lists and covenants not to compete. The adjustment also reflects
the exchange by Star Gas Holdings of voting preferred stock for non-voting
preferred stock, which was valued based upon the formula discussed above.
P-2
<PAGE>
OFFERING
PRO FORMA
SUBTOTAL ADJUSTMENTS PRO FORMA
$ 15,260 $ 120,600(5) $ 35,180
(85,072)(6)
(14,268)(7)
(13,502)(8)
(4,000)(9)
16,162(10)
51,859 51,859
18,680 18,680
9,410 9,410
-------- ----------- ---------
95,209 19,920 115,129
139,869 139,869
124,738 4,400(5) 129,063
(75)(7)
425 425
-------- ----------- ---------
$360,241 $ 24,245 $384,486
======== =========== =========
$ 4,000 $ (4,000)(9) $ --
4,967 4,967
11,427 11,427
30,872 30,872
13,279 13,279
25,293 25,293
-------- ----------- ---------
89,838 (4,000) 85,838
119,515 (65,350)(6) 47,783
(6,382)(7)
125,000(5) 125,000
2,280 2,280
7,060 7,060
167,632 (6,381)(7) 161,251
-------- ----------- ---------
386,325 42,887 429,212
-------- ----------- ---------
24,930 (8,264)(6) 16,666
-------- ----------- ---------
11,458 (11,458)(6)
-------- ----------- ---------
2,405 (151)(8) 2,504
250(10)
72,942 (13,351)(8) 75,503
15,912(10)
(132,005) (1,580)(7) (133,585 )
(4,534) (4,534 )
(1,280) (1,280 )
-------- ----------- ---------
(62,472) 1,080 (61,392 )
-------- ----------- ---------
$360,241 $ 24,245 $384,486
======== =========== ==========
- -----------------------
(5) Reflects the Debenture Offering, net of estimated offering expenses of $4.4
million, with net proceeds to the Company of $120.6 million.
(6) Reflects the Star Gas Refinancing.
(7) Reflects the Note Repurchase and the related extraordinary loss
representing the premium paid on the early retirement of such debt.
(8) Reflects the Common Stock Repurchase.
(9) Reflects the repayment of Star Gas working capital borrowings.
(10) Reflects the Common Stock Offering, net of estimated offering expenses of
$1.3 million, with net proceeds to the Company of 16.2 million.
P-3
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P-4
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
The following pro forma statement of operations for the year ended December
31, 1993 is derived from the Company's financial statements for the year ended
December 31, 1993, adjusted to give effect to the Heating Oil Acquisitions, the
Star Gas Transactions, the Prior Note Offerings and the Offerings, as if each
such transaction had occurred on January 1, 1993.
The results of operations of the acquired distributorships are based on
their individual fiscal year ends. The combination of the acquired
distributorships on their individual fiscal year bases, rather than the
Company's fiscal year, does not produce a materially different effect. The
acquisitions of the distributorships and Star Gas have been accounted for as
purchases. The unaudited statements of operations of the individually
insignificant distributorships and for Star Gas for the year ended December 31,
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-5
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE><CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO., INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
Net sales............................................... $ 538,526 $ 75,149 $ 102,397
Cost of sales........................................... 366,809 50,954 47,532
--------------- -------- -----------
Gross profit.......................................... 171,717 24,195 54,865
Operating expenses...................................... 123,280 16,490 36,891 $(2,884)(3)
Amortization of customer lists and deferred charges..... 28,731 6,042 667(4)
Depreciation and amortization of plant and equipment.... 5,933 851 5,725 633(4)
Provision for supplemental benefit...................... 264
Impairment of long-lived assets......................... 33,913
--------------- -------- -----------
Operating Income...................................... 13,509 6,854 (27,706)
Interest expense--net................................... 20,508 15,843 (7,694)(5)
3,748(6)
Other income (expenses)................................. (165)
--------------- -------- -----------
Income (loss) before income taxes..................... (7,164) 6,854 (43,549)
Income taxes............................................ 400 180
--------------- -------- -----------
Net income (loss)..................................... $ (7,564) $ 6,854 $ (43,729)
=============== ======== ===========
Net income (loss) per common share(9):
Class A Common Stock.................................. $ (.53)
Class B Common Stock.................................. 1.88
Class C Common Stock.................................. (.53)
Weighted average number of common shares outstanding:
Class A Common Stock.................................. 18,993 2,489(7)
Class B Common Stock.................................. 217
Class C Common Stock.................................. 2,545
</TABLE>
- ------------------------
(1) Represents the results of the distributorships acquired in the 1993
Acquisitions from January 1, 1993 to their dates of acquisition by the
Company. Results of such distributorships from the dates of acquisition to
December 31, 1993 are included in the Company's December 31, 1993
consolidated results. The 1993 results of the distributorships acquired in
the 1994 Nine Month Acquisitions and the 1994 Fourth Quarter Acquisitions
are also included in their entirety in this column.
(2) Represents the 1993 results of Star Gas, excluding certain operations sold
and including operations acquired prior to the Star Gas Acquisition.
(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:
Salaries and related costs............................................ $2,273
Other................................................................. 611
------
$2,884
======
The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1993 and 1994 and of Star Gas. These employees
were not employed by the Company when the distributorships and Star Gas were
acquired and the Company was able to integrate the businesses without
incurring any incremental costs.
(4) Adjustment of amortization of customer lists and deferred charges and
depreciation and amortization of plant and equipment, as applicable, to
reflect an annual charge in accordance with the Company's accounting
policies.
(5) Reflects deceased interest expense of Star Gas as result of the Star Gas
Recapitalization in December 1993. The primary reasons for the decrease in
pro forma interest expense were that, as part of the recapitalization, $36.6
million of debt was exchanged for preferred stock causing a pro forma
reduction of interest expense of approximately $5.1 million, and $17.1
million of notes and loans were repaid with a portion of the proceeds of the
capital contributions from the Company and others, causing a pro forma
reduction of interest expense of approximately $1.8 million.
(6) Reflects increased interest expense as a result of the Prior Note Offerings.
The primary reasons for the increase in pro forma interest expense were the
additional pro forma interest expense on the 9 3/8% Note Offering ($7.0
million), the additional pro forma interest expense on the 10 1/8% Note
Offering ($1.3 million), the additional pro forma interest expense of
acquisitions, other than from the excess proceeds of these two offerings
($1.4 million), partially offset by the reduced pro forma interest expense
of utilizing a portion of the 9 3/8% Note Offering proceeds to repay $50
million of other notes ($5.2 million) and the reduced pro forma interest
expense of utilizing a portion of the 10 1/8% Note Offering proceeds to
repay $24.9 million of other Subordinated Notes ($1.1 million). If the Prior
Note Offerings had occurred on January 1, 1993, the Company would have
recorded a $3.8 million extraordinary loss as a result of the early
retirement of debt.
(7) Reflects the issuance of shares in the Star Gas Acquisition.
P-6
<PAGE>
OFFERING
PRO FORMA
SUBTOTAL ADJUSTMENTS PRO FORMA
$716,072 $ 716,072
465,295 465,295
- -------- ---------
250,777 250,777
173,777 173,777
35,440 35,440
13,142 13,142
264 264
33,913 33,913
- -------- ---------
(5,759) (5,759)
32,405 6,705(8) 39,110
(165) (165)
- -------- ---------
(38,329) (45,034)
580 580
- -------- ---------
$(38,909) $ (45,614)
======== =========
$ (1.96)
1.88
(1.96)
21,482 (1,522)(10) 22,460
2,500(11)
217 217
2,545 2,545
- ------------------------
(8) Reflects increased interest expense as a result of the Offerings. The
reasons for the increase in pro forma interest expense were the additional
pro forma interest expense on the $125 million Debenture Offering of $15.3
million, partially offset by utilizing a portion of the proceeds to repay
$65.4 million of Star Gas debt causing a reduction in the pro forma
interest expense of $7.0 million, and utilizing a portion of the proceeds
to repay $12.8 million of other long term debt causing a reduction in the
pro forma interest expense of $1.6 million. If the Note Repurchase had
occurred on January 1, 1993, the Company would have recorded a $1.9 million
extraordinary loss as a result of the early retirement of such debt.
(9) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the year ended December 31, 1993, after adjusting the net
loss for preferred stock dividends of $3.4 million. The pro forma net
income (loss) per common share has been computed using the average number
of outstanding common shares for the year ended December 31, 1993, plus
approximately 3.5 million common shares assumed to have been issued on
January 1, 1993, after adjusting the pro forma net loss for preferred stock
dividends of $3.1 million.
(10) Reflects the repurchase of 1.5 million shares of Class A Common Stock with
a portion of the proceeds of the Offerings.
(11) Reflects the issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering.
P-7
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P-8
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
The following pro forma statement of operations for the nine months ended
September 30, 1994 is derived from the Company's financial statements for the
nine months ended September 30, 1994, adjusted to give effect to the 1994 Nine
Month Acquisitions, the 1994 Fourth Quarter Acquisitions, the Star Gas
Acquisition, the 9 3/8% Note Offering, the Debenture Offering, the Common Stock
Offering and the Use of Proceeds, as if each such transaction had occurred on
January 1, 1993.
The unaudited statements of operations of the Company, the distributorships
acquired and Star Gas for the nine months ended September 30, 1994 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-9
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO. INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
Net sales.................................................. $385,291 $ 32,248 $69,251
Cost of sales.............................................. 257,240 21,301 30,960
-------------- -------- -----------
Gross profit............................................. 128,051 10,947 38,291
Operating expenses......................................... 91,908 5,163 26,650 $ (428)(3)
Amortization of customer lists and deferred charges........ 19,466 3,082 461(4)
Depreciation and amortization of plant and equipment....... 4,308 431 5,200 (564)(4)
Provision for supplemental benefit......................... 209
-------------- -------- -----------
Operating Income......................................... 12,160 5,353 3,359
Interest expense--net...................................... 16,721 5,753 907(5)
Other income (expenses).................................... 83 126
Share of loss of Star Gas.................................. (1,243) 1,243(6)
-------------- -------- -----------
Income (loss) before income taxes........................ (5,721) 5,353 (2,268)
Income taxes............................................... 425 218
-------------- -------- -----------
Net income (loss)........................................ $ (6,146) $ 5,353 $(2,486)
============== ======== ===========
Net income (loss) per common share(9):
Class A Common Stock..................................... $ (.45)
Class B Common Stock..................................... 1.10
Class C Common Stock..................................... (.45)
Weighted average number of common shares outstanding:
Class A Common Stock..................................... 18,993 2,489(7)
Class B Common Stock..................................... 196
Class C Common Stock..................................... 2,545
</TABLE>
- ------------------------
(1) Represents the results of the distributorships acquired in the 1994 Nine
Month Acquisitions from January 1, 1994 to their dates of acquisition by
the Company. Results of such distributorships from the dates of acquisition
to September 30, 1994 are included in the Company's September 30, 1994
consolidated results. The nine-month results of the distributorships
acquired in the 1994 Fourth Quarter Acquisitions are also included in their
entirety in this column.
(2) Represents the results of operations of Star Gas for the nine months ended
September 30, 1994, excluding certain operations sold and including
operations acquired prior to the Star Gas Acquisition.
(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:
<TABLE>
<S> <C>
Salaries and related costs...................................................... $388
Other........................................................................... 40
----
$428
====
</TABLE>
The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1994 and of Star Gas. These employees were not
employed by the Company when the distributorships and Star Gas were acquired
and the Company was able to integrate the businesses without incurring any
incremental costs.
(4) Adjustment of amortization of customer lists and deferred charges and
depreciation and amortization of plant and equipment, as applicable, to
reflect an annual charge in accordance with the Company's accounting
policies.
(5) Reflects increased interest expenses as a result of the 9 3/8% Note
Offering. The reasons for the increase in pro forma interest expense were
the additional pro forma interest expense on the 9 3/8% Note Offering ($.6
million), the additional pro forma interest expense of acquisitions, other
than from the excess proceeds of the 9 3/8% Note Offering ($.8 million),
partially offset by the reduced pro forma interest expense of utilizing a
portion of the 9 3/8% Note Offering proceeds to repay $50 million of other
notes ($.5 million). If the 9 3/8% Note Offering had occurred on January 1,
1993, the Company would have recorded a $2.3 million extraordinary loss as
a result of the early retirement of debt.
(6) Reversal of the share of loss of Star Gas for the nine months ended
September 30, 1994 since Star Gas is assumed to have been 100% acquired on
January 1, 1993 (see Note 2 above).
P-10
<PAGE>
OFFERING
PRO FORMA
SUBTOTAL ADJUSTMENTS PRO FORMA
$ 486,790 $ 486,790
309,501 309,501
--------- ---------
177,289 177,289
123,293 123,293
23,009 23,009
9,375 9,375
209 209
--------- ---------
21,403 21,403
23,381 $ 4,956(8) 28,337
209 209
--------- ---------
(1,769) (6,725)
643 643
--------- ---------
$ (2,412) $ (7,368)
========= =========
$ (.44)
1.10
(.44)
21,482 (1,522)(10) 22,460
2,500(11)
196 196
2,545 2,545
- ------------------------
(7) Reflects the issuance of shares in the Star Gas Acquisition.
(8) Reflects increased interest expense as a result of the Offerings. The
reasons for the increase in pro forma interest expense were the additional
pro forma interest expense on the $125 million Debenture Offering of $11.5
million, partially offset by utilizing a portion of the proceeds to repay
$65.4 million of Star Gas debt causing a reduction in the pro forma
interest expense of $5.2 million, and utilizing a portion of the proceeds
to repay $12.8 million of other long term debt causing a reduction in the
pro forma interest expense of $1.3 million. If the Note Repurchase had
occurred on January 1, 1993, the Company would have recorded a $1.9 million
extraordinary loss as a result of the early retirement of such debt.
(9) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the nine-months ended September 30, 1994, after adjusting
the net loss for preferred stock dividends of $3.3 million. The pro forma
net income (loss) per common share has been computed using the average
number of outstanding common shares for the nine months ended September 30,
1994, plus approximately 3.5 million common shares assumed to have been
issued on January 1, 1993, after adjusting the pro forma net loss for
preferred stock dividends of $3.3 million.
(10) Reflects the repurchase of 1.5 million shares of Class A Common Stock with
a portion of the proceeds of the Offerings.
(11) Reflects the issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering.
P-11
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P-12
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
The following pro forma statement of operations for the twelve months ended
September 30, 1994 is derived from the Company's financial statements for the
twelve months ended September 30, 1994, adjusted to give effect to the 1994 Nine
Month Acquisitions, the 1994 Fourth Quarter Acquisitions, the Star Gas
Transactions, the 9 3/8% Note Offering, the Debenture Offering, the Common Stock
Offering and the Use of Proceeds, as if each such transaction had occurred on
October 1, 1993.
The unaudited statements of operations of the Company the distributorships
acquired and Star Gas for the twelve months ended September 30, 1994 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-13
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO., INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
Net sales............................................. $ 546,434 $ 48,438 $ 101,351
Cost of sales......................................... 361,682 32,940 45,299
--------------- -------- -----------
Gross profit........................................ 184,752 15,498 56,052
Operating expenses.................................... 126,008 8,307 36,037 $ (947)(3)
Amortization of customer lists and deferred charges... 25,824 4,164 882(4)
Depreciation and amortization of plant and
equipment........................................... 5,872 689 6,628 (448)(4)
Provision for supplemental benefit.................... 280
--------------- -------- -----------
Operating income.................................... 26,768 6,502 9,223
Interest expense--net................................. 22,082 9,514 (1,621)(5)
2,002(6)
Other income (expenses)............................... (53) (740)
Share of loss of Star Gas............................. (1,243) 1,243(7)
--------------- -------- -----------
Income (loss) before income taxes................... 3,390 6,502 (1,031)
Income taxes.......................................... 607 300
--------------- -------- -----------
Net income (loss)................................... $ 2,783 $ 6,502 $ (1,331)
=============== ======== ===========
Net income (loss) per common share(10):
Class A Common Stock................................ $ (.04)
Class B Common Stock................................ 1.57
Class C Common Stock................................ (.04)
Weighted average number of common shares outstanding:
Class A Common Stock................................ 18,993 2,489(8)
Class B Common Stock................................ 201
Class C Common Stock................................ 2,545
</TABLE>
- ------------------------
(1) Represents the results of the distributorships acquired in the 1994 Nine
Month Acquisitions from October 1, 1993 to their dates of acquisition by the
Company. There were no fourth quarter 1993 acquisitions. Results of such
distributorships from the dates of acquisition to September 30, 1994 are
included in the Company's twelve months ended September 30, 1994
consolidated results. The twelve month results of the distributorships
acquired in the 1994 Fourth Quarter Acquisitions are also included in their
entirety in this column.
(2) Represents the results of operations of Star Gas for the year ended
September 30, 1994, excluding certain operations sold and including
operations acquired prior to the Star Gas Acquisition.
(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:
Salaries and related cost--Star Gas...................................... $557
Salaries and related cost--Acquired Distributorships..................... 390
----
$947
====
The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1994 and of Star Gas. These employees were not
employed by the Company when the distributorships and Star Gas were acquired
and the Company was able to integrate the businesses without incurring any
incremental costs.
(4) Adjustment of amortization of customer lists and deferred charges and
depreciation and amortization of plant and equipment, as applicable, to
reflect an annual charge in accordance with the Company's accounting
policies.
(5) Reflects deceased interest expense of Star Gas as result of the Star Gas
Recapitalization in December 1993. The primary reasons for the decrease in
pro forma interest expense were that, as part of the recapitalization, $36.6
million of debt was exchanged for preferred stock causing a pro forma
reduction of interest expense of approximately $1.1 million, and $17.1
million of notes and loans were repaid with a portion of the proceeds of the
capital contributions from the Company and others, causing a pro forma
reduction of interest expense of approximately $.4 million.
P-14
<PAGE>
DEBENTURE
OFFERING
PRO FORMA
SUBTOTAL ADJUSTMENT PRO FORMA
$696,223 $ 696,223
439,921 439,921
- -------- ---------
256,302 256,302
169,405 169,405
30,870 30,870
12,741 12,741
280 280
- -------- ---------
43,006 43,006
31,977 $6,626(9) 38,603
(793) (793)
- -------- ---------
10,236 3,610
907 907
- -------- ---------
$ 9,329 $ 2,703
======== =========
$ (.04)
1.57
(.04)
21,482 (1,522)(11) 22,460
2,500(12)
201 201
2,545 2,545
- ------------------------
(6) Reflects increased interest expense as a result of the 9 3/8% Note
Offering. The reasons for the increase in pro forma interest expense were
the additional pro forma interest expense on the 9 3/8% Note Offering ($2.4
million), the additional pro forma interest expense of acquisitions, other
than from the excess proceeds of the 9 3/8% Note Offering ($1.4 million),
partially offset by the reduced pro forma interest expense of utilizing a
portion of the 9 3/8% Note Offering proceeds to repay $50 million of other
notes ($1.8 million). If the 9 3/8% Note Offering had occurred on October
1, 1993, the Company would have recorded a $1.3 million extraordinary loss
as a result of the early retirement of debt.
(7) Reversal of the share of loss of Star Gas for the twelve months ended
September 30, 1994, since Star Gas is assumed to have been 100% acquired on
October 1, 1993 (see Note 2 above)
(8) Reflects the issuance of shares in the Star Gas Acquisition.
(9) Reflects increased interest expense as a result of the Offerings. The
reasons for the increase in pro forma interest expense were the additional
pro forma interest expense on the $125 million Debenture Offering of $15.3
million, partially offset by utilizing a portion of the proceeds to repay
$65.4 million of Star Gas debt causing a reduction in the pro forma
interest expense of $7.0 million, and utilizing a portion of the proceeds
to repay $12.8 million of other long term debt causing a reduction in the
pro forma interest expense of $1.7 million. If the Note Repurchase had
occurred on October 1, 1993 the Company would have recorded a $1.9 million
extraordinary loss as a result of the early retirement of such debt.
(10) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the twelve months ended September 30, 1994, after
adjusting the net income (loss) for preferred stock dividends of $3.3
million. The pro forma net income (loss) per common share has been computed
using the average number of outstanding common shares for the twelve months
ended September 30, 1994, plus approximately 3.5 million common shares
assumed to have been issued on October 1, 1993 after adjusting the pro
forma net income for preferred stock dividends of $3.3 million.
(11) Reflects the repurchase of 1.5 million shares of Class A Common Stock with
a portion of the proceeds of the Offerings.
(12) Reflects the issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering.
P-15
<PAGE>
This page intentionally left blank.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
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-8
Consolidated Financial Statements of Star Gas Corporation and
Subsidiaries:
Independent Auditors' Reports.................................. F-31
Consolidated Balance Sheets.................................... F-33
Consolidated Statements of Operations.......................... F-34
Consolidated Statements of Shareholders' Equity (Deficiency)... F-35
Consolidated Statements of Cash Flows.......................... F-36
Notes to Consolidated Financial Statements..................... F-38
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, 1992 and 1993, 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, 1993. 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, 1992, and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1993 in conformity with generally
accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standard Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, in 1993.
KPMG PEAT MARWICK LLP
New York, New York
February 28, 1994
F-2
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1992 1993 1994
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 3,859,557 $ 4,613,546 $ 17,054,782
Accounts receivable (net of allowance of $1,270,754, $1,026,202 and
$2,609,280)........................................................ 78,358,514 74,818,503 43,687,417
Inventories.......................................................... 15,729,305 13,992,928 14,198,175
Prepaid expenses..................................................... 4,623,433 5,230,865 6,239,369
Notes receivable and other current assets............................ 1,680,633 1,715,329 1,436,187
U.S. Treasury Notes held in a Cash Collateral Account................ -- 20,000,000 --
------------ ------------ -------------
Total current assets............................................ 104,251,442 120,371,171 82,615,930
------------ ------------ -------------
Property, plant and equipment......................................... 61,092,297 62,643,562 67,838,103
Less accumulated depreciation and amortization....................... 28,342,302 31,103,032 34,191,071
------------ ------------ -------------
32,749,995 31,540,530 33,647,032
------------ ------------ -------------
Intangible assets (net of accumulated amortization of $188,459,167,
$217,190,143 and $236,656,477)
Customer lists..................................................... 86,093,145 73,177,198 79,066,572
Deferred charges................................................... 14,128,629 13,717,281 22,293,795
Deferred pension costs............................................. -- 1,332,616 1,332,616
------------ ------------ -------------
100,221,774 88,227,095 102,692,983
------------ ------------ -------------
Investment in Star Gas Corporation.................................... -- 16,000,000 14,757,000
------------ ------------ -------------
U.S. Treasury Notes held in a Cash Collateral Account................. 15,000,000 -- --
------------ ------------ -------------
Other assets.......................................................... 560,000 450,000 425,000
------------ ------------ -------------
$252,783,211 $256,588,796 $ 234,137,945
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Working capital borrowings........................................... $ 32,000,000 $ 28,000,000 $ --
Current maturities of other long-term debt........................... 33,345 33,345 33,345
Current installments of capital lease obligations.................... 103,595 -- --
Current maturities of cumulative redeemable preferred stock.......... -- 4,166,667 4,166,667
Subordinated notes payable........................................... 12,400,373 -- --
Accounts payable..................................................... 15,289,518 16,664,026 8,550,814
Customer credit balances............................................. 19,317,863 22,324,023 27,090,937
Unearned service contract revenue.................................... 13,180,431 13,018,983 13,171,375
Accrued expenses:
Wages and bonuses.................................................. 5,030,100 6,392,559 6,155,676
Taxes other than income taxes...................................... 1,856,074 1,564,822 469,658
Pension............................................................ 2,373,188 1,465,905 1,015,989
Other.............................................................. 9,410,757 10,046,589 13,604,085
------------ ------------ -------------
Total current liabilities....................................... 110,995,244 103,676,919 74,258,546
------------ ------------ -------------
Maxwhale Notes Payable................................................ 50,000,000 50,000,000 --
------------ ------------ -------------
Senior notes payable.................................................. -- -- 42,631,832
------------ ------------ -------------
Other long-term debt.................................................. 80,404 47,059 8,820,800
------------ ------------ -------------
Supplemental benefits payable......................................... 1,688,728 1,652,314 1,636,919
------------ ------------ -------------
Pension plan obligation............................................... 1,239,250 7,079,494 7,059,730
------------ ------------ -------------
Subordinated notes payable............................................ 84,978,349 135,263,663 167,631,831
------------ ------------ -------------
Cumulative redeemable exchangeable preferred stock, par value $.10 per
share, 409,722 shares authorized 408,884, 250,000 and 208,332 shares
outstanding of which 41,667 at December 31, 1993 and September 30,
1994 are reflected as current......................................... 37,717,790 20,833,333 16,666,533
------------ ------------ -------------
Commitments and contingencies
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.......................... 1,899,258 1,899,258 1,899,258
Class B common stock-par value $.10 per share; 6,500,000 shares
authorized, 216,901, 216,901 and 25,963 shares outstanding
(liquidation preference--$1,236,336, $1,236,336 and $147,972)......... 21,690 21,690 2,596
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........................................... 54,462,132 54,416,259 51,093,938
Deficit.............................................................. (89,274,148) (112,741,672) (132,004,517)
Minimum pension liability adjustment................................. -- (4,534,035) (4,534,035)
------------ ------------ -------------
(32,636,554) (60,683,986) (83,288,246)
Note receivable from stockholder...................................... (1,280,000) (1,280,000) (1,280,000)
------------ ------------ -------------
Total stockholders' equity (deficiency)............................... (33,916,554) (61,963,986) (84,568,246)
------------ ------------ -------------
$252,783,211 $256,588,796 $ 234,137,945
------------ ------------ -------------
------------ ------------ -------------
</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
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1991 1992 1993 1993 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................ $523,243,243 $512,430,194 $538,526,317 $377,383,609 $385,290,895
Cost of sales.................... 378,771,961 350,941,386 366,809,517 262,367,466 257,239,663
------------ ------------ ------------ ------------ ------------
Gross profit.................... 144,471,282 161,488,808 171,716,800 115,016,143 128,051,232
Selling, general and
administrative expenses......... 79,427,873 83,407,680 93,378,666 68,270,664 68,570,797
Direct delivery expense.......... 25,007,204 26,756,585 29,901,565 20,909,602 23,336,788
Amortization of customer lists... 24,839,983 23,496,438 23,182,730 18,236,229 14,801,779
Depreciation and amortization of
plant and equipment............. 5,550,381 5,534,205 5,933,100 4,368,314 4,307,857
Amortization of deferred
charges........................ 5,185,113 5,363,321 5,548,246 4,136,435 4,664,555
Provision for supplemental
benefits....................... -- 1,973,728 263,586 193,122 209,601
------------ ------------ ------------ ------------ ------------
Operating income (loss)....... 4,460,728 14,956,851 13,508,907 (1,098,223) 12,159,855
Other income (expense):
Interest expense................ (21,916,205) (20,204,808) (22,155,840) (16,501,218) (18,055,514)
Interest income................. 1,187,676 1,582,885 1,647,435 1,354,068 1,334,718
Gains (losses) on sales of fixed
assets........................... (104,911) 8,297 (164,686) (28,817) 83,141
Other........................... 60,147 (332,590) -- -- --
------------ ------------ ------------ ------------ ------------
Loss before income taxes, equity
interest in Star Gas and
extraordinary item.......... (16,312,565) (3,989,365) (7,164,184) (16,274,190) (4,477,800)
Income taxes..................... 250,000 400,000 400,000 218,000 425,000
------------ ------------ ------------ ------------ ------------
Loss before equity interest in
Star Gas and extraordinary
item........................ (16,562,565) (4,389,365) (7,564,184) (16,492,190) (4,902,800)
------------ ------------ ------------ ------------ ------------
Share of loss of Star Gas
Corporation.................... -- -- -- -- (1,243,000)
------------ ------------ ------------ ------------ ------------
Loss before extraordinary
item........................... (16,562,565) (4,389,365) (7,564,184) (16,492,190) (6,145,800)
Extraordinary item--loss on early
extinguishment of debt......... -- -- (867,110) (867,110) (654,500)
------------ ------------ ------------ ------------ ------------
Net loss........................ $(16,562,565) $ (4,389,365) $ (8,431,294) $(17,359,300) $ (6,800,300)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
stock.......................... $(19,854,648) $ (8,842,105) $(11,798,320) $(20,726,296) $(10,140,746)
Income (loss) before
extraordinary item per common
share:
Class A Common Stock............ $(1.64) $(.81) $(.53) $(.94) $(.45)
Class B Common Stock............ .31 1.14 1.88 1.41 1.10
Class C Common Stock............ (1.64) (.81) (.53) (.94) (.45)
Extraordinary loss per common
share:
Class A Common Stock............ $ -- $ -- $(.04) $(.04) $(.03)
Class B Common Stock............ -- -- -- -- --
Class C Common Stock............ -- -- (.04) (.04) (.03)
Net income (loss) per common
share:
Class A Common Stock............ $(1.64) $(.81) $(.57) $(.98) $(.48)
Class B Common Stock............ .31 1.14 1.88 1.41 1.10
Class C Common Stock............ (1.64) (.81) (.57) (.98) (.48)
Weighted average number of common
shares outstanding:
Class A Common Stock............ 10,180,558 12,854,266 18,992,579 18,992,579 18,992,579
Class B Common Stock............ 3,034,060 2,447,473 216,901 216,901 195,919
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, 1991, 1992 AND 1993 AND NINE MONTHS ENDED SEPTEMBER 30,
1994 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------
CLASS A CLASS B CLASS C
----------------------- --------------------- -------------------- ADDITIONAL
NO. OF NO. OF NO. OF PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- -------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
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)
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)
Net loss............. (8,431,294)
Cash dividends
declared and
paid................ (11,972,850)
Cash dividends
payable............. (3,063,380)
Accretion of
redeemable preferred
stock............... (45,873)
Minimum pension
liability
adjustment..........
---------- ---------- ---------- -------- --------- -------- ----------- -------------
Balance at December
31, 1993............ 18,992,579 1,899,258 216,901 21,690 2,545,139 254,514 54,416,259 (112,741,672)
Net loss............. (6,800,300)
Cash dividends
declared and
paid................ (9,501,108)
Cash dividends
payable............. (2,961,437)
Repurchase Class B
Common Stock........ (190,938) (19,094) (3,322,321)
---------- ---------- ---------- -------- --------- -------- ----------- -------------
Balance at September
30, 1994............ 18,992,579 $1,899,258 25,963 $ 2,596 2,545,139 $254,514 $51,093,938 $(132,004,517)
---------- ---------- ---------- -------- --------- -------- ----------- -------------
---------- ---------- ---------- -------- --------- -------- ----------- -------------
<CAPTION>
MINIMUM NOTE
PENSION RECEIVABLE
LIABILITY FROM
ADJUSTMENT STOCKHOLDER TOTAL
----------- ----------- ------------
<S> <C> <C> <C>
Balance at December
31, 1990............. $ -- $(1,280,000) $(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............ -- (1,280,000) (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............. -- (1,280,000) (33,916,554)
Net loss............. (8,431,294)
Cash dividends
declared and
paid................ (11,972,850)
Cash dividends
payable............. (3,063,380)
Accretion of
redeemable preferred
stock............... (45,873)
Minimum pension
liability
adjustment.......... (4,534,035) (4,534,035)
----------- ----------- ------------
Balance at December
31, 1993............ (4,534,035) (1,280,000) (61,963,986)
Net loss............. (6,800,300)
Cash dividends
declared and
paid................ (9,501,108)
Cash dividends
payable............. (2,961,437)
Repurchase Class B
Common Stock........ (3,341,415)
----------- ----------- ------------
Balance at September
30, 1994............ $(4,534,035) $(1,280,000) $(84,568,246)
----------- ----------- ------------
----------- ----------- ------------
</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
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ------------------------------
1991 1992 1993 1993 1994
-------------- -------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $ (16,562,565) $ (4,389,365) $ (8,431,294) $ (17,359,300) $ (6,800,300)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Amortization of
customer lists....... 24,839,983 23,496,438 23,182,730 18,236,229 14,801,779
Depreciation and
amortization of plant
and equipment........ 5,550,381 5,534,205 5,933,100 4,368,314 4,307,857
Amortization of
deferred charges and
debt discount........ 5,223,354 5,394,397 5,548,246 4,148,045 4,664,555
Share of loss of Star
Gas Corporation...... -- -- -- -- 1,243,000
Provision for losses on
accounts receivable.. 2,156,320 2,444,581 1,836,113 1,649,988 1,491,498
Provision for
supplemental
benefits............. -- 1,973,728 263,586 193,122 209,601
(Gain) loss on bond
redemptions.......... (60,147) 332,590 867,110 867,110 654,500
(Gain) loss on sales of
fixed assets......... 104,911 (8,297) 164,686 28,817 (83,141)
Amortization of
acquired pension plan
obligation........... (23,328) (24,785) (26,407) (19,819) (19,764)
Decrease (increase) in
accounts receivable.. 8,217,612 (6,994,519) 1,703,898 33,522,017 29,639,588
Decrease (increase) in
inventory............ 12,509,679 (2,438,308) 1,736,377 2,941,246 (205,247)
Decrease in income
taxes receivable..... 668,000 -- -- -- --
Decrease (increase) in
prepaid expenses,
notes receivable and
other current
assets............... 279,716 (12,823) (642,128) (1,465,990) (729,362)
Decrease (increase) in
other assets......... (100,000) (200,000) 110,000 10,000 25,000
Increase (decrease) in
accounts payable..... (6,133,548) 2,360,312 1,374,508 (6,115,613) (8,113,212)
Increase (decrease) in
customer credit
balances............. 2,378,664 (822,574) 3,006,160 7,168,515 4,766,914
Increase (decrease) in
unearned service
contract revenue..... 104,643 823,902 (161,448) (845,939) 152,392
Increase (decrease) in
accrued expenses..... 461,857 (756,093) 171,555 (150,670) 1,877,476
-------------- -------------- -------------- ------------- -------------
Net cash provided by
operating activities... 39,615,532 26,713,389 36,636,792 47,176,072 47,883,134
-------------- -------------- -------------- ------------- -------------
Cash flows used in
investing activities:
Acquisition of customer
lists.................... (10,127,482) (33,361,262) (10,266,783) (10,199,182) (13,319,403)
Increase in deferred
charges................ (2,570,234) (1,800,647) (3,581,798) (3,047,753) (7,901,570)
Capital expenditures..... (4,146,765) (14,509,037) (5,182,335) (4,309,984) (6,622,621)
Net proceeds from sales
of fixed assets........ 261,333 528,376 294,014 129,638 291,403
</TABLE>
F-6
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ------------------------------
1991 1992 1993 1993 1994
-------------- -------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment in Star Gas
Corporation............ -- -- (16,000,000) -- --
-------------- -------------- -------------- ------------- -------------
Net cash used in
investing activities.. (16,583,148) (49,142,570) (34,736,902) (17,427,281) (27,552,191)
-------------- -------------- -------------- ------------- -------------
Cash flows from financing
activities:
Proceeds from issuance of
common stock............. -- 47,630,000 -- -- --
Costs of issuing and
exchanging common
stocks................. -- (4,924,164) -- -- --
Net proceeds from
issuance of redeemable
exchangeable preferred
stock.................. 4,449,055 7,499,950 -- -- --
Net proceeds from
issuance of
subordinated notes..... 5,700,000 6,800,000 48,067,642 48,067,642 71,087,500
Repayment of notes
payable................ -- -- -- -- (50,654,500)
Repurchase of preferred
stock.................. -- -- -- -- (4,166,800)
Repurchase of common
stock-- Class B........ -- -- -- -- (3,341,415)
Repurchase of
subordinated notes..... (5,616,508) (6,964,693) (25,368,574) (25,368,574) --
Borrowings under
financing
arrangement............ 175,600,000 166,000,000 127,000,000 63,000,000 15,000,000
Repayments under
financing
arrangement............ (194,850,000) (173,750,000) (131,000,000) (95,000,000) (43,000,000)
Decrease (increase) in
Cash Collateral
Account................ (5,000,000) (10,000,000) (5,000,000) (5,000,000) 20,000,000
Decrease in other debt
and supplemental
obligations............ (33,345) (33,346) (161,089) (250,009) (250,004)
Principal payments under
capital lease
obligations............ (686,577) (596,833) (103,595) (103,595) --
Cash dividends paid...... (5,216,921) (8,279,636) (14,580,285) (11,516,905) (12,564,488)
-------------- -------------- -------------- ------------- -------------
Net cash provided by
(used in)
financing
activities........ (25,654,296) 23,381,278 (1,145,901) (26,171,441) (7,889,707)
-------------- -------------- -------------- ------------- -------------
Net increase
(decrease) in
cash.............. (2,621,912) 952,097 753,989 3,577,350 12,441,236
Cash at beginning of
year.................... 5,529,372 2,907,460 3,859,557 3,859,557 4,613,546
-------------- -------------- -------------- ------------- -------------
Cash at end of year....... $ 2,907,460 $ 3,859,557 $ 4,613,546 $ 7,436,907 $ 17,054,782
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<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, 1994 AND 1993 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 28
major markets in the Northeast, including the metropolitan areas of Boston, New
York City, Baltimore, Providence and Washington, D.C., serving approximately
417,000 customers in those areas. Credit is granted to substantially all of
these customers with no individual account comprising a concentrated credit
risk.
Investment in Star Gas Corporation
The Company's investment in Star Gas Corporation (see note 15) is accounted
for following the equity method.
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:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1992 1993 1994
----------- ----------- -------------
Fuel oil......................... $ 8,151,053 $ 6,289,676 $ 5,354,914
Parts............................ 7,578,252 7,703,252 8,843,261
----------- ----------- -------------
$15,729,305 $13,992,928 $ 14,198,175
----------- ----------- -------------
----------- ----------- -------------
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 long-term and subordinated debt. Such costs are being amortized using
the interest method over the lives of the instruments.
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, 1994 AND 1993 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company assesses the recoverability of intangible assets at the end of
each fiscal year and, when appropriate, at the end of each fiscal quarter, 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.
Revenue Recognition
Sales of petroleum products, boilers, burners and other heating equipment
are recognized at the time of delivery of the product to the customer or at the
time of installation, if necessary. Revenue from repairs and maintenance service
is recognized upon completion of the service for customers without service
contracts. Payments received from customers for heating equipment service
contracts are deferred and amortized into income over the the terms of the
respective service contracts, on a straight line basis, which generally do not
exceed one year.
Environmental Costs
The Company expenses, on a current basis, costs associated with managing
hazardous substances and pollution in ongoing operations. The Company also
accrues for costs associated with the remediation of environmental pollution
when it becomes probable that a liability has been incurred and the amount can
be reasonably estimated.
Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. When appropriate, deferred income taxes were 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
Standards 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 consolidated 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
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, 1994 AND 1993 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Stock outstanding, after adjusting the net loss for preferred dividends declared
and the accretion of 1991 Redeemable Preferred Stock, aggregating $3,292,000,
$4,452,000, $3,367,000, $3,367,000 and $3,341,000 for the years ended 1991, 1992
1993, and for the nine months ended September 30, 1993 and 1994, 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, 1994 and for the nine-month
periods ended September 30, 1993 and September 30, 1994 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, 1994 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
1992 1993 1994 USEFUL LIVES
----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Land............................... $ 1,469,065 $ 1,519,065 $ 1,819,065
Buildings.......................... 7,151,142 7,420,171 8,141,837 20-45 years
Fleet and other equipment.......... 38,507,056 38,412,619 41,330,801 3-17 years
Furniture and fixtures............. 10,784,419 11,861,514 12,988,930 5-7 years
Leasehold improvements............. 3,180,615 3,430,193 3,557,470 Terms of leases
----------- ----------- -------------
61,092,297 62,643,562 67,838,103
Less accumulated depreciation and
amortization....................... 28,342,302 31,103,032 34,191,071
----------- ----------- -------------
$32,749,995 $31,540,530 $ 33,647,032
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
(3) NOTES PAYABLE, OTHER LONG-TERM DEBT AND WORKING CAPITAL BORROWINGS
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,
1992 1993 1994
----------- ----------- -------------
<S> <C> <C> <C>
Notes payable to banks under working capital
borrowing arrangements(a)(c)........................ $32,000,000 $28,000,000 $ --
Notes payable in connection with the acquisition of
Whale Oil Corp., refinanced on February 3, 1994
and paid on February 4, 1994, with interest at the
rate of 9% per annum(b)(c)........................ 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, through June 1, 1996
(see note 10)..................................... 113,749 80,404 55,395
</TABLE>
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, 1994 AND 1993 IS
UNAUDITED)
(3) NOTES PAYABLE, OTHER LONG-TERM DEBT AND WORKING CAPITAL
BORROWINGS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1992 1993 1994
----------- ----------- -------------
<S> <C> <C> <C>
Notes payable in connection with the purchase of
fuel oil dealers, due in monthly, quarterly and
annual installments with interest at various rates
ranging from 8% to 9% per annum, maturing at
various dates through September 13, 1999.......... -- -- 8,798,750
----------- ----------- -------------
82,113,749 78,080,404 8,854,145
Less current maturities, including working capital
borrowings.......................................... 32,033,345 28,033,345 33,345
----------- ----------- -------------
$50,080,404 $50,047,059 $ 8,820,800
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
- ------------------------
<TABLE>
<C> <S>
(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 facility terminates on June 30, 1996. 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, 1993, the rate on the working capital borrowings was 4.9%.
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.
On August 1, 1994, the Company further amended the Credit Agreement to include a $50
million two-year revolving credit acquisition facility, convertible into a three-year
self amortizing loan. Assuming the refinancing of the Company's 11.85%, 12.17% and
12.18% Senior and Subordinated Notes due in 1998, repayments and/or sinking fund
deposits equal to 1/3 of the outstanding balance of the facility on June 30, 1996 would
be payable annually with the final payment due May 30, 1999. If the assumed refinancing
does not occur on or prior to June 30, 1998, the final payment due on May 30, 1999
would be accelerated to June 30, 1998. The Company has additionally pledged its
accounts receivable and inventory as security under the Credit Agreement.
</TABLE>
(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, 1994 AND 1993 IS
UNAUDITED)
(3) NOTES PAYABLE, OTHER LONG-TERM DEBT AND WORKING CAPITAL
BORROWINGS--(CONTINUED)
<TABLE>
<C> <S>
(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly owned subsidiary of Petro,
acquired certain assets of Whale Oil Corp. for $50.0 million. The purchase price was
paid by the issuance of $50.0 million of 9% notes due June 1, 1994. The notes were
nonrecourse to Petro, but were secured by letters of credit issued by certain banks
pursuant to the Credit Agreement. Maxwhale paid a fee on these letters of credit,
calculated at a range of 1.75% to 2.25% on $50.0 million less the balance maintained in
a Cash Collateral Account, plus 0.25% on the Cash Collateral Account balance. Petro had
fully guaranteed these letters of credit. The Maxwhale customer list was pledged
pursuant to a security agreement in favor of the banks.
On February 4, 1994, the Company repaid the $50.0 million of Maxwhale notes at a
purchase price of 101.33% of the principal amount thereof, with a portion of the
proceeds of its $75.0 million 9 3/8% public subordinated debenture offering completed
on February 3, 1994 (see note 5). The Company recorded an extraordinary loss in 1994 of
approximately $0.7 million as a result of the early payment on such debt. Since the
Maxwhale notes were refinanced with the proceeds of new long term debt, such notes were
classified as long term at December 31, 1993.
Under the Credit Agreement, the Company was 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. As a result of the repayment
of the Maxwhale notes, the $20 million in the cash collateral account was released for
general corporate purposes on February 4, 1994.
(c) The customer lists, trademarks and trade names pledged to the banks under the Credit
Agreement are carried on the December 31, 1993 balance sheet at $73,177,198. 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.
With the refinancing of the Maxwhale notes with a portion of the Company's 9 3/8%
Subordinated Debentures, there are no other annual maturities of long-term debt for
each of the next five years as of December 31, 1993, except for the required repayments
of the acquisition related payable of approximately $80,000 due in equal monthly
installments of approximately $3,300 through June 30, 1996.
</TABLE>
(4) LEASES AND CAPITAL LEASE OBLIGATIONS
The Company was 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,
------------------------ -------------
1992 1993 1994
---------- ---------- -------------
<S> <C> <C> <C>
Fleet and other equipment............. $2,701,658 $2,701,658 $ 2,701,658
Less accumulated amortization......... 2,598,063 2,701,658 2,701,658
---------- ---------- -------------
$ 103,595 $ -- $ --
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
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, 1994 AND 1993 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) are as follows:
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- -------------------------------------------------------------- -----------
1994.......................................................... $ 3,260,000
1995.......................................................... 2,974,000
1996.......................................................... 2,128,000
1997.......................................................... 1,507,000
1998.......................................................... 1,392,000
Thereafter.................................................... 5,046,000
-----------
Total minimum lease payments.......................... $16,307,000
-----------
-----------
Rental expense under operating leases for the years ended December 31, 1991,
1992 and 1993 was $4,916,000, $4,448,000, and $5,346,000, respectively, and for
the nine months ended September 30, 1993 and 1994 was $3,877,000 and $4,321,000,
respectively.
(5) SUBORDINATED AND SENIOR NOTES PAYABLE
Subordinated and Senior notes payable, net of unamortized original
discounts, at the dates indicated, consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1992 1993 1994
----------- ------------ -------------
<S> <C> <C> <C>
11.40% Subordinated Notes due July 1,
1993(a)(b)...................................... $12,400,373 $ -- $ --
14.275% Subordinated Notes due October 1,
1995(b)......................................... 12,478,349 -- --
11.85%, 12.17%, and 12.18% Subordinated and Senior
Notes due October 1, 1998(c).................... 60,000,000 60,000,000 60,000,000
14.10% Subordinated and Senior Notes due January
15, 2001(d)..................................... 12,500,000 12,500,000 12,500,000
Subordinated and Senior Notes due March 1,
2000(e)......................................... -- 12,763,663 12,763,663
10 1/8% Subordinated Notes due April 1, 2003(f)... -- 50,000,000 50,000,000
9 3/8% Subordinated Debentures due February 1,
2006(g)......................................... -- -- 75,000,000
----------- ------------ -------------
97,378,722 135,263,663 210,263,663
Less current maturities........................... 12,400,373 -- --
----------- ------------ -------------
Total long-term Senior and Subordinated Notes
payable......................................... 84,978,349 135,263,663 210,263,663
Less long-term Senior Notes payable(g)............ -- -- 42,631,832
----------- ------------ -------------
Total Long-term Subordinated Notes payable........ $84,978,349 $135,263,663 $ 167,631,831
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
(Footnotes on following page)
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, 1994 AND 1993 IS
UNAUDITED)
(5) SUBORDINATED AND SENIOR NOTES PAYABLE--(CONTINUED)
(Footnotes for preceding page)
- ------------------------
<TABLE>
<C> <S>
(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.
(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 the remaining outstanding amounts of its 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 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 these notes.
</TABLE>
<TABLE>
<C> <S>
(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 January, April, July and October. 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 in 1996 and ending on January
15, 2000, the Company is required to repay
</TABLE>
(Footnotes continued on following page)
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, 1994 AND 1993 IS
UNAUDITED)
(5) SUBORDINATED AND SENIOR NOTES PAYABLE--(CONTINUED)
(Footnotes continued from preceding page)
<TABLE>
<C> <S>
$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 (see note 7). 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,
1994, LIBOR was 5.0625%.
(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.
(g) On February 3, 1994, the Company issued $75.0 million of 9 3/8% Subordinated Debentures
due February 1, 2006. These Debentures are redeemable at the Company's option, in whole
or in part, at any time on or after February 1, 1997 upon payment of a premium rate as
defined. Interest is payable semiannually on the first day of February and August.
In connection with the offering of its 9 3/8% Subordinated Debentures, the Company
solicited and received consents of the holders of at least a majority in aggregate
principal amount of each class of subordinated debt and redeemable preferred stock (see
note 7) to certain amendments to the respective agreements under which the subordinated
debt and the redeemable preferred stock were issued. In consideration for the consents,
the Company paid to the holders of the subordinated debt due in 1998, 2000 and 2003 a
cash payment aggregating $0.6 million and caused approximately $42.6 million of the
aggregate principal amount of the subordinated debt to be ranked as senior debt. In
addition, the Company agreed to increase dividends on the redeemable preferred stock by
$2.00 per share per annum. The Company also paid approximately $1.5 million in fees and
expenses to obtain such consents (see note 7).
Expenses connected with the above seven offerings, and amendments thereto, amounted to
approximately $12,772,000. At December 31, 1992 and 1993, and September 30, 1994, the
unamortized balances relating to notes still outstanding amounted to approximately
$1,675,000, $2,762,000 and $6,915,000, respectively, and such balances are included in
deferred charges.
Aggregate annual maturities for each of the next five years, are as follows as of December
31, 1993:
</TABLE>
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------
1994....................................................... $ --
1995....................................................... --
1996....................................................... 2,100,000
1997....................................................... 2,100,000
1998....................................................... 62,100,000
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, 1994 AND 1993 IS
UNAUDITED)
(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 on the following
page, 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.
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 (the
"Offering") at an initial offering price of $11.00 per share.
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.
Holders of Class B Common Stock were 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, (iv) 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. 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.
During July 1994, the Company exercised its right to terminate the Special
Dividends on the Class B Common Stock, effective August 31, 1994, "the
expiration date." The Company's restated and amended articles of incorporation
provides that when the Company terminates the Special Dividends, the holders of
Class B Common Stock have the right to require the Company to purchase their
shares at $17.50 per share plus all accrued and unpaid Special Dividends through
the expiration date ($0.2763 per share for the period July 1, 1994 through
August 31, 1994).
As of the expiration date of August 31, 1994, 190,938 shares of Class B
Common Stock were repurchased for approximately $3.3 million. The remaining
Class B Common Stockholders will not be paid any dividends until the aggregate
amount of dividends paid on all other classes of stock exceeds the Common Stock
Allocation (defined as the Company's cash flow for each fiscal year after
December 31, 1985, on a cumulative basis, minus all Special Dividends paid or
accrued). At December 31, 1993 the Common Stock Allocation amounted to
approximately $100.2 million. After the Common Stock
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, 1994 AND 1993 IS
UNAUDITED)
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS--(CONTINUED)
Allocation has been satisfied, each share of Class B Common Stock will
participate equally with each share of Class A Common Stock and Class C Common
Stock with respect to all dividends.
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 ENDING SEPTEMBER 30,
------------------------------------ ------------------------
1991 1992 1993 1993 1994
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash dividends declared
Class A....................... $ -- $3,157,000 $9,971,000 $7,360,000 $7,834,000
Class B....................... 952,000 2,715,000 408,000 306,000 238,000
Class C....................... -- 465,000 1,336,000 986,000 1,050,000
Cash dividends declared per
share
Class A....................... $ -- $ .18 $ .525 $ .39 $ .41
Class B....................... .31 1.14 1.88 1.41 1.10
Class C....................... -- .18 .525 .39 .41
</TABLE>
Under the Company's most restrictive dividend limitation, $7.1 million was
available at December 31, 1993 for the payment of dividends on all classes of
Common Stock. The amount available for dividends is increased each quarter by
50% of the cash flow, as defined, for the previous fiscal quarter.
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 September 30, 1994 amounted to an aggregate of $147,972.
(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 $0.10 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. In connection with receiving the
consents in 1994 to modify certain covenants under which the Redeemable
Preferred Stock was issued, the Company has agreed to increase dividends on the
Redeemable Preferred Stock by $2.00 per share per annum which began in February
1994. The shares of the Redeemable Preferred Stock are exchangeable in whole, or
in part, at the option of the Company, for 1999 Notes of the Company.
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, 1994 AND 1993 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 first such
redemption in the amount of $4,166,800 occurred on August 1, 1994.
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 were 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%.
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. In March 1993, the Company issued $12,763,663 of 2000
Notes in exchange for all of the 1991 Redeemable Preferred Stock (see note 5).
Preferred dividends of $3,269,000, $4,258,000 and $3,321,000 were declared
on all classes of preferred stock in 1991, 1992 and 1993, respectively. For the
nine months ended September 30, 1993 and 1994, Preferred Dividends of $3,321,000
and $3,341,000 respectively, were declared on all classes of preferred stock.
Aggregate annual maturities of Redeemable Preferred Stock are as follows as
of December 31, 1993:
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------
1994....................................................... $ 4,167,000
1995....................................................... 4,166,000
1996....................................................... 4,167,000
1997....................................................... 4,167,000
1998....................................................... 4,167,000
1999....................................................... 4,166,000
-----------
$25,000,000
-----------
-----------
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, 1994 AND 1993 IS
UNAUDITED)
(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, 1991, 1992 and 1993 was $2,774,000, $2,447,000 and
$3,342,000, respectively, net of amortization of the pension obligation
acquired.
The following table sets forth the defined benefit plans' funded status, all
of which are underfunded, and amounts recognized in the Company's balance sheets
at the indicated dates:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1992 1993
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations including vested
benefits of $18,409,871 and $23,566,465............ $ 18,790,759 $ 23,848,149
------------ ------------
------------ ------------
Projected benefit obligation........................... $(21,715,790) $(26,458,728)
Plan assets at fair value (primarily listed stocks and
bonds)............................................... 16,581,099 17,252,490
------------ ------------
Projected benefit obligation in excess of plan
assets............................................... (5,134,691) (9,206,238)
Unrecognized net loss from past experience different
from the assumed and effects of changes in
assumptions.......................................... 3,645,967 7,538,164
Unrecognized net transitional obligation............... 606,394 546,784
Unrecognized prior service cost due to plan
amendments........................................... 674,044 785,832
Additional liability................................... (2,133,731) (6,260,201)
------------ ------------
Accrued pension cost for defined benefit plans......... $ (2,342,017) $ (6,595,659)
------------ ------------
------------ ------------
</TABLE>
Net pension cost for defined benefit plans for the periods indicated
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
----------- ----------- ----------
<S> <C> <C> <C>
Service cost-benefits earned during the
period..................................... $ 1,154,607 $ 1,162,736 $1,391,564
Interest cost on projected benefit
obligation................................. 1,665,229 1,781,444 1,778,401
Actual return on assets...................... (2,515,808) (1,248,604) (994,937)
Net amortization and deferral of gains and
losses..................................... 1,471,819 (71,885) 207,465
----------- ----------- ----------
Net periodic pension cost for defined
benefit plans........................ $ 1,775,847 $ 1,623,691 $2,382,493
----------- ----------- ----------
----------- ----------- ----------
Assumptions used in the above accounting
were:
Discount rate................................ 8.5% 8.5% 7.0%
Rates of increase in compensation level...... 6.0% 6.0% 4.0%
Expected long-term rate of return on
assets....................................... 10.0% 10.0% 8.5%
</TABLE>
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, 1994 AND 1993 IS
UNAUDITED)
(8) PENSION PLANS--(CONTINUED)
In addition to the above, the Company made contributions to
union-administered pension plans during the years ended December 31, 1991, 1992
and 1993 of $2,365,000, $2,442,000 and $2,867,000, respectively.
The Company has recorded an additional minimum pension liability for
underfunded plans of $5,866,651 at December 31, 1993, representing the excess of
unfunded accumulated benefit obligations over plan assets. A corresponding
amount is recognized as an intangible asset except to the extent that these
additional liabilities exceed the related unrecognized prior service costs and
net transition obligation, in which case the increase in liabilities is charged
as a reduction of stockholders' equity. The Company has recorded intangible
assets of $1,332,616 and a reduction in stockholders' equity of $4,534,035 as of
December 31, 1993.
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 $1,212,843 at December 31,
1993, is being amortized over 40 years.
Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's
then 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 $1,973,000, 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 Standards No. 106 (SFAS No. 106) "Employers' Accounting for Post
Retirement Benefits Other Than Pensions." This Statement requires that the
expected cost of postretirement 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 postretirement benefits,
other than pensions, the adoption of the new Statement did not have any material
effect on the Company's consolidated financial condition or results of
operations.
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, 1994 AND 1993 IS
UNAUDITED)
(9) INCOME TAXES
Income tax expense was comprised of the following for the indicated periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current:
Federal...................................... $ -- $ -- $ -- $ -- $ --
State........................................ 250,000 400,000 400,000 218,000 425,000
-------- -------- -------- -------- --------
$250,000 $400,000 $400,000 $218,000 $425,000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Deferred income tax expense results from temporary 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,
-------------------------------------
1991 1992 1993
--------- ---------- ----------
<S> <C> <C> <C>
Excess of tax over book (book over tax) depreciation.... $(114,000) $ (11,000) $ 242,000
Excess of book over tax vacation expense................ (223,000) (3,000) (93,000)
(Excess of book over tax) tax over book bad debt
expense............................................... (74,000) (165,000) 92,000
(Excess of book over tax) tax over book supplemental
benefit expense....................................... -- (671,000) 12,000
Deferred service contracts.............................. 66,000 66,000 18,000
Other, net.............................................. 36,000 50,000 (60,000)
Recognition of tax benefit of net operating loss to the
extent of current and previously recognized temporary
differences........................................... -- -- (211,000)
Deferred tax assets not recognized...................... 309,000 734,000 --
--------- ---------- ----------
$ -- $ -- $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
As of December 31, 1993, the Company has for Federal tax reporting purposes,
a net operating loss (NOL) carryforward of approximately $51.3 million. Total
income tax expense amounted to $250,000 for 1991, $400,000 for 1992, and
$400,000 for 1993. The following reconciles the effective tax rates to the
"expected" statutory rates for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Computed "expected" tax (benefit) rate........... (34.0)% (34.0)% (34.0)%
Reduction of income tax benefit resulting from:
Net operating loss carryback limitation........ 34.0 34.0 34.0
State income taxes, net of Federal income tax
benefit........................................ 1.5 10.0 5.6
----- ----- -----
1.5% 10.0% 5.6%
----- ----- -----
----- ----- -----
</TABLE>
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, 1994 AND 1993 IS
UNAUDITED)
(9) INCOME TAXES--(CONTINUED)
During the first quarter of 1993, the Company adopted Statement of Financial
Accounting Standards 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
consolidated 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 SFAS 109 were fully
reserved.
Under SFAS No. 109, as of January 1, 1993, the Company had net deferred tax
assets of approximately $14.1 million subject to a valuation allowance of
approximately $14.1 million. The components of and changes in the net deferred
tax assets and the changes in the related valuation allowance for 1993 using
current rates were as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED
JANUARY 1, EXPENSE DECEMBER 31,
1993 (BENEFIT) 1993
---------- --------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards........................... $ 14,389 $ 2,606 $ 16,995
Excess of tax over book depreciation....................... (2,472) (242) (2,714)
Excess of book over tax vacation expense................... 1,042 93 1,135
Excess of book over tax (tax over book) supplemental
benefit expense.......................................... 671 (12) 659
Excess of book over tax (tax over book) bad debt expense... 440 (92) 348
Other, net................................................. 76 42 118
---------- --------- ------------
14,146 2,395 16,541
Valuation allowance........................................ (14,146) (2,395) (16,541)
---------- --------- ------------
$ -- $ -- $ --
---------- --------- ------------
---------- --------- ------------
</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, 1993, the Company had the following income tax carryforwards
for Federal income tax reporting purposes (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
DATE AMOUNT
- ----------------------------------------------------------------- -------
<S> <C>
2005............................................................ $26,651
2006............................................................ 15,012
2007............................................................ 1,367
2008............................................................ 8,286
-------
$51,316
-------
-------
</TABLE>
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, 1994 AND 1993 IS
UNAUDITED)
(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 December 31, 1993 was $80,404 (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.
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, 1994. 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. The note was amended in 1993 to increase the
principal amount by $60,449, the amount of interest due from January 1, 1993
through December 31, 1993. 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 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
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, 1994 AND 1993 IS
UNAUDITED)
(10) RELATED PARTY TRANSACTIONS--(CONTINUED)
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 were to expire on November 30, 1994,
are nontransferable. 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 then applied
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 then applied 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 was $4.10. In November 1994, the options
belonging to Malvin P. Sevin were exercised by his estate, while Irik P. Sevin's
options were extended to November 30, 1997 on generally the same terms and
conditions as the original options, however, Irik P. Sevin's extended options
will vest in three equal annual installments on each November 30th.
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 the shares of Class A Common Stock was
$20 per share. These options were nontransferable and were to expire on 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 then applied 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 then applied 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 were $4.10. In November 1994, the options belonging to Malvin P.
Sevin were exercised by his estate, while Irik P. Sevin's options were extended
to November 30, 1997 on generally the same terms and conditions as the original
options, however, Irik P. Sevin's extended options will vest in three equal
annual installments on each November 30th.
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 transferable 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)
F-24
<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, 1994 AND 1993 IS
UNAUDITED)
(10) RELATED PARTY TRANSACTIONS--(CONTINUED)
to Malvin P. Sevin. The option price for each such share is $11.25. These
options are nontransferable. Malvin P. Sevin's options expired in March 1994
unexercised while the expiration date of Irik P. Sevin's options were extended
to March 3, 1999.
None of the aforementioned options of Irik and Malvin Sevin were granted
under a Stock Option Plan and no other options were authorized at the time the
options were issued. All options granted vested upon issuance and were issued at
an exercise price that was estimated to be fair value at the date of grant.
On November 1, 1992, the Company authorized for issuance 50,000 options for
the purchase of Class A Common Stock to an officer of the Company, exercisable
at $11.00 per share, estimated to be the fair value at the date of grant.
Options for 25,000 shares were issued on November 1, 1992 and options for 25,000
shares were issued in June 1993. Twenty percent of the options vest and become
exercisable on each of the next five anniversary dates of the issuances.
Information relating to stock options during 1991, 1992 and 1993 are
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES AVERAGE
------------------ OPTION PRICE
CLASS A CLASS C PER SHARE TOTAL
------- ------- ------------ ----------
<S> <C> <C> <C> <C>
Shares under option at December 31, 1990 (prices
range from $4.10 to $11.25 per share)............ 667,794 166,949 $ 5.51 $4,596,947
Granted.......................................... -- -- -- --
Exercised........................................ -- -- -- --
------- ------- ------------ ----------
Shares under option at December 31, 1991 (prices
range from $4.10 to $11.25 per share).......... 667,794 166,949 5.51 4,596,947
Granted.......................................... 25,000 -- 11.00 275,000
Exercised........................................ -- -- -- --
------- ------- ------------ ----------
Shares under option at December 31, 1992 (prices
range from $4.10 to $11.25 per share).......... 692,794 166,949 5.67 4,871,947
Granted.......................................... 25,000 -- 11.00 275,000
Exercised........................................ -- -- -- --
------- ------- ------------ ----------
Shares under option at December 31, 1993 (prices
range from $4.10 to $11.25 per share).......... 717,794 166,949 $ 5.82 $5,146,947
------- ------- ------------ ----------
------- ------- ------------ ----------
Shares exercisable at December 31, 1993.......... 672,794 166,949 $ 5.54 $4,651,947
------- ------- ------------ ----------
------- ------- ------------ ----------
</TABLE>
In March 1994 the Company issued stock options to Irik P. Sevin to purchase
100,000 shares of Class A Common Stock. The option price for each such share is
$8.50, the then market value of the stock on the date the options were granted.
These options are non-transferable and expire on March 31, 2004.
On August 23, 1994, the Company issued stock options to another officer of
the Company to purchase 50,000 shares of Class A Common Stock. The option price
for each such share is $7.50, the then market value of the stock on the date the
options were granted. Twenty percent of the options become exercisable on each
of the next five anniversary dates of the grant.
In December 1992, Malvin P. Sevin passed away. All options previously owned
by him were exercisable by his estate up until the original expiration dates of
such options.
F-25
<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, 1994 AND 1993 IS
UNAUDITED)
(10) RELATED PARTY TRANSACTIONS--(CONTINUED)
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 years ended December 31, 1992 and 1993 was
$50,000 and $4,000, respectively. 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 were 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 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 for 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 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.
During 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
F-26
<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, 1994 AND 1993 IS
UNAUDITED)
(11) ACQUISITIONS--(CONTINUED)
approximately $13,600,000. In addition, during 1993, the Company acquired a
29.5% interest in Star Gas Corporation for $16,000,000. (See note 15)
Sales and net income of the acquired companies are included in the
consolidated statements of operations from the respective dates of acquisition.
Star Gas is accounted for following the equity method.
Unaudited pro forma data giving effect to the purchased businesses and to
the Star Gas investment as if they had been acquired on January 1 of the year
preceding the year of purchase, with adjustments, primarily for amortization of
intangibles, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales.................................. $593,876 $604,491 $557,843
-------- -------- --------
-------- -------- --------
Equity in earnings of (share of loss of)
Star Gas Corporation..................... -- 167 (11,923)
-------- -------- --------
-------- -------- --------
Net loss................................... (15,547) (3,012) (19,570)
-------- -------- --------
-------- -------- --------
Earnings (loss) per common share:
Class A Common Stock..................... $ (1.62) $ (.81) $ (1.09)
Class B Common Stock..................... .57 1.77 2.47
Class C Common Stock..................... (1.62) (.81) (1.09)
-------- -------- --------
-------- -------- --------
</TABLE>
During the nine months ended September 30, 1994, the Company acquired the
customer lists and equipment of seven unaffiliated fuel oil dealers. The
aggregate consideration for these acquisitions, accounted for by the purchase
method, was approximately $31,000,000.
F-27
<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, 1994 AND 1993 IS
UNAUDITED)
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1991 1992 1993 1993 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash paid during the periods
for:
Interest.................... $21,928,724 $20,238,486 $ 21,705,736 $13,062,177 $14,934,390
Income taxes................ 202,650 319,487 495,739 280,655 296,508
Noncash investing activity:
Acquisition of customer
lists and deferred
charges................... -- -- -- -- (8,798,750)
Noncash financing activities:
Redemption of preferred
stock..................... -- -- (12,763,663) -- --
Issuance of subordinated
notes payable............. -- -- 12,763,663 -- --
Minimum pension liability... -- -- 5,866,651 -- --
Deferred pension costs...... -- -- (1,332,616) -- --
Minimum pension liability
adjustment................ -- -- (4,534,035) -- --
Issuance of Note Payable..... -- -- -- -- 8,798,750
</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 AT DECEMBER 31, 1993
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term debt................... $ 50,114 $ 50,106 $ 50,080 $ 50,076
Subordinated notes payable....... 97,379 109,943 135,264 148,644
Cumulative redeemable
exchangeable preferred stock... 37,718 39,350 25,000 27,170
</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
F-28
<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, 1994 AND 1993 IS
UNAUDITED)
(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER
SHARE DATA)
The seasonal nature of the Company's business results in the sale by the
Company of approximately 50% of its volume of home heating oil in the first
quarter and 30% of its volume of home heating oil in the fourth quarter of each
year. The Company generally realizes net income in both of these quarters and
net losses during the warmer quarters ending June and September.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1992 1992 1992 1992 TOTAL
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
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)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1993 1993 1993 1993 TOTAL
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................ $ 251,271 $ 71,978 $ 54,135 $161,142 $538,526
Gross profit............................. 89,595 15,817 9,604 56,701 171,717
Income (loss) before taxes and
extraordinary item..................... 39,269 (25,972) (29,571) 9,110 (7,164)
Net income (loss)........................ $ 38,938 $(26,809) $ (29,488) $ 8,928 $ (8,431)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
Earnings (loss) per common share
Class A Common Stock..................... $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
Class B Common Stock..................... .47 .47 .47 .47 1.88
Class C Common Stock..................... $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, JUNE 30, SEPT. 30, NINE MONTHS ENDED
1994 1994 1994 SEPTEMBER 30, 1994
--------- -------- --------- ------------------
<S> <C> <C> <C> <C>
Net sales................................... $ 266,793 $ 69,267 $ 49,231 $385,291
Gross profit................................ 103,530 17,616 6,905 128,051
Income (loss) before taxes, equity interest
and extraordinary item.................... 50,417 (22,217) (32,678) (4,478)
Net income (loss)........................... $ 51,425 $(23,761) $ (34,464) $ (6,800)
--------- -------- --------- ----------
--------- -------- --------- ----------
Earnings (loss) per common share
Class A Common Stock........................ $ 2.30 $ (1.11) $ (1.67) $ (.48)
Class B Common Stock........................ .41 .41 .28 1.10
Class C Common Stock........................ $ 2.30 $ (1.11) $ (1.67) $ (.48)
--------- -------- --------- ----------
--------- -------- --------- ----------
</TABLE>
F-29
<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, 1994 AND 1993 IS
UNAUDITED)
(15) 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 newly formed
corporation. 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 a 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 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 its
fiscal 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 unconditional 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). The
purchase prices upon exercise of any such options are calculated based upon
specified multiples of Star Gas' earnings before interest, taxes, depreciation
and amortization (EBITDA), subject to certain minimum prices, and are payable in
cash or Class A common stock of the Company or, in the case of 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.
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. In addition, the shareholders' agreement provides that each
investor in Star Gas, prior to selling any of its equity interests in Star Gas
to any purchaser other than another investor in Star Gas, must first offer to
sell such equity interests to Star Gas and then to the other investors.
The Company is managing 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 fiscal 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 reimburses the
Company for its expenses and the cost of certain Company personnel.
(16) SUBSEQUENT EVENT
In December 1994, the Company exercised its right to purchase the remaining
outstanding common equity of Star Gas by paying $3.8 million in cash and issuing
2.5 million shares of the Company's Class A common stock. In connection with
this transaction and in accordance to the option agreements entered into during
the Company's initial investment in Star Gas, certain other investors received
options on 0.7 million shares of the Company's Class A common stock exercisable
through December 1999 at $10.14 per share in exchange for certain options they
held in Star Gas.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
STAR GAS CORPORATION:
We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1993 and 1994 and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for the years 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 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 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 1994 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 6 to the Consolidated Financial Statements, Star Gas
Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1994.
KPMG PEAT MARWICK LLP
New York, New York
November 17, 1994
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Star Gas Corporation and Subsidiaries
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Star Gas Corporation and subsidiaries
for the year 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 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 financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Star Gas Corporation and Subsidiaries for the year ended September 30, 1992
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
December 3, 1992,
except for Note 5
as to which the date is
April 1, 1993
F-32
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1993 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 730,256 $ 1,825,093
Receivables, net of allowance of $716,000 and $521,000........ 9,034,888 8,172,047
Inventories (note 3).......................................... 6,445,293 4,778,007
Prepaid expenses and other current assets..................... 1,596,457 1,734,090
Assets held for sale (note 1)................................. 7,378,126 --
------------ ------------
Total current assets.................................... 25,185,020 16,509,237
------------ ------------
Property and equipment:
Customer equipment............................................ 128,056,431 132,329,606
Land and buildings............................................ 9,918,745 9,739,310
------------ ------------
137,975,176 142,068,916
Less accumulated depreciation........................... 30,306,574 37,079,397
------------ ------------
107,668,602 104,989,519
------------ ------------
Intangibles, net of accumulated amortization of $32,455,238 and
$36,394,491, and other assets................................. 19,529,973 15,644,682
------------ ------------
Total assets............................................ $152,383,595 $137,143,438
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current debt (note 5)......................................... $ 8,197,953 $ 4,766,063
Accounts payable.............................................. 9,433,402 2,875,975
Accrued interest.............................................. 7,833,308 1,364,263
Other accrued expenses........................................ 2,888,373 3,039,216
Customer credit balances...................................... 2,733,000 3,286,425
------------ ------------
Total current liabilities............................... 31,086,036 15,331,942
------------ ------------
Long-term debt (note 5)......................................... 123,991,264 70,163,385
------------ ------------
Deferred income taxes and other long-term liabilities........... 817,663 643,137
------------ ------------
Cumulative redeemable preferred stock........................... -- 8,264,100
------------ ------------
Shareholders' equity (deficiency): (notes 1,2 and 5)
Common stock.................................................. 266 45
Preferred stock............................................... 41,729 500,111
Capital in excess of par value................................ 58,471,501 108,336,313
Deficit....................................................... (59,836,948) (66,095,595)
Treasury stock, at cost....................................... (2,187,916) --
------------ ------------
(3,511,368) 42,740,874
------------ ------------
Total liabilities and shareholders' equity.............. $152,383,595 $137,143,438
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Propane and related products.................. $117,877,556 $132,194,740 $114,920,000
Hauling....................................... 16,225,561 16,220,657 11,129,869
Other, net.................................... 6,636,627 5,780,581 6,742,273
------------ ------------ ------------
140,739,744.. 154,195,978 132,792,142
------------ ------------ ------------
Costs and Expenses:
Propane and related products.................. 57,641,607 69,447,511 55,045,905
Delivery and branch........................... 57,855,438 62,332,227 53,714,862
Depreciation and amortization................. 14,128,104 16,092,452 11,781,088
General and administrative.................... 3,002,555 3,772,546 4,001,577
------------ ------------ ------------
132,627,704.. 151,644,736 124,543,432
------------ ------------ ------------
Impairment of long-lived assets................. -- 33,047,065 --
------------ ------------ ------------
Net loss on sales of businesses................. -- -- 739,789
------------ ------------ ------------
Income (loss) before interest expense and income
taxes......................................... 8,112,040 (30,495,823) 7,508,921
Interest expense................................ 16,665,525 16,335,155 9,514,569
------------ ------------ ------------
Loss before income taxes........................ (8,553,485) (46,830,978) (2,005,648)
Income tax expense (benefit).................... (1,294,003) 257,027 300,000
------------ ------------ ------------
Net loss........................................ $ (7,259,482) $(47,088,005) $ (2,305,648)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
8%
CUMULATIVE
CONVERTIBLE
COMMON PREFERRED CAPITAL IN TOTAL
STOCK PREFERRED STOCK EXCESS COMMON SHAREHOLDERS'
----------- STOCK ----------------- OF PAR TREASURY EQUITY
OLD NEW SERIES A OLD NEW VALUE DEFICIT STOCK (OLD) (DEFICIENCY)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of September
30, 1991................. $ 256 -- 40,309 -- -- 55,052,931 (5,489,461) (2,187,916) $ 47,416,119
Issuance of common stock
(old).................. 10 -- -- -- -- 1,999,990 -- -- 2,000,000
Net loss................. -- -- -- -- -- -- (7,259,482) -- (7,259,482)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
Balance as of September
30, 1992............... 266 -- 40,309 -- -- 57,052,921 (12,748,943) (2,187,916) 42,156,637
Conversion of $1,420,000
of junior subordinated
debt into 8% preferred
stock (old)............. -- -- -- 1,420 -- 1,418,580 -- -- 1,420,000
Net loss................. -- -- -- -- -- -- (47,088,005) -- (47,088,005)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
Balance as of September
30, 1993................ 266 -- 40,309 1,420 -- 58,471,501 (59,836,948) (2,187,916) (3,511,368)
Retirement of treasury
stock (old), conversion
of $4,080,000 of notes
plus accrued interest,
1,420 shares of 8%
preferred stock (old),
40,309 shares of Series
A Preferred Stock (old)
and 266 shares of common
stock (old) into 5,000
shares of Series E
preferred stock (new)
and 480.695 shares of
common stock (new)...... (266) 48 (40,309) (1,420) 5,000 2,220,547 -- 2,187,916 4,371,516
Issuance of 179,750
shares of Series A and
90,000 shares of Series
C preferred stock (new),
net of issuance costs... -- -- -- -- 269,750 25,984,523 -- -- 26,254,273
Conversion of $25,000,000
of subordinated debt,
net of unamortized
issuance costs, into
150,000 shares of Series
B and 100,000 shares of
Series D preferred stock
(new)................... -- -- -- -- 250,000 24,207,642 -- -- 24,457,642
Redemption of 56,311
shares of Series D
preferred stock (new)
with the cash proceeds
from the sale of Federal
Petroleum Company and
Highway Pipeline
Trucking Company........ -- -- -- -- (56,311) (5,683,431) -- -- (5,739,742)
Common stock contributed
(27.877 shares) in
connection with the
redemption of the Series
D preferred stock (new).. -- (3 ) -- -- -- 3 -- -- --
Stock dividends declared
(31,672 shares) on
Series A, B, C, D and E
preferred stock (new)... -- -- -- -- 31,672 3,135,528 (3,167,200) -- --
Cash dividends declared
and paid on Series C
preferred stock (new)... -- -- -- -- -- -- (21,699) -- (21,699)
Stock dividends declared
(7,641 shares) on Series
A and B 12.625%
Cumulative Redeemable
Preferred Stock......... -- -- -- -- -- -- (764,100) -- (764,100)
Net loss................. -- -- -- -- -- -- (2,305,648) -- (2,305,648)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
Balance as of September
30, 1994................ $-- 45 -- -- 500,111 108,336,313 (66,095,595) -- $ 42,740,874
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1992 1993 1994
------------ ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss......................................... $ (7,259,482) $ (47,088,005) $ (2,305,648)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of long-lived assets................ -- 33,047,065 --
Depreciation and amortization.................. 14,128,104 16,092,452 11,781,088
Deferred income taxes.......................... (1,497,840) (13,700) 15,300
Provision for losses on accounts receivable.... 731,781 1,368,742 588,657
Net loss on sales of businesses................ -- -- 739,789
Loss (gain) on sales of fixed assets and other
items......................................... (234,824) 214,625 201,305
Changes in operating assets and liabilities:
Decrease (increase) in receivables........... 813,836 (381,760) 454,771
Decrease (increase) in inventories........... (770,937) 2,170,477 1,667,286
Decrease (increase) in other assets.......... 453,934 5,865 (104,438)
Increase (decrease) in accounts payable...... (105,714) 131,132 (6,557,427)
Increase (decrease) in other current
liabilities................................. 3,074,016 3,977,004 (5,473,416)
Increase (decrease) in other long-term
liabilities................................. (1,330,070) 482,931 (189,826)
------------ ------------- ------------
Net cash provided by operating
activities................................ 8,002,804 10,006,828 817,441
------------ ------------- ------------
Investing activities:
Capital expenditures............................. (6,730,179) (4,787,637) (5,418,690)
Purchases of companies, net of cash acquired..... (1,206,681) (61,109) (760,000)
Proceeds from sales of fixed assets.............. 1,134,298 722,950 479,451
Proceeds from sales of businesses................ -- -- 6,392,214
------------ ------------- ------------
Net cash provided by (used in) investing
activities................................ (6,802,562) (4,125,796) 692,975
------------ ------------- ------------
Financing activities:
Proceeds from issuance of debt................... 182,999 1,938,930 700,000
Repayment of debt................................ (8,070,794) (9,972,296) (18,799,707)
Net proceeds (repayments) under revolving credit
facility........................................ (5,472,004) 1,580,708 (2,808,704)
Proceeds from the issuance of common stock....... 6,873,900 -- --
Net proceeds from the issuance of preferred
stock........................................... 5,126,100 -- 26,254,273
Redemption of preferred stock.................... -- -- (5,739,742)
Cash dividends paid on preferred stock........... -- -- (21,699)
------------ ------------- ------------
Net cash used in financing activities...... (1,359,799) (6,452,658) (415,579)
------------ ------------- ------------
Net increase (decrease) in cash............ (159,557) (571,626) 1,094,837
Cash at beginning of year.......................... 1,461,439 1,301,882 730,256
------------ ------------- ------------
Cash at end of year................................ $ 1,301,882 $ 730,256 $ 1,825,093
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
F-36
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1992 1993 1994
------------ ------------- ------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes................................... $ 276,097 $ 296,372 $ 356,320
------------ ------------- ------------
------------ ------------- ------------
Interest....................................... $ 14,257,459 $ 15,145,124 $ 15,052,098
------------ ------------- ------------
------------ ------------- ------------
Other non-cash transactions:
Conversion of subordinated debt into preferred
stock........................................ $ 1,420,000
-------------
Reclassification to assets held for sale:
Property, plant and equipment, net........... $ 4,399,914
Net operating assets......................... 2,978,212
-------------
$ 7,378,126
-------------
-------------
Recapitalization:
Exchange of notes............................ $ 4,080,000
Exchange of accrued interest................. 291,516
Exchange of 1,420 shares of preferred
stock (old)................................ 1,420
Exchange of Series A preferred stock (old)... 40,309
Exchange of common stock (old)............... 266
Common stock contributed (new)............... 3
Retirement of treasury stock (old)........... (2,187,916)
Issuance of Series E convertible preferred
stock (new)................................ (5,000)
Issuance of common stock (new)............... (48)
Capital in excess of par value............... (2,220,550)
Exchange of subordinated debt................ (25,000,000)
Write-off of related unamortized issuance
costs....................................... 542,358
Issuance of Series B convertible preferred
stock (new)................................ 150,000
Issuance of Series D convertible preferred
stock (new)................................ 100,000
Capital in excess of par value............... 24,207,642
Exchange of subordinated debt................ (7,500,000)
Issuance of 12.625% cumulative redeemable
preferred stock............................. 7,500,000
------------
$ --
------------
------------
Stock dividends:
Stock dividends declared on 12.625%
cumulative redeemable preferred stock...... $ 764,100
Stock dividends declared on convertible
preferred stock (new)...................... 31,672
Capital in excess of par value............... 3,135,528
Deficit...................................... (3,931,300)
------------
$ --
------------
------------
Sale of assets:
Receipt of note receivable................... (500,000)
Reduction in assets held for sale............ 500,000
------------
$ --
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Star Gas Corporation (the "Company"), a Delaware Corporation, sells and
distributes propane gas and related appliances to retail and wholesale customers
located principally in the Midwest, Northeast and Southeast (see note 11)
sections of the United States. As of September 30, 1994, on an as-if-converted
basis (see note 2), the Company was owned by Petroleum Heat and Power Co., Inc.
("Petro") (33.3%), Star Gas Holdings ("Holdings") (18.6%), the Prudential
Insurance Company of America ("Prudential") (33.4%) and a group of limited
partnerships managed by First Reserve Corporation (the partnerships are
hereinafter collectively referred to as "FRC") (14.7%). In December 1993, the
Company was recapitalized (see note 2). Prior to the recapitalization, the
Company was owned by Star Energy Inc. (45%) and by FRC (55%), collectively
hereinafter referred to as the "Prior Shareholders". In connection with the
recapitalization, all shares held by Star Energy Inc. were acquired by FRC.
In December 1993, the Company entered into, and is currently being managed
under, a Management Services Agreement with Petro which provides for an annual
cash fee to Petro of $500,000 and an annual bonus equal to 5% of the increase in
the Company's cash flow, as defined, over the fiscal year ended September 30,
1993. The bonus is payable in Class A Common Stock of the Company pursuant to a
formula set forth in the Management Services Agreement. For the year ended
September 30, 1994, the value of this bonus approximated $69,000. The Company
also reimburses Petro for expenses and costs associated with certain Petro
personnel. In November 1994, Petro announced its intention to exercise its
options to purchase certain shares of Common Stock and Cumulative Convertible
Preferred Stock owned by FRC and Prudential. If these options are exercised,
Petro's ownership of Star will increase to approximately 80%.
In December 1993, the Company, in an effort to improve profitability and to
concentrate on its core business, sold one of its wholly owned subsidiaries,
Federal Petroleum Company ("Federal") and initiated discussions to sell another
wholly owned subsidiary, Highway Pipeline Trucking Company ("Highway"). For the
sale of Federal, the Company received $1,650,000 in cash and an 8% interest
bearing note in the amount of $500,000. The note is due in 48 monthly
installments commencing on November 1, 1994 and ending on October 1, 1998. At
September 30, 1993, the Company adjusted the carrying value and the net assets
of Federal to equal the then expected sale price of $2,150,000. In July 1994,
the Company sold Highway for $4.1 million in cash. At September 30, 1993, the
Company had adjusted the carrying value of the net assets of Highway to be sold
to $5,228,128, its estimated value at that date. In September 1994, the Company
sold one of its retail propane operations for approximately $650,000, net of
expenses.
Prior to the recapitalization (see note 2), the Company purchased, in
September 1989, 15.12 shares of common stock owned by a former 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 were retired as
part of the recapitalization. In September 1991, the Company sold 30.60 shares
of Common Stock and 5,126.10 shares of Series A Preferred Stock to the prior
Shareholders for $4,873,900 and $5,126,100 respectively, the proceeds of which
were received in fiscal 1992. In August 1992, the Company sold 10.69 shares of
common stock to the Prior Shareholders for $2,000,000. In March 1993, the Prior
Shareholders agreed to exchange $1,420,000 of long-term liabilities acquired
from a third party (see note 5) in consideration of 1,420 shares of newly issued
8% Cumulative Convertible Preferred Stock.
F-38
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION
During September 1994, the Company effected a reverse stock split of its
newly authorized and issued common stock wherein each share became .001 share.
All newly authorized and issued shares of common stock presented in the
financial statements and notes, give effect to the reverse stock split.
In December 1993, the Company amended its Articles of Incorporation and
authorized three new classes of common Stock, par value $.10--Class A (30,000
shares), Class B (5,000 shares) and Class C (3,000 shares), 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. The Company also authorized
3,000,000 shares of new $1.00 par value preferred stock to be issued in one or
more series as the Board of Directors may determine. The Board is also
authorized to fix and determine the designation and relative rights and
preferences of each such series. Two new classes of preferred stock were then
created by the Board--an 8% Cumulative Convertible Preferred Stock [Series A
(530,000 shares), Series B (300,000 shares), Series C (160,000 shares), Series D
(500,000 shares) and Series E (10,000 shares)] and a 12.625% Cumulative
Redeemable Preferred Stock [Series A (30,000 shares) and Series B (120,000
shares)].
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 payable 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.
In December 1993, as part of the recapitalization, the Company sold 269,750
shares of 8% Cumulative Convertible Preferred Stock for $26,975,000 to the
following investors in the indicated amounts: Petro ($14,000,000), Holdings
($11,000,000) and FRC ($1,975,000). Holdings is a corporation formed for the
purpose of investing in the Company by a group of investors, including Petro who
contributed $2,000,000 of the $11,000,000 invested. The preferred shares were
sold in the following series: Series A--179,750 shares and Series C--90,000
shares. 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, $2,800,000 of its outstanding Term Loan and $7,957,000 of interest in
arrears. The expenses relating to the issuance were $720,727. In addition, the
Company, issued 250,000 shares of its 8% Cumulative Convertible Preferred Stock
(150,000 shares of Series B and 100,000 shares of Series D) and 75,000 shares of
its 12.625% Cumulative Redeemable Preferred Stock (15,000 shares of Series A and
60,000 Series B) to Prudential in exchange for $25,000,000 and $7,500,000,
respectively, of its 12.625% Senior Subordinated Participating Notes. (see note
5).
Petro has an option to buy all of the shares of common stock and the 8%
Cumulative Convertible Preferred Stock owned by Holdings, FRC and Prudential.
This option commences after the issuance of the audited financial statements for
the year ended September 30, 1994 and ends on December 31, 1998. In addition,
Holdings, FRC and Prudential 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 shares
of the Company's Class A Common Stock for $9,903.10 and $14,854.60 per share,
respectively. These options expire on December 20, 1998.
During the year ended September 30, 1994, the Company declared stock
dividends on the 8% Cumulative Convertible Preferred Stock as follows: 11,462
shares of Series A, 9,565 shares of Series B,
F-39
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
5,509 shares of Series C, 4,817 shares of Series D and 319 shares of Series E.
The Company also declared stock dividends on the 12.625% Cumulative Redeemable
Preferred Stock as follows: 1,528 shares of Series A and 6,113 shares of Series
B. In addition, the Company declared and paid a dividend of $.24 per share on
its Series C 8% Cumulative Convertible Preferred Stock.
Each share of Series A, C and E 8% Cumulative Convertible Preferred Stock is
convertible into .0092278 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 .0070746
shares of nonvoting Class B Common Stock and each share of Series D 8%
Cumulative Convertible Preferred Stock is convertible into .0092278 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 the 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 receive 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.
The Company, simultaneously with the issuance of the 8% Cumulative
Convertible Preferred Stock and the 12.625% Cumulative Redeemable Preferred
Stock, retired its treasury stock and redeemed $4,080,000 plus accrued interest
in certain notes held by FRC, 1,420 shares of 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.
Upon the sale of Highway and Federal, the Company was required to apply, and
did apply, the net proceeds received 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 required number of shares of Series D
8% Cumulative Convertible Preferred stock from Prudential. In addition, the
Company has an option, which expires on December 31, 1995, to repurchase the
balance of the Series D shares at the same formula price. In December 1993, the
Company sold Federal for a net price of $2.1 million, consisting of $1.6 million
in cash and a $500,000 note. The cash from the Federal sale was used to
repurchase 16,285 shares of the Series D 8% Cumulative Preferred Stock from
Prudential. In July 1994, the Company sold Highway for a net price of $4.1
million in cash. The proceeds of that sale were used to repurchase 40,026 shares
of Series D 8% Cumulative Convertible Preferred Stock from Prudential.
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
F-40
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
numerator of which is the face value of the Series D 8% Cumulative Convertible
Preferred Stock redeemed and the denominator of which is a total of $10 million.
In connection with the Federal and Highway sales, FRC contributed 27.877 shares
of Class A Common Stock back to the Company.
The following table summarizes the number of recapitalized shares issued,
redeemed and contributed from December 21, 1993 through September 30, 1994:
<TABLE>
<CAPTION>
SHARES STOCK SHARES
ISSUED DIVIDENDS CONTRIBUTED BALANCE
DECEMBER 21, DECLARED SHARES TO THE SEPTEMBER 30,
1993 AND ISSUED REDEEMED COMPANY 1994
------------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Class A Common Stock................ 480.695 (27.877) 452.818
------------ ----------- -------------
------------ ----------- -------------
8% Cumulative Convertible Preferred
Stock:
Series A.......................... 179,750 11,462 191,212
Series B.......................... 150,000 9,565 159,565
Series C.......................... 90,000 5,509 95,509
Series D.......................... 100,000 4,817 (56,311) 48,506
Series E.......................... 5,000 319 5,319
------------ ---------- -------- -------------
524,750 31,672 (56,311) 500,111
------------ ---------- -------- -------------
------------ ---------- -------- -------------
12.625% Cumulative Redeemable
Preferred Stock:
Series A.......................... 15,000 1,528 16,528
Series B.......................... 60,000 6,113 66,113
------------ ---------- -------------
75,000 7,641 82,641
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
The 12.625% Cumulative Redeemable Preferred Stock must be exchanged into
subordinated notes due on January 10, 2001 at the rate of $100 per share 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 the 12.625% Cumulative Redeemable Preferred Stock plus an amount
sufficient to redeem any 12.625% Cumulative Redeemable Preferred Stock received
as dividends thereon. To the extent shares still remain outstanding, the Company
is required to redeem the remaining shares on January 10, 2001.
As of September 30, 1994, after giving effect to the recapitalization of the
Company, the buyback of the Series D 8% Cumulative Convertible Preferred Stock,
the concurrent contribution of common shares by FRC to the Company, the
preferred stock dividends declared in the year ended September 30, 1994, and
assuming conversion of all of the 8% Cumulative Convertible Preferred Stock into
common
F-41
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) RECAPITALIZATION--(CONTINUED)
stock, and no issuance of any option shares, the investors would have the
following equity interests and voting percentages on most matters:
<TABLE>
<CAPTION>
EQUITY VOTING
PERCENTAGE PERCENTAGE
---------- ----------
<S> <C> <C>
Petro................................................. 29.3% 44.0%
Holdings.............................................. 22.6 33.9
FRC................................................... 14.7 22.1
Prudential............................................ 33.4 --
---------- ----------
100.0% 100.0%
---------- ----------
---------- ----------
</TABLE>
Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 33.3%, but its voting interest would remain at
44.0%.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying 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. The
components of inventory were as follows at the dates indicated:
SEPTEMBER 30,
------------------------
1993 1994
---------- ----------
Propane gas............................... $4,982,284 $2,936,331
Appliances and equipment.................. 1,463,009 1,841,676
---------- ----------
$6,445,293 $4,778,007
---------- ----------
---------- ----------
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the depreciable assets (generally thirty years for
buildings and five to thirty years for equipment) using the straight-line
method.
Intangible Assets
Beginning in October 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 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 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.
F-42
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 pre-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 Consolidated 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.
Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. Deferred income taxes are provided to reflect the tax effects of
temporary differences between financial and tax reporting. Effective October 1,
1993, the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109). (see note 6).
Basis of Presentation
Certain reclassifications have been made to the 1992 and 1993 financial
statements to conform to the 1994 presentation.
(4) ACQUISITIONS
The Company expanded its operations in the retail propane gas business by
making several acquisitions during the fiscal years ended September 30, 1992,
1993 and 1994. The consideration for these acquisitions was approximately
$1,207,000, $61,000, and $760,000, respectively. The acquisitions were accounted
for under the purchase method of accounting and the purchase prices have been
allocated to the assets and liabilities acquired based on their respective fair
market values on the dates of acquisition. The purchase prices in excess of the
fair values of net assets acquired were classified as intangibles 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.
F-43
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND REVOLVING CREDIT LOANS
Long-term debt consists of the following:
SEPTEMBER 30,
---------------------------
1993 1994
------------ -----------
Revolving credit facility(a)................... $ 6,808,704 $ 4,000,000
Acquisition loan(a)............................ -- 700,000
11.56% Senior Notes(b)......................... 45,000,000 30,675,000
12.625% Senior Subordinated Participating
Notes(b)..................................... 40,000,000 7,500,000
Senior Reset Term Notes(c)..................... 20,000,000 20,000,000
Term loan agreement(d)......................... 12,125,000 9,325,000
Other liabilities(e)........................... 6,287,259 1,440,610
Other notes payable(e)......................... 1,333,920 737,686
Obligations under capital leases (see note
8)........................................... 634,334 551,152
------------ -----------
132,189,217 74,929,448
Less current maturities and revolving credit
loans...................................... 8,197,953 4,766,063
------------ -----------
$123,991,264 $70,163,385
------------ -----------
------------ -----------
- ------------------------
<TABLE>
<C> <S>
(a) Under the terms of the restated and amended Credit Agreement as of December 21, 1993,
the Company may borrow up to $20 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) plus 2 1/4% or the Alternate Base Rate (as defined below) plus 1/4%,
at the Company's option.
The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted
for reserve requirements, if any. At September 30, 1994, this rate was 4.9%. The
Alternate Base Rate is the higher of (i) the prime or base rate of The First National
Bank of Boston or (ii) the Federal Funds Rate plus 1/2%. At September 30, 1994, the
prime rate was 7.8% and the Federal Funds Rate was 5.0%.
As of September 30, 1993, and 1994, outstanding revolving credit loans aggregated
$6,808,704 and $4,000,000. In addition, as of September 30, 1993 and 1994, the credit
facility provided $2,648,816 and $2,438,816 in letters of credit, respectively.
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, the acquisition loan conversion date. 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 plus 3% on loans
made after the acquisition loan conversion date or the Alternate Base Rate plus 1/2% on
loans made before the acquisition loan conversion date and plus 1% on loans made after
the acquisition loan conversion date, at the Company's option. As of September 30,
1994, $700,000 was borrowed to fund an acquisition completed during fiscal 1994.
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 certain assets of the Company. The Company pays a commitment fee equal to
1/2% of the unused portion of the bank facilities.
</TABLE>
F-44
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND REVOLVING CREDIT LOANS--(CONTINUED)
<TABLE>
<C> <S>
(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. This participating interest feature on the Notes was eliminated in connection
with the recapitalization.
As part of the recapitalization (see note 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.
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, 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 semi-annual installments of
$2,500,000 which were to commence August 28, 1994. The Company, at various dates,
amended the terms of the notes and as a result, the payments of principal are now
$2,500,000 on August 28, 1999, $5,000,000 on February 28, 2000, August 28, 2000 and
February 28, 2001, respectively and $2,500,000 on August 28, 2001.
Interest on the notes was based on the Treasury rate in effect on the issuance date,
which under the terms of the note agreement, was scheduled to be adjusted to the then
current Treasury rate on the "Reset Date", February 28, 1994. Prior to the
recapitalization, the rate was based on the 2.25 year Treasury rate plus 3.75%. In
connection with the recapitalization, the notes were amended such that the interest
rate became the 6.5 year Treasury rate plus 3.30%. On February 28, 1994, the notes were
reset and the rate was reduced from 10.72% to 9.11%.
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 borrowed under the Notes are secured by
substantially all of the Company's assets.
</TABLE>
F-45
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND REVOLVING CREDIT LOANS--(CONTINUED)
<TABLE>
<C> <S>
(d) In March 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 such that 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 remaining 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.
(e) In connection with certain acquisitions, the Company was required to pay, over a
several year period, an aggregate of $6,287,259 as of September 30, 1993, and
$1,440,610 as of September 30, 1994, pursuant to certain covenant not-to-compete
agreements and consulting payments. In addition, the Company had obligations of
$1,333,920 at September 30, 1993 and $737,686 at September 30, 1994 of notes payable to
former owners.
In December 1992, the Prior Shareholders purchased from a third party the Company's
obligation to pay $5,500,000 of consulting and non-competition payments due in equal
installments of $2,750,000 in November 1992 and November 1993. The November 1992
payment was initially deferred until June 1993, however, in March 1993, $1,420,000 of
this payment was exchanged for 1,420 shares of newly issued 8% Cumulative Convertible
Preferred Shares of the Company. The balance of the June 1993 payment, $4,080,000, was
deferred. In December 1993, as part of the recapitalization (see note 2), the Company
exchanged the 1,420 shares of newly issued 8% Cumulative Convertible Preferred Shares
and the $4,080,000 deferred amount (the balance of the purchased payments) plus accrued
interest, for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock and
230.895 shares of Class A Common Stock.
</TABLE>
As of September 30, 1994, the annual maturities of long-term debt,
borrowings under the revolving credit agreement and the acquisition loan are set
forth in the following table:
1995................................................. $ 4,766,063
1996................................................. 11,814,759
1997................................................. 13,652,044
1998................................................. 10,343,708
1999................................................. 15,008,420
Thereafter........................................... 19,344,454
-----------
$74,929,448
-----------
-----------
As of September 30, 1994, the Company was in compliance with all borrowing
agreement covenants, as amended.
F-46
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES
The income tax provision (benefit) shown in the accompanying Consolidated
Statements of Operations consists of the components set forth below:
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1992 1993 1994
----------- -------- --------
Federal:
Deferred............................... $(1,489,055) $ -- $ --
State:
Current................................ $ 203,837 $270,727 $284,700
Deferred............................... (8,785) (13,700) 15,300
----------- -------- --------
195,052 257,027 $300,000
----------- -------- --------
$(1,294,003) $257,027 $300,000
----------- -------- --------
----------- -------- --------
A federal income tax benefit was recorded in 1992 as a result of reversing
previously recorded federal deferred income tax liabilities. No federal income
tax benefits were recorded as a result of the losses for 1993 or 1994. State tax
expense was recorded each year in jurisdictions where the Company had to pay
taxes and where net operating loss carryforwards or carrybacks are not
recognized.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards 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 significant effect on the
Company's financial condition or results of operations, since the Company did
not carry any material deferred income tax accounts on its balance sheet at
September 30, 1993 and any net deferred tax assets set up as a result of
applying SFAS No. 109 have been fully reserved.
Under SFAS No. 109, as of October 1, 1993, the Company had total deferred
tax assets of approximately $35.8 million subject to a valuation allowance of
approximately $10.6 million. With the recapitalization in December 1993 (see
note 2), the Company's NOL's were limited for purposes of general carryforward
availability and otherwise limited for specified carryforward purposes since the
recapitalization constituted a change in control for income tax reporting
purposes. The Company believes that it has sufficient tax strategies available
that will enable it to utilize most of its NOL carryforwards.
F-47
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES--(CONTINUED)
The components of and changes in the net deferred taxes and the changes in
the related valuation allowance for the year ended September 30, 1994 were as
follows:
<TABLE>
<CAPTION>
DEFERRED
OCTOBER 1, BENEFIT SEPTEMBER 30,
1993 (EXPENSE) 1994
------------ ------------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards................... $ 28,798,684 $ 2,655,318 $ 31,454,002
Accounts receivable
reserves.................... 243,476 (66,473) 177,003
Intangibles, principally due
to
differences in
amortization................ 6,489,063 (520,629) 5,968,434
Other......................... 263,799 (121,753) 142,046
------------ ------------ -------------
35,795,022.. 1,946,463 37,741,485
Valuation allowance............. (10,584,168) (780,229) (11,364,397)
------------ ------------ -------------
Total deferred tax assets... 25,210,854 1,166,234 26,377,088
------------ ------------ -------------
Deferred tax liabilities:
Assets held for sale,
principally due to
differences in amortization
and depreciation............ (312,321) 312,321 --
Property and equipment,
principally due to
differences in
depreciation................ (25,119,933) (1,493,855) (26,613,788)
------------ ------------ -------------
Total deferred tax
liabilities............... (25,432,254) (1,181,534) (26,613,788)
------------ ------------ -------------
Net deferred tax liability...... $ (221,400) $ (15,300) $ (236,700)
------------ ------------ -------------
------------ ------------ -------------
</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 and the
tax strategies available, that at September 30, 1994, a valuation allowance of
$11.4 million is appropriate.
At September 30, 1994, the Company had approximately $92.5 million of
Federal net operating loss (NOL) carryforwards available to offset future
taxable income. Such NOL's expire in the years 2004 through 2009.
(7) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan which provides benefits for all eligible
non-union employees. Subject to IRS limitations, the 401(k) plan provides for
each employee to contribute from 1% to 15% of compensation with the Company
contributing a matching amount of each employee's contribution up to a maximum
of 3% of compensation. Aggregate Company contributions made to the 401(k) plan
during fiscal 1992, 1993, and 1994 were $537,703, $313,652, and $312,925
respectively.
The Company also makes monthly contributions on behalf of its union
employees to a union sponsored defined benefit pension plan. The amount charged
to expense was $202,545, $198,206, and $207,107 in fiscal 1992, 1993 and 1994,
respectively.
F-48
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) LEASE COMMITMENTS
The Company has entered into noncancellable capital lease agreements with
former owners of acquired businesses for certain premises and related equipment.
These leases contain bargain purchase options, exercisable on the lease
termination dates. Amortization of premises and equipment under capital leases
is included in depreciation expense. The Company has also entered into operating
leases for office space, trucks and other equipment.
The future minimum rental commitments at September 30, 1994 under leases
having an initial or remaining noncancellable term of one year or more are as
follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1995................................................ $157,476 $1,200,000
1996................................................ 138,351 800,000
1997................................................ 80,976 600,000
1998................................................ 80,976 200,000
1999................................................ 80,976 200,000
Thereafter.......................................... 425,121 800,000
-------- ----------
Total minimum lease payments........................ 963,876 $3,800,000
----------
----------
Less amount representing interest................... 412,724
--------
Present value of net minimum rentals................ $551,152
--------
--------
The Company incurred rent expense of $3,586,450, $4,174,689, and $3,451,376
in 1992, 1993 and 1994, respectively.
(9) IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1993, in connection with the recapitalization (see note 2),
and the impending sales of Federal and Highway (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 operations,
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.
(10) LITIGATION
Propane is an explosive gas and serious personal injury and property damage
can occur in connection with its transportion, storage and use. A lawsuit has
been threatened against the Company based on a recent incident in the Midwest.
The Company believes that such lawsuit, if commenced, will not have a material
adverse effect on the Company. Additionally, in the ordinary course of business,
Star Gas is threatened with, or is named in, various other lawsuits. Star Gas is
not party to any litigation which individually or in the aggregate could
reasonably be expected to have a material adverse effect on the Company.
F-49
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) SUBSEQUENT EVENTS
On November 17, 1994, in an effort to focus on its core profitable business,
the Company sold all of its retail propane operations located in the Southeast
portion of the United States for $13,250,000 in cash. The consideration received
from the sale approximates the net book value of the assets sold and therefore,
no material gain or loss was recognized.
The Company applied a portion of the proceeds from the sale to reduce
outstanding principal and accrued interest on its 11.56% Senior Notes and Term
Loan in the amount of $3,382,539 and $602,310, respectively. In addition, the
Company redeemed the remaining outstanding shares of the Series D 8% Cumulative
Convertible Preferred Stock from Prudential amounting to $5,091,011. As a result
of the redemption, FRC has agreed to return 20.693 shares of Common stock (see
note 2) held by them, as a contribution to the capital of the Company. The
remainder of the proceeds will be used by the Company for general operating
purposes.
F-50
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY 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 TO BUY ANY OF THE DEBENTURES TO
ANY PERSON 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 SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT
TO THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
PAGE
Available Information................. 2
Certain Definitions................... 2
Prospectus Summary.................... 3
The Company........................... 11
Risk Factors.......................... 12
Common Stock Offering................. 16
Use of Proceeds....................... 16
Capitalization........................ 17
Selected Financial and Other Data..... 19
Management's Discussion and Analysis
of Results of Operations
and Financial Condition............. 22
Business.............................. 29
Management............................ 40
Description of Debentures............. 43
Description of Other Indebtedness and
Redeemable Preferred Stock.......... 64
Underwriting.......................... 67
Legal Matters......................... 67
Experts............................... 68
Incorporation of Documents by
Reference............................. 68
Pro Forma Financial Statements........ P-1
Index to Financial Statements......... F-1
$125,000,000
[LOGO]
PETROLEUM HEAT
AND POWER CO., INC.
12 1/4% SUBORDINATED
DEBENTURES DUE 2005
----------------------
PROSPECTUS
----------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
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